Nouriel Roubini's Global EconoMonitor

RGE’s Wednesday Note – Global Trade in Recovery Mode

In this week’s note, we examine trends in international trade. The following content is drawn from a special report on trade in RGE’s newly released Q1 2010 update to our Global Economic Outlook. Clients can read the full report, which looks into factors that will drive trade flows in 2010, here: “Trade: Q1 2010 Outlook.”

After slowing to 3.0% in 2008, global trade volumes contracted by an estimated 13% in 2009—the first contraction since 1982 and the sharpest in the post-war period. The decline came as global demand and large inventory destocking hit the global supply chain; the credit market turmoil caused a severe crunch in trade finance; and oil and commodity prices corrected following a boom in early 2008. After plunging during Q4 2008 and Q1 2009, world trade bottomed in Q2 2009 and started growing in Q3 2009. Fiscal stimulus and slower inventory destocking boosted domestic demand, infrastructure spending and global manufacturing activity, and drove global trade in capital and consumer goods, auto parts and commodities. Trade flows slightly moderated in some countries in Q4 2009 as these temporary effects began to wane. By the end of 2009, exports of major trading countries were far below their 2008 peak levels, with the exports of Japan and especially the EU lagging those of the U.S., emerging Asia and Latin America. Imports of major trading countries, especially the U.S. and EU, stood far below their peak levels in 2008. Emerging Asia was the only major trading region in which imports reached 2008 peak levels, which might be an indication of reviving intra-Asia trade in parts and components, commodities and semi-finished goods, and rising Chinese demand for commodities and processing trade-related items—a precursor to improving exports to the U.S. and EU.

RGE forecasts world trade will grow by 4.5%-5.0% in 2010, led by fiscal stimulus spending, inventory restocking and a small improvement in global demand. Chinese commodity stockpiling, despite slowing from 2009 and a slow pick up in the OECD’s commodity demand, will support bulk trade in 2010. After aggressive inventory cutbacks in 2009, inventory restocking by importers and exporters during H1 2010 will modestly boost global trade in intermediate and final goods. But with economic growth, consumption and investment below their 2007-08 peaks in most advanced and developing economies, the pace of inventory restocking will be weak and will end by mid-2010 in most countries. As a result, the boost to global trade from the inventory cycle will be small and short-lived. During H1 2010, fiscal stimulus will continue to boost infrastructure spending, domestic demand and industrial activity. This will boost global trade in intermediate, capital and consumer goods, infrastructure-related commodities and auto parts and components. But the impact will wane in H2 2010 as most countries withdraw stimulus measures due to reviving domestic demand and fiscal concerns.

The Baltic Dry Index rose 200% in 2009, led by Chinese commodity demand and a pickup in commodity prices, but the index remains far below the record levels of 2008. While Chinese commodity stockpiling might have peaked, strong emerging market commodity demand, high global commodity prices and factors driving global trade (inventory restocking and fiscal stimulus) will support the Baltic Dry Index in 2010. Due to slow recovery in global trade and shipping demand, the entry of new shipping fleets into the market will exacerbate the shipping supply glut. This will continue to put downward pressure on shipping rates and earnings of shipping companies during 2010, notwithstanding the impact of deferred ship deliveries and global inventory restocking on shipping demand.

Improving global credit conditions and export demand have reduced the cost of trade credit, insurance and counterparty risk since H2 2009, though they remain high relative to pre-2008 levels. Demand for trade credit will pick up during 2010, with the gradual recovery in global trade. But the financing gap and credit costs are unlikely to decline significantly and will largely depend on improvements in bank balance sheets and credit growth in the economy.

The impact of inventory restocking and fiscal stimulus on global trade will fade in H2 2010. Advanced economies’ imports will slow as private demand remains sluggish, keeping emerging economies’ exports weaker than in the pre-crisis years, notwithstanding improving exports to other emerging markets. Emerging market imports will pick up from 2009, but imports meant for export to the U.S. and EU will recover slowly. Trade growth in the coming years is unlikely to reach the highs of 8.0% witnessed during 2003-07, since imports and exports in the East-West trade might take a few years to return to their high growth rates. In fact, global trade itself might witness structural changes going forward as consumption grows sluggishly in the U.S. and EU. RGE projects that consumption in emerging markets will be inadequate to fill this gap in the short-term. But surplus countries and developing countries in general, with rising incomes and industrialization, have the potential to increase domestic consumption in the coming years. This will boost their trade in commodities, capital goods and finished goods, and change their export and import baskets over time. Going forward, emerging markets will increasingly trade amongst each other for final demand, rather than re-exporting goods to the U.S. and EU, driving global trade flows and changing its direction and composition.

