A field of wheat at harvest time

Demand for commodities has supported a rise in global trade

We have finally seen good news in international trade in recent months as the value of trade flows has risen broadly.

This is partly due to a recovery in commodity prices. A 40 per cent rise from their early 2016 trough reflects demand coming through from accelerating global growth and reductions in supply driven by ongoing structural reforms in China and a slowdown in investment in extractive industries.

During much of 2015-16 trade actually fell in value terms and logged only weak growth in volumes. HSBC estimates that in volume terms, global exports of goods and services grew only 0.8 per cent in 2016. Trade values began to improve during the year, eventually turning positive. By March 2017, the leading importers had all returned to positive year-on-year annual rates of change. China turned in a strong performance during the first quarter, with annual growth in merchandise imports averaging 22 per cent.

Services exports in recent years have tended to grow faster than goods

Although affected by the downturn in 2015, services exports in recent years have nonetheless tended to grow faster than goods. One factor fuelling this growth is technological change.

International e-commerce and trade in digital products are expanding the range of services that can be traded. For example, analysis of medical scans can now be seamlessly conducted across international borders, an option that did not exist just a decade or two ago. And there are broader structural factors contributing, such as the growth of the middle class in emerging markets that is boosting demand for international tourism and transport services.

However, geopolitical and policy uncertainties could threaten the trade recovery. Higher US interest rates may affect demand. Protectionist rhetoric could translate into larger-scale action through policies such as the proposed US border adjustment tax.

Trade prospects have already been damaged by the failure of liberalisation to advance in some regions. The US withdrawal from the 12-member Trans-Pacific Partnership was a major setback and the future of the accord without the US is uncertain.

And in Europe, Brexit could disrupt trade flows within the region and between the UK and the EU’s preferential trade partners. HSBC estimates that the loss of preferential trade arrangements with the EU could potentially reduce UK exports of goods and services by 9 per cent in 2030 compared with current trade policies. New bilateral deals will be required if the UK is to offset the potential increases in cost to trade with the EU.

But risks are not all to the downside. There has also been progress on agreements that could support trade growth. The World Trade Organization’s (WTO) Trade Facilitation Agreement is now in place and easing red tape and customs processes, while the WTO’s Information Technology Agreement has expanded duty-free treatment for electronics. More deals are possible.

In Asia, negotiations for the 16-member Regional Comprehensive Economic Partnership agreement are advancing. An important complement is China’s Belt & Road Initiative, engaging more than 60 countries across Asia, Africa and Europe. An international forum in Beijing in May helped to mobilise international support for next steps in the initiative.

Meanwhile Europe has finalised free-trade agreements with Canada, Singapore and Vietnam and is pursuing deals with Japan, Mexico and others.

Good progress on such initiatives would lend a welcome hand to the fragile trade recovery that is just now getting underway.

This research was first published on 20 June 2017.
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