I really liked the ECB’s recent report on the slowdown in global trade (summarized here), for five reasons.
1) It doesn’t assume that trade should always grow faster than output. A liberalization of trade (or a fall in transportation costs—or less attractively, new opportunities to take advantage of transfer pricing) should lead to expansion of trade, but only until a new equilibrium level is reached. In the long-run, an elasticity of around 1 (e.g. trade grows with demand for traded goods) makes some sense.
2) It (implicitly) casts a somewhat skeptical eye on the expansion of trade from 2001 to 2007, and doesn’t assume that the growth in trade over this period was completely sustainable. The 2001-07 expansion of trade was associated with an exceptionally fast pace of growth in Chinese exports, one, I would add, not matched by comparable growth in China’s imports (especially of manufactures); it thus was sustainable only so long as the rest of the world ran large external deficits to balance China’s large surplus.
“In 2001- 07, China’s exports rose faster by about 15 percentage points than import demand in its main markets; by 2008-13, this differential had fallen to 6 percentage points (see Chart A). Waning competitiveness over that period may have played a role: China’s real effective exchange rate (based on relative producer prices) has appreciated by about one-quarter since 2005. At the same time, China’s exports had to slow eventually – they cannot outstrip the expansion of export markets in the long term.”
During this period Chinese export growth filtered throughout Asia. Rising Chinese exports to Europe, the United States, and commodity exporters (who could afford to buy more manufactures because the price of commodities rose) led to an increase in Chinese imports of components (global value chains), though after 2004, as I will argue below, component imports started to lag export growth.
3) It notes that the recent slowdown in trade has been marked by a very large shift in China’s import elasticity. For the past several years Chinese import growth has significantly lagged Chinese GDP growth.
“The recent decline in China’s income elasticity of imports has been striking and has made a marked contribution to the fall in the world trade elasticity. China’s trade elasticity dropped from 1.8 in 1980- 2007 to 0.8 in 2012-15. The fall in imports in 2015 was particularly stark, with imports expanding by just 2%, despite robust economic activity”