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economic insight

A worker rides a bicycle past containers at a port in Tokyo August 19, 2015.ISSEI KATO/Reuters

What ever happened to globalization? Growth in the volume of traffic in stuff between nations is stagnating, if not in retreat. Some economists wonder if this is a sign that we have reached "peak trade." Could it be that the frantic efforts to create seaborne and airborne highways between Asian workshops and North American and European warehouse shops was just a phase that has now run its course?

Over the last three years, global trade in goods expanded by an average 2.4 per cent per year, according to World Trade Organization figures. It's a sluggish performance, in line with the recent weakness in global economic expansion. That is a puzzle because over the two decades prior to the 2008 financial crash, trade expanded at more than 7 per cent per annum, double the rate of economic expansion.

Recent figures from World Trade Monitor, a Netherlands think tank, suggest the trend continues with global trade volumes contracting in the first half of this year. In December, IMF staffers Cristina Constantinescu and Michele Ruta and Aaditya Mattoo from the World Bank published a paper, arguing that this is not just a cyclical trough, nor a knee-jerk rise in protectionism, but a structural change.

Trade volumes surged in response to economic expansion in the period up to the crash, in part because of the removal of trade barriers in the 1990s. More importantly, massive foreign direct investment in China and the offshoring of U.S. manufacturing to Asia created a supply chain network that enabled capital and raw materials to flow into Asia while convoys of containers delivered goods to Europe and America.

We now seem to have moved over a trade hump. According to the IMF paper, Chinese supply chains are maturing with a lower share of imported components in total exports. Chinese factories in the interior are making more of the bits that go into assembly plants on the coast. Efforts to reshape the economy towards one more reliant on internal Chinese consumer demand may also be having an effect. In the U.S., manufacturing imports surged during the 1990s as a percentage of GDP; American firms rushed to take advantage of low Asian wages. But the volume growth has stabilized since the turn of the century, suggesting that the trend has run its course.

It doesn't mean that globalization is reversing but the impetus may change – the more widespread use of robotics, 3-D printing of components and the need for shorter supply chains may also curb the expansion of cross-border trade.

You might be wondering: does any of this matter? Who cares whether trade expands at a faster or slower rate? The answer is that it depends on where you are and what you do. Trade in merchandise represents less than a quarter of America's GDP, according to World Bank figures, but it accounts for more than half of the economy of Canada. If the patterns of global production are about to change, then it does matter if you are a nation (such as Canada) that is a small and scattered marketplace but one that makes its living playing a big role in global trade.

There is also a much bigger issue that risks being obscured by our obsession with huge ships laden with boxes, steaming across the Pacific. What matters in trade is your real share of the pie. It is the intellectual property in a drug or an iPhone that is important, not where the pills are made or the gadget is assembled. The Chinese have cottoned on to this, hence the huge efforts to increase domestic content in their manufacturing.

Canada needs to increase its value-added trade, which means the export of ideas, licences and expertise and it needs to spend less time worrying about cargoes of ore or barrels of crude. As we move past the speed bump of offshore global manufacturing, we need to spot the next shift in the production cycle.

It could already be upon us. The rapid fall in population growth rates in East Asia is having a huge impact on the competitiveness of Chinese manufacturing and it will also affect patterns of consumption in those markets. The formation of families will slow with the birth rate and demands for health care, financial services and entertainment will rise.

Trade in services is less easy to measure than the movement of containers and cargoes but it can offer better margins and it employs more people. However, it is still subject to protectionism and barriers to entry. Far from peaking, the trade in services is only just beginning.

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K.

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