Global Trade and the World Economy October Animesh Ghoshal, DePaul University

Transcription

1 Global Trade and the World Economy October 2017 Animesh Ghoshal, DePaul University

2 State of World Economy, Oct Global economy strengthening Outlook still fragile World as whole Advanced economies Emerging economies Prognosis

3 World economy as a whole Global economy strengthening World growth since mid 2016 fastest since 2010 Projected growth in 2017: 3.6% 2015: 3.4% 2016: 3.2% Pickup in economic activity widespread US, Europe, emerging markets all show improvement

4 Global Economy Advanced Economies Emerging and Developing Economies World Trade Volume Global Economy: Recent and Projected Figures (Percentage Change) Oil Price Non-fuel Commodity Price

5 Advanced Economies USA Euro Area Japan UK Canada

6 Advanced economies Overall, improvement from 2016; growth should rise from 1.5% to 2.2% US Eurozone Japan

7 United States Disappointing growth since Great Recession, though picking up Expected growth in 2017: 2.2% Up from 1.5% in 2016 Good job creation Unemployment rate 4.2% in September, down from 5% year ago Positive elements Banks, saving rate stabilized Problems Policy paralysis Median household income barely recovered

8 U.S. Unemployment Rate

9 Euro area Picked up after long recession, but still unsatisfactory : Growth decreased from 2% to 1.8% Expected growth in 2017: 2.2% Unemployment still very high, at 9% Uncertainty after Brexit Major problems Imbalances between core and periphery Periphery has lost competitiveness; difficult to regain Austerity vs. growth How to generate growth in periphery? Very little entrepreneurship of the kind that sees new firms becoming giants. Among world s 500 largest public companies, there are 25 American firms started after 1975; only 1 from Eurozone (Inditex, owner of Zara brands)

10 Japan Abenomics has had some success, but still struggling Growth rose from 0 in 2014 to 1% in 2015 and 2016 Expected growth in 2017: 1.5% Huge budget deficit (4.5% of GDP highest among advanced countries) Aging population and declining labor force

11 Emerging and Developing Economies China India Brazil Russia South Africa Saudi Arabia Mexico

12 Emerging economies Excellent performance in last decade While GDP of advanced economies had zero growth over , GDP of emerging economies grew by almost 25%. Share of world GDP now 40% (more than 50% at PPP) Share of world exports more than 50%

13 Can emerging economies be engine of world growth? Overall: growth decreased from 4.7% in 2014 to 4.3% in 2015 and 2016; expected to recover to 4.6% in 2017 and 4.9% in 2018 With a few exceptions, sharp slowdown among the big ones between 2010 (7.4%)and 2015 (4.3%) One factor: sharp drop in commodity prices Big potential problem: borrowed heavily when interest rates very low in US and Europe

14 Commodity Prices,

15 Emerging economies: China For many years, growth approx. 10%, but has slowed down 2010: 10.6% 2013: 7.8% 2016: 6.7% 2017: 6.8% (expected) Reasons Overinvestment in dubious projects; debt now 250% of GDP Household debt 40% SOE debt 170%, much non-performing Rebalancing economy From manufacturing and investment to services and consumption Consequences China world s second biggest importer Slowdown affects Commodity exporters (oil, iron ore, copper) Manufacturing exporters (processed food, machinery, autos, luxury goods)

16 Other emerging economies Some of slowdown due to external factors like lower exports and FDI, but some internal factors Saudi Arabia facing problems due to oil price Producing at high volume, even at low of $35 (now $50-55) Budget deficit $50 b (7.5% of GDP); need $85 oil for balance Can currency peg (3.75 riyal per dollar) be maintained? Brazil had negative growth of -3.8% in 2015; -3.6% in 2016; 0.7% expected in 2017 Budget problems: deficit of 8% of GDP (huge expenditure on public pensions) Currency depreciation in 2015, high interest rate No choice except raising taxes and cutting spending Bond rating lowered to junk ; president impeached for falsifying budget figures Russia had negative growth in 2015, and 2016; 1.8% expected in 2017 Dependence on oil and gas exports conflict (Ukraine) and sanctions Massive currency depreciation in 2015 Only India maintained growth at 7.1 % in 2016, but Infrastructure problems and bureaucracy Bungled currency reform; latest figures show slowdown to 5.7%

