Global trade will see strong bounce

As signs grow that the worst of the global slowdown is passing, fears are being voiced that world trade could hold back the recovery.

The answer depends on whether trade is seen as a reflection of the broader economy or a transmission belt for the downturn. The links between finance and trade are still little understood.

World trade has experienced its biggest contraction since the 1930s – much sharper than the fall in economic output.

Some economists argue that damage to trade finance and global supply chains, and a series of open and furtive protectionist measures in the meantime, could hamper the recovery in trade, and with it the rebound in output.

"There is a good reason to fear that trade growth will lag rather than lead any recovery, and that this will itself constrain the pace of recovery," said consultants PFC Energy.

Globalisation – the integration of the world economy – could go into reverse as national self-interest takes priority over the promotion of trade, they said in a note.

Yet behind the continuing headlines of contracting trade, the first signs of a recovery are also evident.

Of 18 countries reporting trade data for June so far, almost all show a rise in imports and exports over the previous month, said World Bank senior economist Caroline Freund.

"Although trade was still 25 per cent lower than in June last year, this is the first generalised spark in trade flows since the beginning of the crisis," she said in a blog last week.

A study by Freund on the policy portal VoxEU.org concluded that trade would contract overall by 12-20 per cent this year.

But, like many economists, she forecasts a powerful bounce. "In terms of the rebound in trade I think it will be fast – that's what's happened in previous episodes, so that trade falls fast but it also comes up really fast," she said.

Why trade has contracted so sharply in the current downturn is still being debated. It seems the financial crisis that triggered the downturn delivered a triple blow to trade, Ronald McKinnon, professor emeritus of economics at California's Stanford University, told a recent symposium covered by the magazine International Economy. He said it created insecurity, and when incomes fall and people and businesses feel less secure they can easily postpone purchases of manufactured goods and consumer durables – the goods that are traded most. The risk of bank insolvency dried up trade finance, which is used to fund 90 per cent of the $16 trillion in world trade. And malfunctioning wholesale financial markets made it hard for exporters and importers to hedge currency transactions, he said.

Great uncertainty remains over what will happen now to the financial sector, and how that affects trade.

A combination of protectionism and re-regulation after the crisis is putting banks under stricter national control, which could affect cross-border financial integration, said Nicolas Veron, research fellow at the Brussels think-tank Bruegel.

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