One of the most significant developments of the 20th century has been the integration of national economies into a global economic system. The result of this integrating process called globalization has been a striking increase in international trade.
Today’s exports are over 40 times higher than in 1913. Looking at changes in trade relative to GDP offers another intriguing perspective because the global economy has had consistent positive growth over the past couple of centuries.
Less than 10% of the world’s output up until 1870 came from exports on a global scale. The value of commodities shipped globally today is very close to 25%. This demonstrates that international trade has increased more than proportionately throughout the last century of economic expansion.
With every passing year, global trade grows faster and more robust. In the modern global economic system, nations trade final goods and intermediate inputs. This results in a sophisticated global network of financial relationships.
Trade volume in 2023
WTO economists are now projecting merchandise trade volume growth of 1.7% in 2023, up from October 2022’s estimate of 1.0%, accompanied by real GDP growth of 2.4% at market exchange rates.
Growth rates for trade and output for the year 2023 are expected to be below their respective averages of 2.6% and 2.7% for the 12 years since the trade collapse that followed the global financial crisis.
Trade growth should rebound to 3.2% in 2024 as GDP growth picks up to 2.6%, but this estimate is more uncertain than usual due to the presence of substantial downside risks, including rising geopolitical tensions, global food insecurity, the monetary policy tightening fallouts, risks to financial stability, and increasing levels of debt.
Goods trade was more resilient than expected throughout 2022, despite the Ukraine war fallouts. Year-on-year merchandise trade volume growth averaged 4.2% in the first three quarters of 2022 before a 2.4% decline in the fourth quarter dragged growth for the year down to 2.7%.
The final result for 2022 was weaker than the WTO’s October forecast of 3.5% but close to the earlier estimate of 3.0% from April, which relied on simulations to gauge the economic impact of the war. A 2.7% increase in trade volume in 2022 is consistent with the WTO’s initial report on the Ukraine crisis, which estimated that trade growth for the year would fall somewhere between 2.4% and 3.0%.
The final figure ended up being within this range and well above the most pessimistic scenario considered in the report, which would have seen trade growth of just 0.5% if countries had split into competing trade blocs.
Fragmentation has mostly been avoided, but it remains a significant threat that could hinder economic growth and reduce living standards over the long term. The fact that worst-case scenarios were avoided in 2022 should not be a cause for complacency. Several factors contributed to the trade slump in the fourth quarter of 2022, the most conspicuous being the rise in global commodity prices. Although food and energy prices had receded from their post-conflict peaks, they remained high by historical standards and continued to erode real incomes and import demand.
The impact of energy prices was most decisive during the European winter, when gas supplies from Russia were almost cut off. High food prices were also felt in Middle Eastern and African countries that relied heavily on imports from Ukraine and Russia.
On a more positive note, a WTO follow-up study marking one year of the Ukraine war found that vulnerable economies could find substitute products and suppliers to obtain essential food supplies. This response might not have been possible without an open and inclusive multilateral trading system to anchor the global economy. Rising COVID infections also significantly impacted the Chinese economy in the 2022-23 fourth quarter, where GDP growth dropped to 0.0%, and exports fell to 6.5%.
This decline may be reversed to China’s advantage in 2023. The relaxation of COVID controlling measures is expected to unleash pent-up consumer demand in the world’s second-largest economy, which could boost international trade, particularly in travel-related services.
Finally, interest rate hikes in advanced economies may have succeeded in cooling demand. Still, they have also revealed weaknesses in banking systems that could lead to broader financial instability if left unchecked.
Inflation and rate hikes
After years of expansionary monetary policy, central banks find themselves struggling to strike a balance between taming inflation, sustaining economic growth, and maintaining financial stability. A miscalculation could have negative consequences for the global economy and trade.
Reversing the course on low-interest rates would take a lot of work, and the road ahead will likely be bumpy. Recent bank failures in the United States and Europe highlight the possible existence of further vulnerabilities stemming from a changed interest rate environment.