Despite the G20 leaders’ pledges to avoid protectionism, tariff and non-tariff barriers and subsequent retaliation have actually increased since the global recession began. Trade tensions between major trading nations will be prevalent until economic growth improves and unemployment eases significantly, and China will be the main target of these measures. Yet, at least so far, the impact of protectionism on trade flows has been small.

Economic and political constraints at home will prevent Doha trade ministers from reaching a breakthrough on agricultural subsidies and industrial tariffs in 2010, when their economies are still recovering. Talks might be delayed until 2011 if some economies witness weaker growth in H2 2010. But the global recession has provided an opportunity to reassess the role of the WTO. The WTO should expand its surveillance mechanism to monitor the use of protectionist measures during recessions, such as tariff and non-tariff barriers, export subsidies, protectionist clauses under fiscal stimulus (such as the “Buy American” clause), and the bailout national champions (such as the auto companies). Besides focusing on the provision of trade finance, the WTO should ensure that global trade talks going forward address issues related to environmental and labor standards, food and energy security, and global warming. Yet adding these measures to the trade agenda might make a global trade deal more difficult. Slow progress on multilateral trade talks will encourage countries to continue to pursue bilateral and regional trade agreements.

7 Responses to “RGE’s Wednesday Note – Global Trade in Recovery Mode”

aesop againFebruary 10th, 2010 at 1:47 pm

Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.“Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”

PeterJBFebruary 10th, 2010 at 3:49 pm

As I have said often enough, government, and all that hangs off it, that is to say “leadership” as we know it and they like to think of themselves, does not stimulate the economy. Government by practice, is a constraint to growth and anti-entrepreneurial while also being an accelerator of wealth transfer from producers to parasites:”Once the central bank raises the pace of money expansion in order to lift the economy out of a recession, it prevents the demise of various false activities. It also gives rise to new false activities. The outcome of such so-called economic growth is nothing more than the strengthening of wealth consumers and renewed pressure on wealth generators. All this undermines the process of wealth generation and weakens true economic growth.””Neither the Fed nor the government can grow the economy. All that stimulatory policies can do is redistribute real savings from wealth-productive to nonproductive activities.””A further attempt by the federal government to “help” the economy with fiscal stimulus is only likely to further weaken the pool of real savings. This will make it much harder for the economy to stage a meaningful recovery.”From Mises Daily ( Depression is Not Overby Frank Shostak on February 10, 2010Ho hum

