Global trade slowdown
As an export based economy a large portion of Singapore’s GDP can be linked to global trade. Specifically the financial sector, wholesale trade, tourism, the port and the refining and petrochemicals sectors are all linked both to regional trade growth in Asia and general global trade growth. Any significant change to the trend of growth of global trade could present a serious challenge to future GDP growth using Singapore’s current economic structure and force a strategic re-evaluation of the economic model.
In this section
Post pandemic global economy
Figure 5.11 presents global trade from 2000 until present with forward projection to 2022. The pace of global trade growth has slowed since the turn of the century and forecasts have been reduced even before the global health pandemic COVID-19 (WTO, 2020).
Singapore's exposure to global trade
Singapore’s economy is open and responsive to changes in global trade. It is a price taker in global markets and in industries such as the wholesale trade and petrochemical sector, that are based on the re-export of goods purchased elsewhere (FAS, 1997). The growth in trade volumes are linked to the growth in global trade. Sea freight volumes is listed as one of the forward predictive indicators for future growth (MTI, 2011). The period of slowed global trade coincided with a transition point in Singapore’s economy marked by lower annual GDP growth rates of <4%, decline in immigration rates and compositional changes with increased share of finance and professional, scientific business services as a share of GDP (Statistics Singapore, last access 2020).
Historical trends in global trade
There are both cyclical (short term) and long term structural factors identified in the decline of global trade (Hoekman, 2015). Global trade in the short term is forecasted to decline by 11-30%, as the global coronavirus pandemic (WTO, 2020). In the wake of the recovery the future trade growth could be further limited by longer term structural shifts (Chadha, 2020). A historical review of global trade, presented by a number of authors in a 2015 report by the Centre for Economic Policy Research, identifies three long term observations signalling a decline in global trade growth: (Hoekman, 2015)
Shift to higher share of manufactured goods vs agriculture and raw materials
Elasticity of trade to GDP growth is usually >1 (elastic), but can rise in the short-term up to 2 (very elastic). This means that trade and GDP growth are strongly linked.
Trade can be an enabler for higher levels of future GDP growth
The cyclical factor cited in the report was dropping aggregate demand in developed economies in the US, EU due to balance sheet deleveraging in the wake of the global financial crisis. Another mean-reversion factor identified was the return of the elasticity of trade to GDP back to historical levels in 2001-2013 1 to 1.2. Trade elasticity to GDP reached a peak in the early 2000s at close to 2.0 (Hoekman, 2015).
Structural trends driving down global trade
(Hoekman, 2015):
Compositional changes in demand and trade
The first structural factors identified driving trade down are compositional changes in demand and trade as economies shift to service-based economies. The general long term trend is for economies to transition to the service economy. Services and experience are not as readily transported across borders. In contrast information barriers are much lower due to new digital infrastructure. Globalization also accelerates exchanges of knowledge resources in the public commons which can enable a faster pace of technology transfer and raises the competitive pressure against higher cost long supply chain links. While these knowledge transfers may be economically beneficial, they may not be captured in traditional measures of trade (Hoekman, 2015)
Completion of one-time transition associated with opening of China and Eastern Europe
The second factor identified is the one-time opening up of China and easter Europe following the end of the Soviet Union in 1989. During the period 2000-2008 a one-time step change in foreign value added (trade) as % of GDP from 15% to 25% for China was observed (Duval, 2014). The size of China’s contribution to global trade is significant and the one-time step change can also be observed in a rise in global trade as % of global GDP (Hoekman, 2015).
Global value chain diversification, regionalization
The third factor is a shift in global value chains (GVC) to become more diversified and regional, and less concentrated specifically to China. A value chain is the connected network of suppliers and producers that connect an end consumer product to its constituent raw inputs of materials and labor. The combined effect of lower barriers to knowledge transfer and more flexible modes of manufacturing enabled by automation present more options for local, regional supply chains.
Nationalism geopolitics
Finally the fourth factor is intentional barriers to trade by governments to protect domestic markets from competition and general cooling of cooperation between US and China (Hoekman, 2015). For a variety of reasons globally wealth inequality is on a long term trend of increasing since the end of WWII in 1945 both internationally and sub-nationally (Piketty, 2014). This wealth inequality can lead to general social tensions if the open trade policies become a target for working class citizens becoming suspicious of jobs moving overseas. There is evidence that education inequality was a factor in driving nationalist policy in the campaign for US presidential election Donald J Trump in 2016 who’s main election platform was to tighten immigration border with Mexico and to put up more protectionist trade barriers with China and his electorate was disproportionately lower educated than his rival (Galston, 2016).
Last updated
