Contracting Global Trade | Dr Kamal Monnoo

And Pakistan’s fortunes

A recent statement by the Commerce Minister that our exports are falling mainly due to the falling international commodity prices of rice and cotton yarn in a way reflects the mindset prevalent at the Commerce Ministry: Nothing is wrong with our policies and management, the decline in our trading fortunes being just a case of fait accompli! Well, partially true, because global trade is perhaps having its worst period since post 2008 recession, except this time there is no freezing up of the financial system to blame. Now whether it is due to a cyclical slowdown or a structural change tied to the maturing or even decline of globalisation, this augurs very poorly for growth in coming months and years.

Given our very narrow export base and high dependence on a handful of markets, Pakistan ought to be worried. Extremely poor trade reports from China and India, as released by WTO last week, have added to this picture of slowing, if not contracting, global trade. Exports from China fell 11.2 percent in January from a year earlier, while imports fell 18.8 percent in the 15th straight monthly drop. And this isn’t being driven simply by a slowdown in Asia: Exports from China to the United States dropped 9.9 percent, while those to the European Union fell 12 percent. South Korea’s exports fell 8 percent in 2015, its worst showing since the height of the crisis. Indian exports, likewise, also fell 13.60% in January 2016 from a year earlier.

Though according to latest data released by the Indian government itself, its quantum of exports is back on the rise since last quarter; however, its imports continue to register a decline. In the case of Bangladesh it has been an exceptional story as the country has posted growth both in quantity and value terms. Analyse all these developments intrinsically and the outcome reflects a rather alarming scenario for Pakistan where its main international trading partners are importing less, but at the same time its regional competitors continue to eat into its global trade’s market share – their quantitative numbers are growing while Pakistan’s exports (even in quantitative terms) consistently post a falling trend.

Also, this emerging trend in global trade tells a new story: nations today have suddenly become very careful about whom they trade with and what they trade in. Gone are the days when they single mindedly focused on expansion of trade or had blind faith to slip into the prescribed WTO straight jacket to become a part of the global trade order. Today they instead choose to do business only where visible gains can be felt tangibly. The 2008 financial crisis, ensuing world recession, and a noodle bowl effect of FTAs (Free Trade Agreements), RTAs (Regional Trade Agreements), PTAs (Preferential Trade Agreements), have slowly but surely undermined the once unquestioned wisdom of multilateral functioning. Modern day thinking being that while expanding global markets is a worthy goal, history offers lessons that only fair and ‘constructive trade’ is what nations should be seeking — ‘constructive’ referring to a realisation that only such trade is welcome that tangibly adds value to the home economy and ensures a gradual but clear development of its core national industries. And in such a challenging global environment to safeguard Pakistan’s market share in world trade or to post a meaningful GDP growth at home – one that is equitable and generates employment — our Commerce Ministry will soon need to understand and quickly adapt to this new modern day trade phenomenon.

Between 1950 and 2008, global trade grew at three times that of the growth rate of the world’s economy, reflecting the post-war expansion and the eventual integration of China and the Soviet bloc. That all stopped with the global financial crisis, when worries about the banking system made crucial financing all but unobtainable. After a brief recovery, global trade in recent years has grown only at about the same rate as that of global growth, and it appears this year after a long time it will in fact fall well behind even the rate of world economy’s growth. The Danish shipping conglomerate (largest in the world) A P Moller-Maersk announced in January 2016 that it is suffering its worst business conditions since 2008, a contention supported by the decline in the price to charter dry-bulk carriers, now at an all time low and down 75 percent in about six months.

As with any malaise, understanding what is going wrong with global trade is important so that home policies can be adjusted accordingly. Although not overtly cited by any of the global trading organisations or associations, World Trade Organisation included, the medicine now tacitly being offered to suffering economies amounts to supporting home manufacturing and jobs to counter excess global supply, caused in part by debt-fuelled expansion of capacities over the last eight years. Investment in China was yesterday’s demand but is now today’s supply. There was so much outsourcing that global trade collapsed because of the cascading effects at different levels of production. To curtail this, new trade agreements are being signed that primarily protects domestic industry and in essence trades on reciprocity.

With this new interpretation, one was hopeful that this new trend would serve as a guide for our commerce managers. However, it appears, Pakistan’s trade policy seems to be moving in the opposite direction. Forget just the ever increasing trade deficits with China and India, we now tend to be in a rush to blindly sign trade agreements, which not only make no sense, but are also out-rightly destructive for home manufacturing. Examples are numerous: the latest ones with Indonesia and Malaysia and the ones in the pipeline, Turkey and a revised one with Thailand. While elsewhere, the current mantra is that it may be nice to form new economic linkages, however the resulting economic activity must primarily take place at home — a sentiment, which today in fact is nearly gripping the entire world (developing and developed) economies alike.

Once the champions of outsourcing and of trade without barriers, US and Japan, are currently busy doing the reverse by encouraging their core industries to relocate back home. Essentially, countries looking for increased market share in total global trade are not just looking for FTAs, but also strategising to expand their manufacturing innovation hubs, invest in federally funded research centres that disseminate advanced manufacturing knowledge, and willing to provide subsidies that are expressly contingent on exportation. In other words: in this new Great Game of Trade, the emphasis is on safeguarding home markets whilst going on to strengthening external influence.

In one such recent development, the United States in order to counter China’s influence and pivot itself as the dominant power in the region, just concluded a far from perfect deal, the Trans Pacific Partnership (TPP) with select Asia Pacific and South American countries: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States. The original endeavour was to draw together countries representing two-fifths of the global economy, from Canada and Chile to Japan and Australia, into a web of common rules governing trans-Pacific commerce, making it the capstone of a new economic agenda to provide market access to a resurgent US industry. However, it met with resistance, as it took more than six years for TPP to become a reality because the smaller nations would just not budge from their stance where they saw a danger for their core home industries. The Pakistani policymakers also need to show the same kind of tenacity if we have to avoid being reduced to a mere trading economy in this cycle of global economic downturn.

Source: http://www.pakistantoday.com.pk/2016/02/24/comment/contracting-global-trade/
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