Billet

October18,2016

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CommentsonIMFsGlobalTrade:Whatsbehindthe
Slowdown?orwhythereismoretotradeslowdown
thanweakdemand
TRADE&GLOBALIZATION
Post,October18,2016
ParSbastienJean
TheIMFslatestWorldEconomicOutlookpointstoweakdemandandinvestmentasthemain
factorbehindtheworldtradeslowdown.Iarguethatthisconclusionisoverblownandthatthe
highqualityunderlyingworkfallswellshortofexplainingtheslowtradepuzzle.

TheanalysisofworldtradeslowdowndeliveredbytheIMFinitslatestWEO(Chapter2)isan
importantcontribution,basedonsubstantialandskillfulquantitativeanalysis.Itconcludesthat
the overall weakness in economic activity, in particular in investment, has been the primary
restraint on trade growth, accounting for up to threefourths of the slowdown. While other
factors widely held as key explanations for slow trade are also mentioned (rebalancing of
Chinas economy, changing dynamics in GVC participation and increasing spread of
protectionism),theemphasisputonweakdemandasthemainunderlyingcausehasimportant
implications: if most of the slowdown is due to weak demand, then there is no point in
questioning a potential structural break in GVC participation or the rise in protectionism in
addition, trade should be expected to follow more or less its precrisis trend in the future, at
leastwhenadjustedforweakerGDPandinvestmentgrowth.Asthisdiagnosisisnotsharedby
allanalysts,though,acriticalassessmentisinorder.

Three different methodologies are combined in this analysis: an aggregate import demand
model, a theorybased structural decomposition analysis, and gravity estimates. In practice,
however, only the first one really supports the conclusion. The second one, while being an
elaborate piece of research, remains a rather stylized representation of reality, based on a
schematic interpretation of changes in relative prices under the assumption of homogenous
products.Itdoesnotattempttoexplainchanges,sincethemodelisbyconstructioncalibrated
toreflectthedifferentstatesoftheworldeconomy.Instead,itallowsattributingchangestotwo
different factors, one being an indirect assessment of trade costs, while the other is a wide
ranging definition of changes in demand structures. As such, these results are difficult to
interpret in a policy perspective. As for the third methodology, based on gravity estimates, it
doesnotpointtodemandfactors,butrathertotheimportanceofGVCparticipation,identified
ashavingbeenaboosterofworldtradebeforethefinancialcrisis,butnotsincethen.

As matter of fact, the conclusion thus relies on estimations of an aggregate import demand,
adjustingfortheimportintensityofitsdifferentcomponents.Themainresultissummarizedin
thefirstpanelofthereportsFigure2.7(p.73,reproducedinFigure1below).Theclaimthat
changes in economic activity can account for about threefourths of the decline in the global
goods import growth rate is mainly based upon result B on the righthand side of the graph,
showingthatthemodelonlyleavesapproximately1.7p.p.unexplained(theredbar)outofa
totalslowdownof6.5p.p.Thelatterfigureisintriguing,tobeginwith:didtradereallyslowed
downbyasmuchas6.5p.p.?Shouldwereallyexpectworldtradetoincreaseyearlybycloseto
10%,insteadoftherhythmcloseto3%observedinrecentyears?Twoimportantreasonsare
behind this unrealistically high target. The first one is related to the choice of the reference
period. 20032007, the period chosen due to data constraints, was a bully period for world
trade,justafterthe200102troughandjustbeforethe200809fall.Byanystandard,thisis
not a suitable benchmark for a longterm analysis. 19852007 is clearly preferable in this
respect, and Figure 1 lefthand panel shows the difference it makes: the model then leaves
approximately2p.p.unexplained,outofaslowdownworthlessthan6p.p.Thesecondreason
hastodowiththedefinitionoftheslowgrowthpuzzle.NobodydeniesthefactthatslowerGDP
growthleadstoslowertradegrowth,sothepuzzleisnotthattradehassloweddown,butrather
thatitsloweddownmorestronglythanGDPdid.Inotherwords,whatneedstobeexplainedis
notthegrowthinworldtradeinabsolute,butratherrelativetoGDP.Simplecalculationsbased
on the WEO database allow assessing the joint implications of these two remarks (Table 1):
using the 200307 period as a benchmark and trade growth as the variable of interest, the
slowdown is 5.8 p.p. (slightly less than in the IMF model, presumably due to sampling
differences)usinginsteadthe19852007periodandfocusingonthedifferentialgrowthrateof
tradewithrespecttoGDP,theslowdownisreducedto3.0p.p.Thisisstilllarge,butprovidesa
differentperspective:the2p.p.unpredictedworldtradeslowdowninIMFestimatesarenota
quarteranymore,butrathertwothirdsofthepuzzle.Explainingathirdoftheslowdownisnot
thatbadalready,butmightwarrantmorehumbleconclusionsinline,bytheway,withthefact
thatallbutoneofthetwiceyearlyIMFforecastsofworldtradevolumeprovedoverestimated
since2011,oftenbyalargeamount.

