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VoxEU Column International trade

The peak globalisation myth: Part 2 – Why the goods trade ratio declined

The public discussion on globalisation tends to obsess over manufactured goods. This second in a series of four columns presents evidence that the decline in the goods trade-to-GDP ratio is in line with much more mundane explanations that have much less world-shaking implications for global commerce. About 60% of the decline is due to a drop in the ratio for fuels and mining goods, which dovetails nicely with the massive drop in the price of commodities from about 2010. The rest is due to a fall in the ratio of manufactures to GDP.

Part 1 of this series of VoxEU columns presented evidence that the standard ‘peak globalisation’ chart was misleading in several ways. The peak in 2008 is false in the sense that it hides important heterogeneity. As Figure 1 shows, the trade ratio for large trading nations either peaked before 2008 (China) or after (US and Japan), and the world’s largest trader, the EU, has not peaked so much as stagnated (and there is important heterogeneity among the large EU members; France peaked in 2001, Germany in 2012, and Italy, the Netherlands, and Spain have not yet peaked).

Figure 1 World trade in goods as a percentage of world GDP (top) and ratios indexed to 2008 = 100 (bottom)

Figure 1a World trade in goods as a percentage of world GDP

Figure 1b World trade in goods, ratios indexed to 2008 = 100

Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data, current USDs).

The falsity of the peak matters, since attempts to associate the changes in globalisation with the traumatic Global Financial Crisis of 2008 – or the Great Trade Collapse that followed – are almost surely misguided. While the 2008 peak is false, there is no doubt that trade in goods as a share of GDP is no longer rising as it had been since the end of WWII. Understanding why globalisation changed requires more subtle reasoning.

This second instalment in this series of VoxEU columns digs deeper into why trade in goods is declining in so many of the largest trading nations. The main focus is to bring some evidence to the most common explanations for why the ratio has declined since 2008. We start by decomposing the global peak into price and quantity terms.

Relative prices matter since world trade and world GDP have very different compositions

The numerator of the goods trade ratio in Figure 1 (top panel) has a composition that is very different from its denominator. World trade in goods is made up of about three-quarters manufactures, with the rest roughly equally split between agricultural goods and mining products. World GDP is made up of something like two-thirds services and only one-third goods. Given this mismatch, relative price changes can have a big impact on the ratio, and, as history would have it, relative price changes really did move the ratio.

Figure 2 illustrates the point. The top panel plots the logs of real world GDP and the logs of real world exports. Recalling that the slope of a series in logs equals the growth rate of the series, we see that the growth of real exports outstripped real GDP from the early 1980s to 2008 but that the reverse was true after 2008 – which is why we observe the 2008 peak in the ratio. The key point here is that the ratio of goods trade to GDP fell because GDP was rising faster, not – as one might have thought from the public discussion – because trade in goods was falling.

The bottom panel of Figure 2 shows that the global peak still appears in real terms, but it is more moderate than the peak we get using the ratio of nominal series (Figure 1, top panel). Using nominal series, the ratio fell 8 percentage points between 2008 and 2020; using constant price series, the drop is only 4 percentage points.

Figure 2 World real exports and GDP evolution, 1972–2021 in logs (top) and ratio of volumes (bottom)

Figure 2a World real exports and GDP evolution, 1972–2021 in logs

Figure 2b World real exports and GDP evolution, 1972–2021, ratio of volumes

Note: Top panel: Log of real GDP (constant 2015 USD), and log of world export volume fixed-base index (2015 = 100). Bottom panel: Volume of world exports (2015=100) from WTO over GDP, constant 2015 USD index (2015=100) from WDI.
Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data).

Two other salient points in the charts are noteworthy. First, the fluctuations during the 1970s shown in the ratio in Figure 1 are due to relative price changes, not trade volume changes. Second, the sharp acceleration in the rise of the ratio that appears around 2001 in Figure 1 is due to price changes, not changes in real activity. As the top panel of Figure 2 demonstrates, the growth of world trade in goods was rather constant in real terms between 1982 and 2008.

The point that relative prices have had a macro effect on our inferences from the ratio brings us to the next set of important points – the commodity composition of the peak.

Commodity composition of the 2008 peak

Figure 3 displays the world goods trade flows – broken down into agriculture, mining and fuels, and manufactures – divided by total world GDP (all figures in nominal terms to be comparable to Figure 1). When constructed in this way, the series in the figure all have the same denominator (world GDP) so they can be added vertically.

The data show that about 60% of the fall in the goods-trade share of GDP is due to a drop in the value of trade in mining goods and fuels as a share of world GDP. The rest is due to a reduction in the trade in manufactures. More precisely, the GDP share for all traded goods (total goods in the chart) fell from about 50% to 42% between 2008 and 2020. The share of mining and fuels trade in world GDP dropped from 11% in 2008 to 6% in 2020. The share of manufacturing trade in world GDP dropped from 33% in 2008 to 30% in 2020.

Figure 3 World goods trade to world GDP ratio, by sector, 1980–2020

About 60% of the drop in the trade ratio was due to mining and fuels, the rest by manufactures

Figure 3 World goods trade to world GDP ratio, by sector, 1980–2020

Table for Figure 3 World goods trade to world GDP ratio, by sector, 1980–2020

Source: Author’s calculations based on WTO (trade data) and WDI database (GDP data).

Trade values and volumes have not dropped (except mining goods and fuels)

To get an idea of the movement in trade independently of world GDP, Figure 4 shows the flows in billions of US dollars without normalisation by world GDP. The pattern is, naturally, similar to that of Figure 3, but we see that trade in mining goods and fuels actually fell in nominal terms, while the two other series grew post-2008.

