With decline in world trade, is it end of globalisation?

Daniel Gros has an article asking this question.  He says world trade has declined as commodity prices have crashed:

China has just announced that last year, for the first time since it began opening up its economy to the world at the end of the 1970s, exports declined on an annual basis. And that is not all; in value terms, global trade declined in 2015. The obvious question is why.

While global trade also fell in 2009, the explanation was obvious: The world was experiencing a sharp contraction in GDP at the time. Last year, however, the world economy grew by a respectable 3%. Moreover, trade barriers have not risen significantly anywhere, and transport costs are falling, owing to the sharp decline in oil prices.

Tellingly, the so-called Baltic Dry Index, which measures the cost of chartering the large ships that carry most long-distance trade, has fallen to an all-time low. This indicates that markets do not expect a recovery, meaning that the data from 2015 could herald a new age of slowing trade. The obvious conclusion is that the once-irresistible forces of globalization are losing steam.

The situation in China is telling. In recent decades, as it became the world’s leading trading economy, China transformed the global trading system. Now the value of both imports and exports have fallen, though the former have declined more, owing to the collapse of global commodity prices.

In fact, commodity prices are the key to understanding trade trends over the last few decades. When they were high, they drove increased trade – to the point that the share of trade to GDP rose – fueling hype about the inevitable progress of globalization. But in 2012, commodity prices began to fall, soon bringing trade down with them.

However trade and globalisation not the same thing. Though they are connected. With trade expected to remain subdued the hype over globalisation to fall as well:

This is not to say that globalization and trade are one and the same. Globalization entails many other features, including the surge in cross-border financial transactions and tourism, data exchange, and other economic activities. In fact, these other interconnections have fed back into trade, as they have enabled the emergence of global value chains, whereby different steps of the production process occur in different countries.

But this phenomenon has been overestimated. According to the World Trade Organization, the foreign value-added contained in exports is only around 15% for most large economies, such as the United States and the European Union. In other words, global value chains have little impact on these larger trading economies.

China is the only exception. Its position as an assembly platform for the world’s products meant that it imported most of the highest value-added elements of those goods. But as the country’s industrial structure matures – Chinese-assembled iPhones now contain more Chinese-made parts than they did just a few years ago – it will move closer to the US and the EU in value-added terms, not the other way around. This is yet another reason why trade might diminish in importance.

When something is widely hyped, there is nearly always a real reason for it. Most economies are more open today than they were a generation ago. But it is now becoming clear that the perception that globalization is some overwhelming and inexorable force largely reflected the side effects of the last decade’s commodity boom. If prices remain low, as seems likely, the next decade might well see global trade stagnate, as the trade pattern “rebalances” from emerging economies to the established industrial powers.

Hmm..

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