Upside surprises in inflation could raise the prospect of more extensive rate hikes, but these would come at the risk of broader financial contagion that would reduce output and trade.
Governments and regulators must be alert to these and other financial risks in the coming months. Geopolitical tensions, inflation, commodity prices, and the lingering effects of COVID were the main factors affecting trade and industrial output in 2022. The same year also saw some of the highest inflation rates since the 1980s, massive swings in commodity prices, and an appreciation of the US Dollar. Since strong price movements tend to distort trade statistics in value terms, it makes sense to focus on trade volumes when forecasting trade.
Commodity price fluctuations strongly influenced inflation and trade volumes in 2022. These swings were extreme for European natural gas prices, which rose 48% between January and August of 2022 before falling 76% by February 2023.
Unlike oil prices, which tend to be strongly correlated across regions, natural gas prices commonly diverge considerably. Regional gas prices might eventually equalize due to increased trade in liquified natural gas (LNG), but for the time being, pipeline and shipping infrastructure are preventing this convergence.
European countries responded to the loss of gas shipments from Russia by importing more from other suppliers, including the United States, Qatar, Norway, and Algeria. This has increased LNG prices elsewhere, including in Japan, where its price doubled between January 2022 and February 2023.
What about core inflation?
Europe was fortunate to have a mild winter in 2022, which prevented energy prices from rising even further. However, if European countries cannot secure sufficient natural gas supplies for next winter and if the weather is colder, prices could spike again. Prices of food commodities also fluctuated strongly throughout 2022, jumping 19% between January and May before falling 15% between May and December.
For the year, food prices were up 18% compared to 2021, including a 21% rise in grain prices. Prices of fertilizers registered an even more considerable year-on-year increase of 63%. Higher food prices should encourage more agricultural production, resulting in greater availability and lower future food prices.
On the other hand, less land under cultivation and the high fertilizer cost could lead to reduced crop yields and higher prices. Declining food and energy prices have helped bring down headline inflation in developed economies, but the core one remains stubbornly high.
According to OECD statistics, headline inflation in the United States dropped from 9.1% last June to 6.0% in February 2023, but core inflation only fell from 6.6% in September to 5.5% in February.
Similarly for the European Union, headline inflation dipped from 11.5% in October 2022 to 9.9% in February 2023, while core inflation climbed, reaching 6.6% in February. This suggests that monetary policy control has failed to tame inflation and that interest rates may have to stay high longer to have their intended effects.
The 10.4% quarter-on-quarter decline previously recorded for exports from the CIS3 region in Q2 of 2022 has since been revised to a 3.0% drop, which suggests that Russia has been able to find new markets for its goods despite the sanctions. This revision had a strong impact on the estimated exports of the Middle East, which were expected to greatly increase to make up for shortfalls in supplies of Russian energy.
Africa was also expected to export more significant goods than it ultimately did. However, the US Dollar value of the region’s exports did increase sharply (nearly 18%) due to higher commodity prices.
Exports and imports
Exports from North America, South America, and Europe were broadly in line with expectations, while shipments from Asia were considerably weaker due to a sharp drop in exports in the 2022-23 fourth quarter.
Imports from the CIS region are estimated to have plunged 20.4% in the second quarter of 2022, but they recovered more quickly than expected in the year’s second half. Unfortunately, being confident about these figures is difficult due to a lack of official data.
Russian trade statistics have been unavailable for many months, but estimates based on the statistics of trading partners provide a reasonable approximation. All other regions’ imports declined in volume terms in the fourth quarter of 2022 due to reduced domestic demand or, in some cases, reduced export revenues as commodity prices eased. Global food supplies are less precarious than many had feared at the start of the Ukraine war, but they remain a cause for concern.
The average price of wheat rose 44% year-on-year during this period, while the value of traded grain increased by 31%. This implies a decline of around 7.5% in the volume of world wheat trade. This may not have disastrous consequences if consumers in all countries, including the poorest, can import sufficient quantities of wheat or some close substitute.
