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Peak trade?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • In the first quarter of this year, world trade hit a record high as a share of global GDP. This is calculated using real trade and real GDP. Nominal data gives a false idea of global integration, as shifts in the oil price affect the value of trade more than the value of GDP.
  • Despite record global integration, there are reasons to worry. The growth of globalization has slowed. Protectionism is high on political agendas. Long and complex global supply chains are a strong argument against restricting trade, but the free trade argument has never been easy to explain to the population at large.
  • There are two issues as protectionism threatens trade links. First, supply chains can adapt over time. Protectionism will create shocks, but companies can shift production. Natural disasters have disrupted supply chains in the past, and global trade has carried on.
  • Second, trade in goods may be less relevant in the future. Technology helps localize physical production. In some cases the virtual economy replaces the physical economy (compact discs are practically obsolete, after all). This causes supply chains to shorten, reducing the real trade to GDP ratio – but it does not necessarily make the world less efficient.