Global trade is at an all time low and there are predictions of further dips. Despite so many nations increasingly liberalizing their economies since the past few decades, it is surprising why we are witnessing a very low increase in global trade. Some probable reasons could be:
1. Impact of global financial crisis and Great Recession
The Great Recession hit global demand thus grievously hurting exporting economies, especially the Euro Zone which is facing high unemployment.
So the key to how imports actually improve trade productivity is trade in intermediate goods and services. Offshoring of parts of production can take place through either Foreign Direct Investment (FDI) or offshore-outsourcing (where intermediate material is produced by an independent foreign supplier). A firm can source an input from a foreign supplier where it seeks to lower costs and improve its competitiveness. Trade in these intermediates is hence not a loss of production to foreign players but is an explicit decision by domestic firms to maintain or improve its productivity. Failure to do so would result in job losses-not job savings.
More open markets therefore offer widespread benefits while protectionist trade policies impose high costs. Import barriers deny access to goods and services we need to compete internationally. Rather than protecting domestic jobs, these policies can produce plant closures and job losses.
Trade comprises both imports and exports; both are equally important for global economic performance.
1. Impact of global financial crisis and Great Recession
The Great Recession hit global demand thus grievously hurting exporting economies, especially the Euro Zone which is facing high unemployment.
2. The slowdown in China, can be said to be the primary reason for the slowdown. Due to this slowdown, there has been a drastic fall in demand for iron, oil, etc.
3. Hike in interest rates in the US and predictions of even higher ones have caused investment to flow out of developing markets to 'dollar-based' assets.
4. Political turmoil in Brazil and Middle East, migrant crisis in Europe, Brexit, etc is leading to uncertainty and apprehensions hence low investments.
Global trade has recently become less responsive to changes in global income because of slow expansions of global supply chains, reluctance of firms to work in complex global chains ( where raw material goes to one country, manufacturing takes place in another, assembling in another, marketing in another, and so on) and a shift in demand from trade-intensive investment to less trade intensive public and private investment. This has further led to a weak import demand, which has led to almost one percentage point reduction in growth of global trade.
Emerging economies,especially during a financial crisis or when under heavy debt, tend to focus only on exports and avoid taking imports. Imports often have negative connotations in public mind and trade barriers are often justified as a means of reducing import competition and protecting domestic markets.
Emerging economies,especially during a financial crisis or when under heavy debt, tend to focus only on exports and avoid taking imports. Imports often have negative connotations in public mind and trade barriers are often justified as a means of reducing import competition and protecting domestic markets.
But imports can in fact, improve productivity and competitiveness and policies that restrict access to foreign sources of goods, especially intermediate goods and services, are more likely to produce firm closures and job losses- the very outcomes they were structured to prevent.
So the key to how imports actually improve trade productivity is trade in intermediate goods and services. Offshoring of parts of production can take place through either Foreign Direct Investment (FDI) or offshore-outsourcing (where intermediate material is produced by an independent foreign supplier). A firm can source an input from a foreign supplier where it seeks to lower costs and improve its competitiveness. Trade in these intermediates is hence not a loss of production to foreign players but is an explicit decision by domestic firms to maintain or improve its productivity. Failure to do so would result in job losses-not job savings.
More open markets therefore offer widespread benefits while protectionist trade policies impose high costs. Import barriers deny access to goods and services we need to compete internationally. Rather than protecting domestic jobs, these policies can produce plant closures and job losses.
Trade comprises both imports and exports; both are equally important for global economic performance.
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