Poorest countries caught in the global trade turmoil

The world trading system is in crisis in a manner unprecedented for many decades. Recent trends seem to suggest that trade policy regimes in major economies could change fundamentally, giving rise to profound implications for the world’s poorest and most vulnerable economies.

Although the tariff war involving China and the United States (US) draws intense focus, world trade is also going through some structural changes, complicating the situation further.

The impact of the 2008 global financial crisis on global trade flows was actually a short-lived one, but more recent trade turmoil since 2015 could signal a newer, lower level of trading activities persisting. It appears that medium- to long-term trade growth rates could be much lower than during the 1980-2007 period of over 6%.

Another major development is the weakening nexus between trade and GDP growth. In the three decades prior to the global financial crisis, trade grew at an average two times faster than GDP – an average annual global output growth of 3%  was accompanied by 6.1% trade growth. In the post-financial crisis period, both GDP and trade grew at an average annual rate of 3%.

Perils of protectionism

The gloomy trade prospects have further been affected by protectionist measures undertaken by many developed and large developing countries in the wake of the global financial crisis and their failure to rollback those interventions over time. US policy shifts and unilateral trade measures have seriously hampered the global environment for trade and investment flows.

In addition, China’s lower economic growth and its greater focus on domestic consumption of services and value-added manufacturing production – as well as a slowdown in the expansion of global value chains – are causing reduced trade linkages.

The globalisation backlash and associated protectionist policy agenda have turned a new spotlight on the role of trade in development. The 2030 Agenda for Sustainable Development recognises international trade as a means for achieving various SDGs.

An important question is how the unfolding developments on the international trade front are going to affect LDCs.

Recent trends in world trade

After six long years since 2011, a strong recovery in global trade flows was registered in 2017. World exports of goods and services reached US$22.7 trillion, a rise of more than 10% over the previous year. In 2018, world trade reached a record high of almost US$25 trillion. Merchandise exports grew to US$19 trillion, for the first time exceeding the US$18.6 trillion achieved in 2014.

Improving performance of world exports

Source: Data from UNCTADStat

When measured in real terms, world trade growth for goods and services in 2017 reached around 5% – significantly higher than the 3% annual average growth rate achieved from 2012-16. Nevertheless, the reinvigorated trade growth of 2017 remained lower than that of the pre-global financial crisis long-term average of 6.1%. The growth of trade moderated to 4.3% in 2018 and is expected to slow down amid global uncertainties. Merchandise trade alone is projected to grow by only 1.2% in 2019.

Performance of LDCs

From the late 1990s to 2013, LDCs managed to reverse the trend of marginalisation in global trade with their share in total global exports of goods and services increasing quite noticeably, reaching just over 1% of world exports in 2013.

Interestingly, the global financial crisis of 2008 did not cause sustained declines in the relative significance of LDCs. However, they were adversely affected by the trade slowdown of 2015-16 as their share in world exports fell.

LDCs exports rebound from the trade slowdown

Source: Data from UNCTADStat

From 2000-08, LDC exports grew nearly fourfold, from US$43 billion to about US$180 billion. The corresponding increase during 2010-18 was by a much reduced factor of around 1.5.

The global trade crisis was to deal an early blow to one SDG target, namely SDG 17.11.

Adapted from the Istanbul Programme of Action (IPOA) for LDCs for 2011-2020, this target stipulated a doubling of the LDC share of global exports by 2020. Reaching the target would require the LDC share to rise to 2.1%. However, the share actually declined to 0.97% in 2018. Although the dollar value of LDC exports in 2018 was the highest since 2000 – at just over US$240 billion – achieving the target of doubling the LDC share now appears to be extremely challenging given current trends in global trade.

South-South merchandise trade and the global trade crisis

One of the major developments in the world economy over the past three decades or so has been the rapidly growing share of developing countries in world trade. A related trend is that increasingly more trade is taking place between developing countries.

For LDCs, the export share of the Global South in 2018 was around 56%, up from 53% in 2016. In 2018, their merchandise trade (exports plus imports) with developing countries was US$355 billion in comparison with their trade of US$143 billion with developed economies.

The direction of LDC merchandise trade, 2018

Source: Authors’ analysis using data from UNCTADStat

Policy responses in uncertain times

LDCs should continue to build their trade capacity, including export supply response and trade-related institutional development, by making use of aid for trade initiatives like the Enhanced Integrated Framework and other providers. Making progress in these areas takes time, and efforts should not be discouraged by stagnation in global trade.

LDCs should also aim to further expand their trade with the Global South – not least by utilising the trade preferences offered by China and India – while exploiting any market access advantage in their traditional export destinations in developed countries, such as the European Union’s Everything But Arms scheme.

Expanding trade through regional engagements could be another strategy for LDCs. Numerous analyses have shown that the trade potential of regional trading arrangements involving developing countries has remained largely unutilised. Furthermore, effective implementation of many of these agreements has been either very slow or non-existent.

Finally, LDCs should coordinate among themselves and work with other regional and international stakeholders to engage with development partners so that trade- and development-related international commitments are maintained.

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Mohammad A. Razzaque is Research Director at Policy Research Institute, Dhaka, Bangladesh. Syed Mortuza Ehsan is Assistant Professor, Department of Economics at North South University, Dhaka, Bangladesh. Brendan Vickers is Adviser and Head, International Trade Policy Section, Commonwealth Secretariat, London. The authors are grateful to Salamat Ali and Hilary Enos-Edu for data support.