17 Currency fluctuations in emerging economies, Currency units per dollar Dec Dec Dec Oct Argentina Brazil China India Malaysia Mexico Russia South Africa

18 Consequences of currency depreciation For country depreciating Advantages Exports more competitive Disadvantages For importers For borrowers in foreign currency For trade partners Exporters to depreciating country If exports denominated in country s currency Loss when converted to home currency Can be hedged (forward and futures markets), but not costless If exports denominated in home currency (dollars) Local buyers less able to afford product Exporter must reduce price (and profit) or face loss of market share

19 Role of International Trade Trade, economic growth, and welfare Opposition to trade Barriers to trade Recent slowdown in growth of world trade

20 Openness to Trade and Welfare of Population In spite of current problems, world economy has done very well in last 25 years in terms of basic well being of population Two very basic measures Percentage of world population in extreme poverty 1990: 35%; 2015: 9.5% Infant mortality rate 1990: 65 out of 1000; 2015: 31 out of 1000 Several factors, but openness to trade played major role : world trade grew very rapidly Countries opening up to trade grew rapidly, reduced poverty, and improved basic conditions more than those which did not

21 Population and Poverty

22 Trade, economic growth, and welfare Trade between any two parties must be beneficial to both, otherwise it would not occur In international trade, two kinds of static gains well known Enables country to get products which cannot be produced domestically (coffee in US) Enables country to get products made more efficiently elsewhere (airplanes in Mexico) Other dynamic gains receive less attention Trade implies flows of knowledge, not just goods Competition with imports increases productivity of domestic firms

23 Trade and Growth: China China, Exports and GDP Nominal GDP (Billions of U.S. dollars) Exports (Billions of U.S. dollars)

24 Trade and Growth: S. Korea S. Korea, Exports and GDP Nominal GDP (Billions of U.S. dollars) Exports (Billions of U.S. dollars)

25 Trade and Growth: India India, Exports and GDP Nominal GDP (Billions of U.S. dollars) Exports (Billions of U.S. dollars)

26 Trade and Growth: Vietnam Vietnam, Exports and GDP Nominal GDP (Billions of U.S. dollars) Exports (Billions of U.S. dollars)

27 Opposition to Trade While all countries gain from trade, not everyone in every country gains Trade creates winners and losers in each country Losers (businesses and workers) Concentrated geographically Have lot to lose Have name and address Winners (consumers, exporters) Usually dispersed geographically Gains to each not that important Lack names and addresses

28 Opposition to Trade: Protectionism Opponents ask political leaders to protect domestic industry from unfair competition In response, all countries have barriers to imports Tariffs Import quotas Local content requirements Government procurement policies Administrative barriers Standards Health and safety regulations Customs procedures Putting up barriers to imports usually leads to lower exports as well Little relation between imports and jobs

29 Link between imports and unemployment? Unemployment Rate and Imports/GDP, USA Unemployment Rate Imports/GDP

30 Bastiat: Petition of Candlemakers to French Chamber of Deputies (1845) To the Honourable Members of the Chamber of Deputies. We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation.

31 Petition of Candlemakers (cont.) This rival is none other than the sun. We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.

32 World Trade: Slow growth WORLD TRADE VOLUMES (PERCENTAGE CHANGE)

33 Sluggish in growth of world trade Since 2011, growth of world trade has slowed down Relative to past growth Also relative to economic activity Causes Weakness in investment Uptick in protectionism Decline in growth of global value chains

34 Growth of US Trade US imports and exports have grown much faster than GDP 1960: Imports $22 b, Exports $26 b, GDP $543 b Total trade 9% of GDP 2016: Imports $2712 b, Exports $2208 b, GDP $18625 b Total trade 26% of GDP