The IMF interpretation more specifically points to the role of investment, a relatively import
intensive component of demand. In particular, it emphasizes that the sharper slowdown of
trade in capital and durable consumption goods (), which is a large part of investment
expenditures,pointstothepotentialroleofinvestmentweaknessinholdingbackglobaltrade
growth in recent years (IMF 2016, p. 69). This argument is best illustrated by the reports
Figure 2.4, Panel 4 (p. 70, reproduced below as Figure 2). Two remarks are in order here.
Firstly,tradeincapitalgoodswasactuallythemostdynamiccomponentofworldtradeoverthe
recentperiod.Itisthusparadoxicaltopointoutitsroleinordertoexplaintheslowdown,even
though more sustained growth might certainly have been expected for this component.
Secondly, as already mentioned, the 20032007 period is not representative because it is
clearlyanabovetrendshortspell.Thisisespeciallyclearhere,sincetheaverageyearlygrowth
rate of world trade in volume was 14% for capital goods over that period meaning
approximately a doubling every five years. Is this really a sustainable trend, which can be
meaningfullyusedasabenchmark?Idoubtit.

So,whatwasreallytheroleofinvestmentweaknessintherecenttradeslowdown?Beingmore
importintensivethanothercomponentsofdemand,investmentmightindeeddrivedownworld
tradegrowthaslongasitsgrowthrateislowerthantheoneofotherdemandcomponents.Put
differently,thismaybethecasewhentheshareofinvestmentinGDPisdecliningwhateverits
level.Wasitthecaseovertherecentyears?BasedontheWEOdatabaseandfocusingontop
exporters,thepictureisnotclearcut(Figure3):thedeclineininvestmentwasclearinChina(as
expectedfromtheongoingrebalancingprocess),itwasalsosignificantinKorea(alsostarting
fromaveryhighlevelinthiscountry),andRussiasharedthistrendin2015asaresultofits
economic crisis. Other countries, in contrast, did not experience a downward trend in
investment as a share of GDP since 2011. This does not mean that investment level is
satisfactory:onthecontrary,itdidnotrecoveritsprecrisislevelinanyofthesebigcountries,a
fact that is a major concern for growth and the root of the secular stagnation debate. While
investmentlevelislow,though,itsgrowthrateinrecentyearshasbeenmoreorlessonapar
with other demand components. In this rebound phase, investment should be more dynamic
andactasaboosteroftrade.However,arithmetically,aslongasitdoesnotgrowsignificantly
less rapidly than the rest of demand, investment cannot be an important explanation for the
recenttradeslowdown(notwithstandingthefactthatitwasclearlyoneofthemainexplanations
forthesharpfalloftradeduringthecrisis,in2009).

Twoconclusionsfollow.Firstly,theIMFassessmentoveremphasizestheroleofweakdemand,
and in particular investment, in explaining the trade slowdown. Of course, slower GDP growth
command slower trade growth, this mechanical relationship cannot explain recent trends. The
flipside is that the IMF assessment probably understates the importance of the other main
factors, put forward in several other studies: the rebalancing of the Chinese economy, the
declining dynamism in GVC participation, and the spread of protectionist policies (see, e.g.,
Constantinescuetal.2016,Crozetetal.2015,Haughetal.2016,orEvenettandFritz,2016).
Secondly, the estimates presented barely explain a third of the world trade slowdown. This
should humble us about how well we understand ongoing trends, and our humility in this
respect should be reinforced by the most recent figures: as mentioned by the IMF, high
frequencydataassembledbytheNetherlandsCPBsuggestthatworldtradeinvolumeactually
stagnated,orbettersaidslightlydeclined,sinceearly2015.Decidedly,thereismoretoworld
tradesrecenttrendsthanweakdemandandinvestment.

Figure1:MainresultsoftheIMFimportdemandmodel

Source:Figure2.7(EmpiricalModel:DecomposingtheSlowdowninRealGoodsImport
Growth),p.73,IMF2016.ColumnAincludesexportsamongexplanatoryvariables,only
columnsBandCarepresentedasfulldecompositionsoftheworldtradeslowdown(seeIMF
2016,p.74).


Table1:Howlargeistheslowtradepuzzle?

Source:CalculationsbasedontheOctober2016WEOdatabase(IMF),usingworldlevel
growthratesascomputedbytheIMF.Foreachperiod,theaveragegrowthrateiscomputed
asthesimplemeanofyearlygrowthrates(excludingthefirstyear).

Figure2:TradeDynamicsacrossTypesofTradeandProducts

Source:Figure2.4(Panel4),p.70,IMF2016.
 Figure3:Investmentislow,butrecentchangesasashareofGDParemixed(investmentasashareofGDPin%inthe
worldtop8exporters)

Source:CalculationsbasedontheOctober2016WEOdatabase(IMF).

ThispostwaswrittenbasedontheauthorsdiscussionofWEOsChapter2theseminarIMF
insightsonslowtradeandglobaldisinflation,organizedbyCEPIIon12October2016inParis.

References:

Constantinescu,C.Mattoo,A.&Ruta,M.(2015),'TheGlobalTradeSlowdown:Cyclicalor
Structural?'IMFWorkingPaper15/6.

Crozet,M.Emlinger,C.&Jean,S.(2015),Onthegravityofthetradeslowdown,inHoekman,
B.,ed.,TheGlobalTradeSlowdown:ANewNormal?,VoxEUandCEPR,pp.179196.

Evenett,S.J.&Fritz,J.(2016),GlobalTradePlateaus,The19thGlobalTradeAlertReport,
CEPRandGlobalTradeAlert.

Haugh,D.Kopoin,A.Rusticelli,E.Turner,D.&Dutu,R.(2016),'CardiacArrestorDizzySpell:
WhyisWorldTradeSoWeakandWhatcanPolicyDoAboutIt?OECDEconomicPolicyPaper16,
OECD.

IMF(2016),GlobalTrade:WhatsbehindtheSlowdown?,Chapter2,inWorldEconomic
Outlook,October2016,IMF.