Figure 4 Value of world goods trade by sector, 1980–2020 (US$ billion)

Figure 4 Value of world goods trade by sector, 1980–2020 (US$ billion)

Source: Author’s calculations based on WTO (trade data).

The important role of the 1998-2014 commodity supercycle

The fact that more than half the decline in the trade ratio is due to goods related to mining and fuels is a warning sign for grand theories about deglobalisation. Sweeping analyses claiming that the 2008 peak is all about the end of multilateralism, or the end of the neoliberal regime, will struggle to account for the plain fact that 60% of the fall was due to a phenomenon known as the ‘commodity supercycle’ (Cuddington and Jarrett 2008).

Figure 5 displays the prices of traded goods for the world from 1950 to 2020. The commodity supercycle is plain to see. From the late 1990s to the mid-2010s, the price of fuels and mining goods first soared and then crashed. Since the ratio in the global peak in Figure 1 has the value of trade in the numerator, relative prices matter. Notably, the importance of fuels and mining in total goods trade rose substantially (in value terms) during the start-to-peak phase of the supercycle, from 8% of goods trade to 24%. (The annex digs deeper into some facts about the supercycle.) Also important is the fact that prices for manufactures have fallen since 2008, so the slower growth in world trades in manufactures is, in part, due to lower prices rather than a slowdown in real activity. The same goes for agricultural goods.

Figure 5 The 1998-2014 commodity supercycle: World prices for goods trade by sector

Figure 5 The 1998-2014 commodity supercycle: World prices for goods trade by sector

Note: In 1989, at the start of the supercycle, mining & fuels accounted for 8% of goods trade, while agriculture and manufactures accounted for 15% and 77%. In 2011, at the summit of the supercycle, the corresponding shares were 24%, 9%, and 67%.
Source: Author’s calculations based on WTO (trade data).

As the offshoring expansion slowed, and commodity supplies rose in response to booming demand and prices, global prices of commodities came off the boil.

Concluding remarks

The public discussion on globalisation tends to obsess over manufactured goods. Indeed, much of the analysis implicitly assumes that most of the drop is due to reduced trade in manufacturing goods. The usual culprits are the war on trade started by President Trump in 2018 (especially the US-China cycles of retaliation), Brexit, the rise of populism, and the decline of support for open trade in G7 nations. Some analysts spin it out to demonstrate a broad turning away from multilateralism and the open liberal system (Foroohar 2022).

This column presents evidence that the decline in the goods-trade-to-GDP ratio is in line with much more mundane explanations that have much less world-shaking implications for global commerce. About 60% of the decline is due to a drop in the ratio for fuels and mining goods, which dovetails nicely with the massive drop in the price of commodities from about 2010. The rest is due to a fall in the ratio of manufactures to GDP.

The next column in the series will dig into the decline of the manufacturing trade ratio. This will marshal evidence to support the notion that global supply chains are unwinding, as pointed out by Antras (2021).

References

Antras, P (2021), “De-globalisation: Global Value Chains in the Post-COVID-19 Age”, paper written for the 2020 ECB Forum on Central Banking. 

Baldwin, R (2016), The Great Convergence: Information technology and the new globalisation, Harvard University Press.

Cuddington, J and D Jerrett (2008), “Super cycles in real metals prices?”, IMF Staff Papers 55(4).

Foroohar, R (2022), “Davos and the new era of deglobalisation”, Financial Times, 22 May.

Annex: Zooming in on the commodity supercycle

Figure A1 zooms in on the evolution of mining-goods and fuels price and volume. The leftmost panel shows the path of world exports and imports of goods in current US dollar terms. The middle panel shows the price path (taken from Figure 5), and the rightmost panel shows the value series deflated by the price series. The importance of price developments is most clear from the rightmost panel. This indicates that in volume terms, trade in mining goods and fuels has continued to grow steadily after 2008. But the leftmost panel tells us that the price movements more than offset the volume movements. In short, the supercycle is all about prices, not real trade volumes.

Figure A1 Breaking down the commodity super cycle into prices and volumes

Figure A1 Breaking down the commodity super cycle into prices and volumes

Source: Author’s calculations based on WTO (trade data).

While the facts are clear, the connection between the price developments and the globalisation process is not. One could argue that the commodity supercycle was part of globalisation’s unwinding. The question is: Was the supercycle a random occurrence, or was it linked to the offshoring-expansion phase? In Chapter 3 of my 2016 book, I argue that the two are linked. The argument is straightforward.

How the supercycle was driven by globalisation’s second unbundling

ICT-fuelled offshoring transformed globalisation’s impact on the world because G7 manufacturing firms started combining their high-tech knowhow with workers in low-wage nations as part of the offshoring (Baldwin 2016). This high-tech/low-wage combination turned the world of manufacturing competitiveness on its head. A handful of emerging markets (especially China) were competing in manufactures using high tech and low wages. Industrial workers in G7 nations, working with high tech and high wages had trouble keeping up. Industrial workers in developing nations that did not get the offshored manufacturing stages and the tech that came with them were competing with low tech and low wages. They too had trouble keeping up with high-tech/low-wage workers in China and a handful of other nations.

This rapid industrialisation in a handful of emerging economies sparked historically unprecedented income growth, and since these rapid industrialisers included India and China, the rising demand for commodities triggered the 1998-2014 commodity supercycle.