Is A Shifting Political Climate Slowing Global Trade?

For decades, global trade has been transforming the world's economy, bringing Japanese and Korean cars to North American highways, U.S. software to European computers and German machine tools to Asian factories.

But the days of explosive trade growth may be at an end.

The dollar value of world merchandise (or non-services) exports fell from $19 trillion in 2014 to $16.6 trillion last year, a decline of 13.3 percent, according to the World Bank.

Much of that can be explained by the drop in commodity prices, especially oil, which has fallen from a high above $100 a barrel in 2014 into the mid-$40s, says Dean Baker, co-director of the Center for Economic and Policy Research.

"It hasn't been so much a collapse in trading volume as a collapse in prices. And that's a very, very different story," he says.

Once falling commodity prices are factored in, trade growth appears more stable. The volume of world merchandise trade expanded by 2.7 percent in 2015, compared to an overall economic growth rate of 2.4 percent, according to the World Trade Organization.

That may not seem so terrible, but it is well short of the pace at which trade was expanding for decades.

The reasons for the drop are complicated and up for debate.

One factor is what economists call the slowdown in the global supply chain. Translation: Countries such as China are somewhat more likely to use domestically produced components in the products they make, instead of importing them, bringing down overall trade volumes.

But Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, sees something else at work.

"I think by far the biggest reason for the drop in trade growth relative to GDP growth is that we haven't had much liberalization of trade recently," he says.

For years after World War II, the major trading countries put a lot of energy into building up the infrastructure of global trade, slowly stripping away many of the tariffs and restrictions that impeded the exchange of goods.

As time went on, more and more countries joined in. When the General Agreement on Tariffs and Trade was started in 1947, just 23 countries participated; today it's grown to 164.

"That was to my way of thinking largely responsible for the fact that trade and investment were growing faster than GDP for about 50 years. And that process stopped. It stopped in a big way when we finished with the Uruguay round, which was completed in 1995 and took about 10 years to phase in," Hufbauer says.

Most of the major trade agreements have now been implemented, and in many places the shifting political climate has made it much harder to pass new ones.

In the United Kingdom last summer, voters decisively rejected membership in the European Union, casting doubt on Britain's trade relations with Europe. In the United States, the landmark Trans-Pacific Partnership remains in a kind of political purgatory, with both presidential candidates opposing it.

Republican Donald Trump has made opposition to the North American Free Trade Agreement a centerpiece of his campaign, vowing to bring back manufacturing jobs he says were lost as a result of the pact.

Even in Germany, an export powerhouse, trade agreements are viewed with suspicion in some quarters.

Among many economists and political leaders, a consensus exists that see the dwindling support for trade liberalization posing a risk to global growth.

"It is easy to blame trade for all the ills afflicting a country — but curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades," International Monetary Fund Managing Director Christine Lagarde wrote recently.

But Baker says it's easy to overstate the impact of what's happening. Most countries remain committed to trade, and even post-Brexit Britain has vowed to maintain strong trade relations with the rest of Europe. While the Obama administration has imposed scattered penalties on China and other countries for dumping, no evidence exists that the U.S. is embracing protectionism.

"In terms of where you look for major barriers, you're really hard pressed to find any," Baker notes.

Still, as the White House has discovered, the shifting political climate has made new trade pacts a heavier lift. Prospects for passage of the TTP, as well as the Transatlantic Trade and Investment Partnership, are less than bright.

"It's not that we've come to an economic end to liberalization and growth. We've come to a political end," Hufbauer says. "Trade liberalization has basically come to a stop."

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