Baltic Business Research

Speech from Baltic Sea Region and China Day 2014 Kalmar, October 13, 2014 Linnaeus University – School of Business and Economics

1. The growth of world trade is nowadays substantially below the average growth rate of the past 20 years. This means in numbers a historical growth trend (average) in the past two decades at 5 1/4 percent compared to current world trade increases around 2 ½ percent. The current slow improvement of world trade has been going on already for a couple of years. The famous Kiel Institute for the World Economy in Germany speaks even about a kind of decoupling of world trade from the global GDP development. Will this phenomenon – if it proves right – also be observed in the future?

2. It can be considered as remarkable that also emerging markets have been affected by the decreasing growth trend in the advanced OECD world. This decreasing growth trend in the traditional OECD affected more recently even China quite negatively. We probably remember that China soon after the eruption of the subprime crisis in the latter part of the last decade supported growth in the global economy enormously by its very expansionary economic policy – or more exactly by something around one third of total global GDP growth during a couple of years that followed.

3. Today, however, China does not want this global stimulus function anymore. GDP-growth rates in China are aimed to be “parked” somewhere around 7-7 ½ percent – at least for the time being. Chinese politicians want to cool down the previously overheated economy by trying to achieve some magic growth equilibrium in this 7-7 ½-percent range – and by avoiding to come too close to a “recession” according to Chinese definitions (which certainly would be the case if GDP growth declined visibly below six percent in the forthcoming years).

4. Consequently, world trade gets notably less growth support from China during this renewed global growth weakness – but less growth stimuli are also coming from other parts of the emerging world. Sure, India may recover a little bit after the elections – but how sustainable is such a development; it seems to be premature to predict that the new Indian government is on a solid way to higher growth. Furthermore, the Russian growth problems are well known. In 2014, the economy of Russia will most probably stagnate – in the best case!

5. This poor development will give a negative impact on other countries with relatively large trade links to Russia. Here can we can find, for example, Finland, the Baltic states and other countries that previously belonged to the Soviet Union. Germany appears also being quite sensitive to poor or uncertain Russian developments. The fifth BRICS country – South Africa – remains underperforming as well, also structurally.

6. Moving on further geographically, slow GDP can also be noted in Latin America. The Brazilian miracle seems to be quite shaky today. It remains to be seen what the presidential elections will mean to future structural reforms and economic growth. Argentina is confronted with a recession, and Mexico is waiting for a stronger recovery in the U.S.

This brief global “growth journey” may – or rather should – lead to someimportant conclusions:

6a. There are certainly business-cycle reasons that explain slower growth rates in world trade. GDP-growth rates at around 1 ½ percent in the OECD area during the past few years point at dampened export and import growth in these advanced countries which certainly has a negative impact on export and import opportunities of emerging markets, too. There exists an obvious interdependence between advanced and emerging countries. Once the global economy picks up again, export and import numbers in many countries will certainly go up again. But how much? In other words: the business cycle phenomen is still alive in world trade. But has this correlation been lowered in the past years – and structural dampening factors gained momentum?

6b. It seems to be quite a safe assumption that the still ongoing slowdown of world trade also has structural explanations. Potential GDP growth in OECD countries is on a less encouraging trend in many advanced countries due to budget restrictions, etc. Structural weaknesses in France, Italy and other EU countries, for example, are not pointing at a remarkable European recovery any time soon. Potential output has come down. Furthermore, Germany’s resilience is certainly also limited in the uncertain Eastern European political climate and – particularly – the (still) poor French performance and outlook . But also the potential growth rate of the U.S. has come down.

And not to forget: China needs to dampen its growth for quite some time in order to get a more balanced economy and a less burdening environment. This process has been started after the Third Plenum last year (even if we cannot really recognize the strength of this voluntary process). Of course, other emerging countries need structural improvement changes as well – structural changes that initially may lead to (somewhat) shrinking economic growth rates in the forthcoming years in especially emerging countries with budgetary and government debt problems.

Altogether, these factors mean (somewhat) less growth potential for world trade – at least in the shorter run.

6c. One may also ask – as the above-mentioned Kiel Institute does – whether most of the benefits from trade liberalization in the past two or even three decades now have been exploited. Hard to answer! Without doubt, more significant trade liberalization in the future would be very beneficial for the global economy and global trade.

7.   Another angle: I do not believe in the theory that import demand from emerging countries really is about to become saturated – particularly not what concerns investment goods. This is where hope for the future should be originated. Current demand impediments can certainly be partly explained by the weakened GDP growth in all continents. However, future ambitious structural and political reforms by emerging markets – favoring growth potential more strongly – would also create new potential for cross-border trading and investments. Economic progress is to a high extent made at home. Something to remember: the winners of today/so far are not necessarily the winners of tomorrow. Good or maintained global competitiveness can only be achieved by steadily ongoing structural improvements. As the late Nobel Prize winner Paul Samuelson explained to me in in the latter part of the 1990s: “Globalization means that there is no room for comfortable ineffectiveness anymore.”  Each and every government and company should steadily remember and apply these words!

8. The extreme emerging-market hype that we have seen in the past twenty years – based on global excess liquidity, the so-called “great moderation”, and overconfidence – may be over (at least for quite some time). However, despite this probable conclusion, emerging markets will continue to grow faster than all the advanced countries – and, thus, increase their production share in the world.

9. This means translated into the language of the corporate sector that growth potential within many product areas will go on or remain/become increasingly attractive for many companies that want to make business in emerging countries. The needs of experience and skills about these countries in our part of the world will remain in place – which means life-time learning. Maybe we are moving toward a kind of normalization after the by now extinguished emerging-market hype that started in the middle of the 90s. This could be quite healty.

We still do not know the answer exactly. What we do know – on the other hand – is that country analysis and strategies have to be prepared more carefully in the future than it has been the case in the past. This is certainly true of emerging countries as well.

10. Altogether: The dampened growth in world trade and GDP growth in emerging countries happens currently for both temporary and structural reasons. Hopefully, the temporary reasons dominate. But this is far from sure at this very moment.