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  February 21st, 2017 | Written by

Policy Uncertainty Weighs on World Trade

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  • Global trade growth slowed for the fifth consecutive year.
  • The growth of services trade remains relatively resilient.
  • Trade sluggishness seen in both high-income and developing countries.

Global trade growth continued to be slow for the fifth consecutive year, with 2016 showing the weakest trade performance since the 2008-2009 global financial crisis. According to a new paper, preliminary data suggest that world merchandise trade grew by a little more than one percent in 2016 compared to two percent in 2015 and 2.7 percent in 2014.

The growth of services trade continued to be relatively resilient and recovered slightly following a decline in 2015.

While in previous years the sluggishness in trade growth had been concentrated in either high-income or developing countries, the weak trade growth seen in 2016 was characteristic of both types of economies.

The latest annual paper from the World Bank Group, “Global Trade Watch: Trade Developments in 2016,” points to a surge in economic policy uncertainty as a contributor to the 2016 decline in world trade growth.

The paper, which analyzed a sample of 18 countries over 30 years, found that the increase in uncertainty in 2016 may have reduced trade growth by 0.6 percentage points, which accounts for about 75 percent of the difference between trade growth rates in 2015 and 2016.

“Policy uncertainty in Europe and the United States had a negative impact on trade by reducing overall global growth,” according to the paper’s authors. “In a more uncertain environment, firms may choose to postpone investment and export decisions and consumers may cut back spending. The threat of unraveling trade agreements may also hurt trade growth by adding to policy uncertainty.”

The paper also offers new evidence linking slowing trade growth to slowing productivity growth. Sluggish trade reflected the stagnation of global value chains (GVCs), which diminished the scope for productivity growth through a more-efficient international division of labor and diffusion of technologies.

“We are witnessing a decline in the growth of trade as well as productivity, and the slowing expansion of global value chains can help to explain both,” the authors said.

The paper uses manufacturing data by country and year to show a link between labor productivity and GVCs. An analysis that covers 13 sectors in 40 countries over 15 years finds that participation in GVCs is a significant driver of labor productivity. A 10 percent increase in GVC participation increased productivity by close to 1.7 percent.