blindmanFebruary 10th, 2010 at 10:25 pm

the fed gov help the economy…and more along the crackpot theme….”I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”.correction: free bailout system with endless subsidies fordestructive recklessness and in support of epic usury in supportof luxury markets etc.. at the expense of food for the starving andwarmth for the freezing. ie free market. and free transfer ofwealth system from the sane to the insane. free market that a toxic joke? / moral hazard.there is no free market with fractional reserve lending and government subsidized reckless corporatism , ubiquitous.there is only credit worthiness determination based on any standardthe privileged loan originator wishes. that’s why we have a massive financial scandal / scam every 7 years or so followed by a fewprosecutions and a massive transfer of wealth from the taxpayerto the permanent criminal elite class. but we hold no grudge?yes, some american people do begrudge greatly subsidizing great wealth for great failure and fraud. and we also begrudge a government that kills carelessly, or at all, in our name and with”our” money and then suffer in our souls for it.ah, but so what? what does that mean? we don’t even have a clue.?and havingfools lead us into conflicts for special interest profit and”god” sanctioned privilege. and yes, ball players make too much money too. and the haitian women sewing the 206 stitches perball 10’s of thousands of times a year, making 700 dollars a year (lazyand unskilled = labor=worthless)while those imbeciles who can’t even play the game make a milliondollars a year and more, and then spit on the ball and scratch their nuts.the american people have some begrudging in their heart, they do.and i like obama! i voted for him. so i guess i am really just disappointed in myself. actually i should be put on trial as an accessory to this ongoing insane crime. i once wondered howthe average german citizen under the nazis could have sat by andwatched their country be destroyed from within. i don’t anymore.go ahead, destroy the last vestiges of decency, a populationhas been conditioned to not even notice, after all it is justthe dynamics of the “free market”. or free speech! americans wanttheir slasher movies and news stories. and heros to hide behind..there is nothing i have to say here. as has been said, “it hasall been said.”. (except)…and presidential assassinations. the constitution is DEADand the executive branch and supreme court KILLED IT. upheld itand then destroyed it and now spit on its ashes. due process?if congress doesn’t save it with arrests and trials, (or perhaps we will progress to congressional assassination powers) or the peopledon’t stand up ( forget this one ) for it, then the u.s.a. hasbeen defeated by its own media/government/special interestimposed imbecility, per chance to make a quick buck at a crookedcasino, and we should rightly fall into some abyss speciallyprepared for those with absolutely no vision. but good withmindless inappropriate use of phrases like “free markets” won’t take much manipulation and then sarah palin will lookpresidential, readin’ off er’ hand and chewin’ gum at the sametime and boy oh boy she so smart and pretty and then some will seee….the domestic political assassinations / counter terra’ forceson the streets in broad daylight, all in the name of rule of law.and we deserve it here in this country for accepting it imposedon people in other places. yes. you see we are the terrorists.we are. those being terrorized cannot help but notice.because we like the e-trade baby commercials does not relieve usfrom the facts and responsibility for the actions of our government… please, come for me first. i don’t want to see it and i can’tstop it. “free market”, that is a good one. “free speech” , anothergood one. fortunately very few people actually listen to orunderstand words. i guess that is why they print money? everyone”understands” that language. ha! if spending money is “free speech”and the constitution guarantees that protection to every person thendoes a constitutional government have to supply every person (connectedcorporation, especially reckless financial)with money with which to speak? that seems to be the interpretation,in the field of intentional inflation. providing election campaigncoffers are filled by those corporations and revolving job opportunitiesremain available. everyone else can fuck themselves if they don’t like you happen to know how much money it costs to become asupreme court justice, in millions of dollars? it is not cheapand regular speech don’t cut it..when they said “trickle down” they meant “tinkle down” and now eventhe tinkle doesn’t drip. blame the taliban! or the data base! oriran. maybe russia and china. and yemen, somalia and pakistan.and columbia and of course afghanistan. and the internet, and the circus clowns in that little volkswagen or carmen gia or whatever? and the weather. and those damned warm january evenings. etc.. and the prostate..Read more: discussions 2/10/10 in the usual locations.i’m done. the tongue truly has no bone. “free market”..(government subsidized if you offshore your profits and operations).and the words have no coherent meaning. brainwashed america.where did morbid go? and ….

PeterJBFebruary 11th, 2010 at 3:38 am

@ blindman” i once wondered howthe average german citizen under the nazis could have sat by andwatched their country be destroyed from within. i don’t any-more.”In the late ’90’s or early 2000’s I believe and English academic wrote a book on just that which once wondered and what he found after extensive research shocked many people and the book soon faded… (all Western Governments went into denial as well as you know what) I believe his findings equalled much of that which is happening of today… that is, popular support, experts, economists and bankers becoming knowledgeable heroes and worshipped by all and sundry, and where everybody claimed to be pure, loyal and of the faith, that is until those in hobnailed boots stomped on their stairs, smashed in the doors and took them away… imperceptible | faith | hopeful | afraid | are some keywords and while they were in public – all – supported those traitors and terrorists and whatever other names “leadership” had created du jour; they supported severe comeuppance for everyone other than themselves.And then… and then. and then!Ron Paul talks robustly now of revolution but what comes before and after, is what you should fear – IF you don’t act now!Read: The Gulag Archipelago (Russian: Архипелаг ГУЛАГ, Arkhipelag GULAG) is a book by Aleksandr Solzhenitsyn based on the Soviet forced labor and concentration camp system. It’s a Universal Principle of Human NatureHo hum