Economic Insights
Trade Growth Momentum Set to Wane
貿易增長勢頭放緩Trade Growth Momentum Set to Wane

20國貿易限制措施(平均每月)G20 Trade Restrictive Measures (average per month)

Figure 1: G20 Trade Restrictive Measures (average per month)

全球商品貿易增長與全球實質GDP增長的比率Ratio of World Merchandise Trade Growth to World Real GDP Growth

Figure 2: Ratio of World Merchandise Trade Growth to World Real GDP Growth

全球商品貿易增長與全球實質GDP增長的平均比率<br/>Average Ratio of World Merchandise Trade Growth to World Real GDP Growth

Figure 3: Average Ratio of World Merchandise Trade Growth to World Real GDP Growth

Back in February 2016, when the Trans-Pacific Partnership (TPP) was signed by 12 nations including the United States, Japan, Canada and Australia, few would have seriously doubted the future of globalisation and the U.S.’s determination to safeguard the rule-based order that it helped to build after World War II. The deal, covering roughly 40% of the world’s economic output, was hailed as the “21st century trade agreement.” 

Fast forward to the present day, the U.S. has pulled out of the TPP, and the remaining 11 nations have signed a revised pact, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. However, in the absence of the U.S., the new deal only covers around 13% of the world’s economy. 

Protectionist sentiment has been rising across the globe and we have seen a growing scepticism towards multilateral trade arrangements. World cooperation is no longer the only option on the table: the G7 summit in June ended with U.S. President Donald Trump retracting his endorsement of the joint statement. 

Also, according to the latest biannual report from the World Trade Organisation (WTO) on G20 trade measures, a total of 39 new trade-restrictive measures – including tariff increases, stricter customs procedures, and imposition of taxes and export duties – were applied by G20 economies from mid-October 2017 to mid-May 2018. This is equivalent to an average of almost six restrictive measures per month, doubling that recorded during the previous review period (Figure 1). 

Although G20 economies did also implement 47 measures aimed at facilitating trade during the review period, this was only marginally higher than the number of measures recorded in the previous period. This is hardly encouraging at a time when the trade relationship between Mainland China and the U.S. has been worsening. Last month, Trump ordered his Trade Representative to begin the process of imposing 10% tariffs on an additional US$200 billion of Chinese imports. The tariffs may take effect from September, following a public consultation process. 

In fact, global merchandise trade volume growth, at 4.7% last year, rose from 1.8% in 2016 and was the strongest since 2011. However, growth momentum in global trade is set to wane if the Sino-U.S. trade tensions continue to escalate. The increased use of trade-restrictive measures by the G20, which accounts for more than 80% of global economic output and 75% of global trade, would drive up costs of cross-border trade and thereby reduce global trade flows. 

While economists might not agree on the direction of causation between trade growth and GDP growth, there is at least a consensus that there is a strong positive correlation between them. 

The growth of world merchandise trade volume has been around 1.5 times faster than the world real GDP growth since 1981, when the relevant trade data first became available from the WTO (Figure 2). The ratio of trade growth to GDP growth, also known as the elasticity of trade to GDP, rose above 2.0 in the 1990s but fell to 1.1 in the seven years from 2011 to 2017 (Figure 3). Simply speaking, global trade has slowed compared to GDP growth over the past two to three decades, and this slowdown is partially due to structural factors. 

The spike in elasticity during the 1990s was accompanied by the proliferation of global value chains. Thanks to lower production costs in developing countries, there was an increasing fragmentation of production internationally, leading to more trade flows. The accession of Mainland China to the WTO in 2001 accelerated the process. 

The elasticity then declined as this fragmentation process has matured and production costs in some major developing countries are no longer as low as before. Meanwhile, a deceleration in the speed of trade openness and Mainland China’s reduced dependence on imported parts for production are also likely to be contributors to the lower elasticity of trade to GDP growth. 

The Hong Kong economy is highly open and externally oriented. Last year, the value of Hong Kong’s total merchandise trade reached HK$8.2 trillion, or around 309% of GDP. The trading and logistics sector is one of the four pillar industries of Hong Kong, accounting for nearly one-fifth of total employment in the city. 

We therefore have every reason to worry about the development of the trade war, and as the first shot has already been fired, more rounds are expected to come. A study by the OECD in 2016 estimated that if the U.S., Europe and Mainland China were to impose a 10% tariff against all partners on all goods, world GDP and world trade would be reduced by 1.4% and 6% respectively. 

Although the negative impacts are likely to be absorbed over several years, a less open global trade environment and uncertainty about trade policies could have long-lasting effects on business confidence and investment. Hong Kong should tap into new markets such as those in Southeast Asia and along the Belt and Road. 

In the meantime, perhaps it has now become more pertinent than ever for the city to explore more new growth engines beyond the traditional pillars, in the face of the double whammy of trade war and structural slowdown of global trade growth.