However, there is little margin for error if a major producer suffers a crop failure or climate-related natural disaster. Such an event could precipitate a more severe food crisis requiring increased trade. Fortunately, countries have accessed alternative sources of supply so far.
For example, between January and October of 2022, Ethiopia’s wheat imports from Russia and Ukraine were 75% and 95%, respectively, compensated by increased shipments from the United States and Argentina. There are some signs of a trade turnaround in early 2023. The JP Morgan global purchasing managers’ index (PMI) returned to its baseline value of 50 in February 2023, suggesting accelerating global output growth.
The new export orders sub-index, more directly predictive of trade volumes, has also risen but remained below the baseline value in February at 48.3, suggesting continued trade contraction but at a slower rate. However, preliminary PMIs for the United States and the euro area in March 2023 point to a more robust demand recovery, which would boost trade and stoke inflation.
Falling input and output price sub-indices in the PMI indicated that inflationary pressures appeared to be easing. Sub-indices representing delivery times and stocks of finished goods also returned to normal in February 2023, suggesting that supply chain issues mainly had been resolved.
The projected 1.7% increase in the volume of world trade in 2023 is more substantial than the previous estimate of 1.0% from last October, but it is still relatively weak. A slight increase in the consensus estimate of global GDP growth in 2023 from 2.3% to 2.4% helps to explain the discrepancy between the two estimates. This modest change at the worldwide level masks significant shifts between regions, most notably between Europe and Asia. 0.7% points have revised Europe’s expected GDP growth, while 0.4% points have revised Asia’s. More robust than expected GDP growth in Europe would stimulate intra-EU trade, which gives Europe extra weight in world totals. Europe’s exports are projected to grow by 1.8% in 2023, up from the previous estimate of 0.8%.
Europe’s imports are expected to decline by 0.6% in 2023, less than the previous estimate of -0.7%. It should be noted that the region “Europe” includes Ukraine, whose exports and imports fell precipitously in 2022 (33% and 23%, respectively) and have yet to recover.
North America is expected to record the most vigorous merchandise export growth of any WTO region in 2023 (3.3%), followed by the CIS (2.8%), Asia (2.5%), and Europe (1.8%). Weaker export growth is expected in the Middle East (0.9%) and South America (0.3%), while Africa’s goods exports are expected to decline (-1.4%). The relative strength of CIS exports is partly due to a reduced base in 2022 when shipments fell sharply (-4.9%).
The region is expected to record the fastest import growth of any part in 2023 (14.9%) for the same reason, with purchases having fallen 13.5% in the previous year, followed by Africa (5.6%) and the Middle East (5.5%), whose export volumes have been boosted by increased revenues from exports of natural resources.
Imports from North America, South America, and Europe are all expected to contract in 2023 (by -0.1%, -1.6%, and -0.6%, respectively) due to weaker domestic demand. In 2024, trade and GDP growth are expected to grow at rates of 3.2% and 2.6%, but these figures should be interpreted with caution since they are highly dependent on the course of the war in Ukraine.
Other significant risks to the forecast include resurgent inflation, slowdowns in major economies, and geopolitical tensions. Most serious would be a food crisis triggering widespread hunger and starvation in low-income countries. Wealthy countries need to be on the lookout for signs of such a crisis and take steps in advance to prepare for it.
In conclusion, the integration of national economies into a global economic system has led to a significant increase in international trade, with today’s exports being more than 40 times higher than in 1913. However, the global economic system faces many challenges, including rising geopolitical tensions, global food insecurity, the possibility of unforeseen fallouts from monetary tightening, risks to financial stability, and increasing levels of debt.
Despite these challenges, the WTO predicts an increase in trade volume growth of 1.7% in 2023, up from last October’s estimate of 1.0%, accompanied by real GDP growth of 2.4% at market exchange rates. As such, countries need to remain vigilant and take necessary steps to prepare for potential crises. A global network of financial relationships and an open and inclusive multilateral trading system can anchor the global economy and help mitigate the effects of such crises.