Continuity and Change: Where Are We in Terms of Global Trade?

Continuity and change are salient features of capitalist market societies. For quite long periods established structures and practices provide a sound framework to minimize risk and uncertainty. Only when disruptive events happen, either as ‘Black Swan’ events or as the result of endogenous contradictions, do those regimes come under pressure, and what was a period of continuity can easily become a period of change. There are a number of historical episodes that support the relevance of both features. The Great Recession from 2008 and its fall out was such a disruptive event that moved the global economy and its most critical components into a zone of uncertainty where many of the well established and entrenched practices no longer hold. Such regime shifts  are easily to detect a posterior but are extremely difficult to understand and to analyze when they actually occur. Change is poison for analytical models that so much favour continuity. The move to a ‘change regime’ partially helps to explain the intellectual disorientation in many social science disciplines, not least in economics. In such a situation textbook economics but also highly sophisticated modelling are not very helpful to get it right. Rather then insisting on orthodoxies it needs the courage to look in fresh ways on empirical developments, and more so, it needs some risk taking on the side of the analyst. Larry Summers did the job in regards to what he called ‘secular stagnation’. His contributions started a fascinating and relevant debate that has not yet come to an conclusive end.

Let me draw attention to a empirical observation that may add a critical element to this debate but also may have implications for the Eurozone. A team off researchers at the IMF (Cristina Constantinescu, Aditya Mattoo, and Michele Ruta) recently pointed to the relative slow growth in world trade over the last two years with growth rates below the rate of the overall global economy. This may sound trivial as sluggish growth in trade seems only to reflect a cyclical problem that is mainly driven by slow growth in key areas of the global economy. As soon as those regional problems are solved, so a view, world trade will catch up and return to its normal path. The IMF team does not share such a view, though. Their structural analysis shows a different and more disturbing picture. The analysis of four decades of  trade elasticities, i.e. the relation between income and cross-border trade, indicates that the 200os are more similar to the 1970s and early 1980s then they are to the 1990s: In the 1990s an increase of one percent in global income translated into an increase in world trade of 2.3 percent; in the 200s this value came down to 1.3%. Income growth is no longer automatically combined with even higher global trade. The lower value of income elasticity of trade has its root in changing supply chain policies, mainly on the side of China and to some degree on the side of the US. China’s private sector is more and more substituting export-related imports by domestic production. This increase in domestic upstream products reflects on the one side the growing maturity of the Chinese production regime and on the other side foreign direct investment strategies of transnational companies who substitute exports by investments.

The same study shows that the income elasticity has not changed for the Eurozone. And yet, the question is what the changes in China and the US imply for the fate of the Eurozone. Germany is the largest Eurozone exporter to China. It can be assumed that a secular reduction of economic growth in China to about 7 percent per year in combination with a substitution of upstream production may take away some of the German export growth to China. Given, as a recent study of the Deutsche Bundesbank shows, that German exports entail a substantial share of EU-wide outsourcing and supply chain relations, any lower import demand on the side of China will be felt by German exporters, and consequently work through the supply chains. Though it needs to be stressed that the negative effect will be small: About 7% of all German exports go currently to China. Still, in a situation where the Eurozone is facing deflationary tendencies and most if its economy have not yet compensated the income losses experienced since 2010 a weakening of non-Eurozone export markets and in particular of the Chinese export market can add stress.