With Global Trade Falling At Its Fastest Pace in Three Years, What Does The Future Hold?

On the 26th, the latest World Trade Monitor data released by the Netherlands Bureau for Economic Policy Analysis (CPB) showed that the volume of global trade in July fell by 3.2% year-on-year, marking the biggest drop since August 2020, and by 0.6% year-on-year.

 

Experts and industry insiders interviewed said that trade had previously operated in a high-demand scenario during the epidemic and that factors such as the current rise in global inflation, the start of major interest rate hikes by central banks in 2022, and the shift of consumers to service consumption after the epidemic had weakened global merchandise trade exports.

 

The authoritative media in the United States believe that global trade flows have seen three consecutive months of declining flows this summer. The major global trade powers have all experienced negative growth in foreign trade. This seems to mean that a major adjustment in the global trade pattern is entering deep water.

 

Reasons behind the rebound

 

The high interest rate environment is affecting global demand for commodity trade. The World Trade Organization (WTO) has been consistently calling attention to the negative spillover effects of interest rate hikes since major central banks began raising rates.

 

During this year's Davos Forum in Switzerland (January), WTO Director General Iweala called for attention to be paid to the uncertainties affecting trade, of which interest rate movements are an important one.

 

The reason for this is that the Federal Reserve's interest rate hike reduces inflation by dampening demand, which will also dampen demand growth, with negative spillover effects on global trade.

This time, the CPB's sentiment indicator shows that global trade will remain weak in the coming months. Analysts believe that the lack of credit easing will continue to be a drag on exports in the future.

 

With the impact of Japan, the eurozone, and the United Kingdom, output fell sharply, and global industrial output fell 0.1% from a year earlier. The CPB said the sentiment indicators show that in the next few months, global trade will remain weak.

 

Although the market is currently expecting the end of the ECB's rate hike cycle, Fed officials have hinted that high interest rates will be maintained for a longer period of time, suggesting that a rate cut will not come soon. Analysts believe that the high interest rate environment may continue to drag down export trade performance.

 

The impact of the rebound

 

Trade volumes fell in most countries around the world.

 

CPB data showed that most countries around the world saw their trade volumes fall in July. Of these, the eurozone was down 2.5% year-on-year, and the US was down 0.6% year-on-year. Economists now expect the eurozone to see 0% growth in exports this year, down from the 2% growth forecast at the start of the year.

 

Information from the Ministry of Industry and Information Technology (MIIT) shows that in 2021, China's manufacturing value added totaled 31.4 trillion yuan, ranking first in the world for 12 consecutive years and accounting for nearly one-third of the global share.

Moreover, the value added of China's manufacturing sector accounted for 27.4 percent of GDP in 2021, an increase of 1.1 percentage points year-on-year, finally realizing positive growth after many years, and in 2022, China's industrial value added exceeded the 40 trillion yuan mark, accounting for 33.2 percent of GDP.

International market demand has shrunk. The European Union, an important international trade market, saw imports fall by 10.4% year-on-year in the first half of the year and by 22.6% in June alone, showing an accelerated decline.

 

Weak demand led to important manufacturing countries being generally underworked. For example, the eurozone manufacturing PMI since July last year has been located in the 50 below the line of honor; in July this year, it hit a new low of 42.7%.

 

According to the IMF's latest forecast, by 2028, the global GDP growth rate will be only 3% per year. International Monetary Fund (IMF) Managing Director Georgieva said, "If we want trade to be the engine of growth again, then we have to create trade corridors and opportunities."

 

Impact on China

 

A large number of enterprises are transferring their production capacity. A large number of enterprises are shifting their production capacity from mainland China to Southeast Asia and Mexico as a result of the continued promotion of "friendly offshore outsourcing" and "nearshore outsourcing" policies in developed countries.

 

Affected by the Russian-Ukrainian conflict, European manufacturing enterprises are also transferring their production capacity to Asia-Pacific and the Americas. The direct consequence of this transfer is that Mexico and Canada have consolidated their position as the most important trading partners of the United States, and South Korea, Japan, and Southeast Asia have expanded their share of the United States market, while China's trade with the United States has declined.

The future trend will likely be for Japan, South Korea, and Canada to become the U.S. market providers of high-end products, Mexico, Southeast Asia, and even India to become the U.S. market providers of low-end products.

 

Because of the sufficiently complete industrial categories and complete industrial chain, China's position in this trade pattern adjustment is difficult to weaken. Despite major challenges to economic development, China's manufacturing sector has not been damaged, and R&D, investment, and financing have been active.

 

In 2022, China's total trade with countries along the Belt and Road will exceed that of the United States and the European Union, already indicating that growing and evolving developing countries are rising in China's list of foreign trade partners.