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15 Aug, 2012

People’s Daily: World trade faces downside risks

People's Daily Online

Beijing, August 14, 2012 – World trade growth has slowed abruptly in 2012 due to the European sovereign debt crisis and slowdown in emerging economies, according to the 2012 Global Trade and Investment Report released by the Japan External Trade Organization on Aug. 9. The World Bank believes that developing countries have contributed to more than 50 percent of world trade growth since 2009, and their growth rate of gross domestic product in 2012 will be twice that of developed countries. Therefore, developing countries will continue to serve as the engine of global trade growth.

(Photo/China Daily)

Rebound unlikely to continue

According to the World Bank’s Global Economic Prospects report published in June 2012, world trade rebounded in early 2012 mainly due to strengthening import demand in developing countries, after declining sharply in the fourth quarter of last year. However, the deterioration of the European debt crisis in the second quarter added uncertainty to fragile global trade. The rebound is unlikely to continue, but world trade will not decline as sharply as it did in the fourth quarter of last year, the World Bank predicted.

The Organization for Economic Cooperation and Development (OECD) forecast in May that the annual growth rate of the exports of its member states is expected to drop from nearly 6 percent in 2011 to nearly 4 percent in 2012.

The OECD’s chief trade economist said that the global trade outlook remains positive, though trade growth is still below pre-crisis levels.

Sluggish U.S. and European markets affect Asia’s exports

In Asia, South Korea’s exports fell nearly 9 percent in July from a year earlier, the biggest contraction since September 2009. The exports of Thailand and Hong Kong fell over 4 percent and nearly 5 percent, respectively, in June. Indonesia’s exports fell over 16 percent in June, the biggest drop in nearly three years. Major Asian economies witnessed the biggest drop in their exports in July in three years, according to a report released by British market research firm Markit Economics on Aug. 1.

Gu Qingyang, an associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy, said that world trade, which is greatly dependent on the European, U.S., and Japanese markets, has been severely affected by the weak performances of the three economies. The exports of East Asia, Brazil, India, and Russia have also been affected. As the European debt crisis further deteriorates, world trade will naturally decline.

Quan Dejian, an economic analyst based in Singapore, said that Singapore’s dependence on the U.S. and European markets dropped from 34 percent in 2000 to 20 percent in 2011, while the share of its exports to the Asia-Pacific region increased from 61 percent to 71 percent. Southeast Asian countries export a large amount of intermediate goods to China, which then exports finished goods to the U.S. and European markets.

As it can be seen, the trade in Southeast Asia is closely related to the U.S. and European markets. Quan added that 22 percent of foreign direct investment (FDI) in Southeast Asia comes from Europe, and a decline in FDI has inevitably affected the region’s exports. Gu agrees that the sluggish U.S. and European markets have had a negative impact on the exports of Southeast Asia, including the exports of intermediate goods.

Manufacturing slows down in Asia

The Purchasing Managers’ Index (PMI) for Asia compiled by Markit Economics dropped from 49.3 in June to 48.2 in July. A PMI reading below 50 indicates contraction in the manufacturing sector. “The decline of the manufacturing sector is caused by shrinking exports. Asia’s exports are declining at the fastest pace since April 2009,” the firm said.

The managing director of Hong Kong and Shanghai Banking Corporation (HSBC) Qu Hongbin, who doubles as co-head of Asian economic research and chief economist in Greater China region, said on Aug. 9 that China and other Asian countries will face a higher downward pressure on their exports in the second half of 2012. The government of China should make efforts to regulate the counter-cycle by means of monetary and financial policies to prevent the national economy from slowing down sharply.

Furthermore, it still has room for China and other Asian countries to invest in the infrastructure construction. Increasing investment in the infrastructure construction can not only play a role in the regulation of counter-cycle in the short term but also improve urban quality of life and enhance the environment for economic performance in the medium and long term.

Pushing regional trade in Asia forward

The economists are not optimistic about when the global trade can resurge. Quan Dejian believes that Asian economy will continue to slow down in the second half of 2012, but begin rebounding from the fourth quarter of 2012 to the first quarter of 2013. The condition is similar in the United States but will be lasted longer in Europe. As a whole, the global trade will still maintain a slow growth in 2013.

Gu Xingyang said that the future international trade cannot always depend on Europe, the United States and Japan. The trade volume of developing countries especially emerging-market countries will increase. According to the World Bank, the developing countries have contributed over 50 percent to the global trade growth since 2009 and their GDP growth rate will twice than the developed countries in 2012. Therefore, the trade between developing countries will grow into the engine of global trade growth.

In order to promote the regional trade, the Asian Development Bank (ADB) had authorized renminbi and Indian rupee as the currencies of settlement on July 17. The ADB said that currently many countries are short of U.S. dollar and the authorization of this time will encourage the circulation of regional currencies and promote the Asian trade. The statistics of ADB show that currently more than 90 percent of foreign trade in Asia is settled by U.S. dollar, but the proportion will reduce in the next few years. The regional trade of Asia will account for at least 50 percent of the Asian countries’ total foreign trade in the future 10 years.

Comments from Zhang Monan, an associate research fellow with the Economic Forecasting Department of the State Information Center:

Influenced by the sustained deterioration of European credit crisis and simultaneous deceleration of global economic growth, the global trade will show a trend of further slowing down in 2012. The European credit crisis has exerted an influence to the global demand side and even impacted the export-oriented economy of Asia through trade, investment and financing channels. The relevant data show that Asia has obviously reduced its exports to Europe and the United States in the past 10 years, but greatly increased regional trade, forming an Asian supply chain centered in China.

However, after deep analysis, we found that 60 percent to 65 percent of Asian trade volume was achieved through the intermediate product trade, namely produced in such regions as South Korea and Taiwan, assembled in Chinese Mainland and then sold to the West. As the European Union is the largest export market of China, which accounted for 20 percent of China’s total exports, the European credit crisis first led to the slowdown of China’s economic growth in the Asian supply chain centered in China, then spread to more developing countries of Asia and at last formed a pattern of simultaneous deceleration of global demand side (the Europe and the United States) and supply side (Asia).

The future trend of global trade is not so optimistic. The Baltic Dry Index, leading indicator of global trade, has accumulatively down to about 52 percent since the beginning of 2012. With the influence of sluggish market demand and adjustment of supply chain, the downward tendency of the global trade growth rate will hardly be changed in the second half of 2012.

Read the Chinese version at: 全球贸易面临下行风险, Source: People’s Daily