35 Trade, Interdependence and the US Economy Exports of goods and services supported 12 million jobs in 2016 Estimated 25% of manufacturing jobs supported by exports Jobs supported by goods exports pay 13-18% more than national average Agricultural exports supported 930,000 jobs (on and off farm) in 2013

36 US Trade: Major Partners, 2016 (billions of dollars) EXPORTS IMPORTS Country Exports Share (%) Country Imports Share (%) Canada China Mexico Mexico China Canada Japan Japan UK Germany

37 US Food Exports, by Region Market WORLD N. America E. Asia & Pacific Latin America & Caribbean Europe & Central Asia Middle East & N. Africa Sub-Saharan Africa South Asia

38 US Food Exports, by Country Market Leading Markets Canada Mexico Japan China S. Korea Fast-Growing Markets Philippines Vietnam India

39 Trade Agreements Growth of world trade due to two factors Technology made expansion of trade possible Transportation Communication Trade agreements allowed expansion of trade Multilateral (WTO) Bilateral or Regional (EU, NAFTA, US-Korea, TPP?)

40 NAFTA: What it is and why it matters Trilateral free trade agreement 1994 By 2008 all trade barriers removed Investment protections Dispute settlement mechanism Largest free trade area in world 28% of world s GDP 7% of world s population First regional agreement among countries with large income differences No special developing country treatment for Mexico

41 Effects of NAFTA Regional trade increase 1993: $290 billion; 2016: $1.1 trillion Cross border investment increase US investment stock in Mexico 1993: $15 billion; 2016: $100 billion Regional supply chains Intra-industry trade: production process across 3 countries, with each stage produced where most efficient North American Automobile production now almost totally integrated across 3 countries

42 Example of Supply Chain Integration Seat belts for cars Production of nylon fibers Mexico Dyeing and weaving Canada Cutting and sewing Mexico Fitting finished seat belt into car US, Mexico and Canada

43 Absent NAFTA. North American auto industry Major increase in cost Either facing tariffs on each border crossing, Or relocating operations to less efficient sites Other products Average tariff on US exports to Mexico 7.4% Average tariff on Mexican exports to US 3.7% Bound tariff rates: US average: 4% Mexican average: 35% US exporters would face substantial uncertainty

44 Prognosis Overall prospects for world economy uncertain in near term Two major concerns Another asset bubble and financial crash Rising protectionism And when economic conditions are poor, inclination to blame foreigners Danger: protectionism and trade wars as in the 1930s would make things much worse And effect of new US administration?

45 Another bubble? Asset prices very high US: CAPE now 30 Historical average 17 Exceeded only twice: in 1929 and during dot-com boom of late 1990s Canada, Australia, UK: House prices relative to rents highest ever Fund managers losing caution in search for high yields US: Spread between junk bonds and Treasury bonds narrowed dramatically Internationally: Investors willing to buy bonds of Egypt, Iraq, Ukraine at c. 7% Argentina sold 100-year bond this spring, in spite of history (defaulted 6 times in last 100 years) Fed has started raising rates; other central banks will follow Unless handled carefully, asset prices may crash

46 Cyclically Adjusted PE Ratio for US Stocks

47 Trump Effect? Election of Trump could reverse decades of global trends Globalization major theme in Trump s election campaign Attacked existing US trade agreements (NAFTA, WTO) Trade agreements under negotiation (TPP) Threatened to tax US firms investing overseas Proposed high tariffs (30-45%) on Chinese and Mexican goods Declared China a currency manipulator Promised to build a wall along border with Mexico Effects on globalization?

48 What would Trump policies do? Direct effects US is world s largest economy US also has world s share of International trade Global FDI assets Migrants US retreat from world economy would significantly affect trade, capital flows, migration flows

49 Historical globalization trends

50 US share in world trade, FDI, migration

51 What would Trump policies do? Indirect effects Other countries could Retaliate against US, setting off trade war Imitate Trump s agenda Repudiate global norms and institutions Great deal of uncertainty injected into global economy And globalization could be reversed, as in (chart)

52 Collapse of World Trade,