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Global trade's deep freeze

Whether due to a cyclical slowdown or a structural change tied to globalization, this augers poorly for global growth

By James Saft

(Reuters) — Global trade is having perhaps its worst period since the Great Recession, except this time there is no freezing up of the financial system to blame.

Whether due to a cyclical slowdown or a structural change tied to the maturing or even decline of globalization, this augers very poorly for global growth in the coming months and years.

Extremely poor trade reports from China and India on Monday added to a picture of slowing, if not contracting, trade. Exports from China fell 11.2 percent in January from a year ago, while imports fell by 18.8 percent in the 15th straight monthly drop. 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.

India also said on Monday its exports fell 13.6 percent in January from a year ago. South Korea's exports fell by 8 percent in 2015, its worst showing since the height of the crisis.

Danish shipping conglomerate AP Moller-Maersk said last week it was suffering its worst business conditions since the crisis, a contention supported by the sharp decline in the price to charter dry bulk carriers, now at an all time low and down 75 percent in about six months. U.S. railroads have seen carloads fall 15.7 percent thus far this year, compared with 2015.

Between 1950 and 2008, global trade grew at three times the rate of the global economy, reflecting the post-war expansion and the eventual integration of China and the Soviet bloc. That all stopped with the global financial crisis, first with a screech when worries about the banking system made crucial financing all but unobtainable. After a brief recovery, global trade has in recent years grown only at about the rate of global growth, and looks this year to be falling well behind.

To be sure, trade is still expected to be positive this year. Authoritative data from the CPB Netherlands Bureau for Economic Policy Analysis is available only through November, but it shows growth in the last three months is up less than 2 percent from the previous year. Given recent data, it looks highly likely this figure will fall as 2016 numbers come through, perhaps leaving global growth somewhere between 1 and 2 percent. As recently as September, the World Trade Organization was forecasting growth in global trade of 3.3 percent this year, a figure that now looks optimistic.


OVERSUPPLY OR FULL INTEGRATION?

As with any malaise, understanding what is going wrong with global trade is important so the condition can be treated. While not cited by central banks, all of which work to their individual geographic mandates, the medicine now being offered to the global economy amounts to support for financial asset prices and a round-robin of currency depreciations.

Stephen Jen, hedge fund manager at SLJ Macro Partners, suspects that world trade is being hurt by excess supply, caused in part by debt-fueled expansion of capacity after the financial crisis.

"Investment in China was yesterday's demand but is now today's supply. There is so much outsourcing that global trade has collapsed because of the cascading effects at different levels of production," Jen wrote in a note to clients. "With this interpretation, economic growth and inflation ought to be slow for a while for the world to digest the excess supply.

"Fighting these biases through demand-stimulus and blindly pursuing inflation targeting may be counter-productive, as we are starting to witness."

Certainly, it may simply be that, having first harvested the most-easily plucked fruit, the massive build-up of Chinese capacity, which brought with it increases elsewhere in the complex global supply chain, simply outran reasonable global demand.

The worry is that, just as the build-up was self-reinforcing, so would be a contraction of supply, or even a tailing-off of growth.

Growing trade increases specialization and efficiency only to the extent it meets sustainable demand.

That we've had first a few years of poor growth and now a marked slowing reinforces this view. Globalization's period of rapid growth super-charged China's economy and helped to mask weaknesses elsewhere, such as in wage growth in the United States.

Remember too, this is all happening at the same time as households and non-oil producing nations are getting a subsidy from falling energy prices.

It would not be too surprising if globalization suffered a mid-life crisis, one that starts with a global downturn.

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