Emerging trends in world trade

By Shahid Javed Burki
Monday, 05 Apr, 2010

PAKISTAN’s senior leaders in their discussions with the Americans and the Chinese have emphasised that the country in addition to aid, also needs opportunities to trade. The United States is at this time the single largest importer of Pakistan’s commodities, manufactures and services. That this is the case is the consequence of politics rather than economics.

Economists have a theory they call the gravity model of trade according to which the direction of trade is determined by the mass (size) of the trading partner and the distance involved.. Applying this to Pakistan’s case, the direction of trade should be very different from what it is.

China should be the largest trading partner given its physical proximity to Pakistan, the growing size of its economy and the rapid growth in its gross domestic product. India should be the second largest.

However, to move in that direction will not only need the resolution of long-standing disputes with India. It will also require a fairly significant restructuring of the country’s economy. This the various governments that have held sway in Islamabad have not done either for political reasons or for lack of full understanding about the important role trade can play in developing the economy. In other words, the emphasis on trade by the Pakistan administration is correct. But I have a difference with the policy makers about the content of the trade dialogue being pursued with the large trading partners. Before indicating how I would conduct the dialogue on trade, I will provide some data on some of the recent trends in international trade.

According to a report recently released by the World Trade Organisation (WTO), world trade is projected to expand by 9.5 per cent in 2010, twice the rate of growth expected in global GDP. This is a striking turnaround. In 2009, world trade shrank by 12.2 per cent, the largest decline in several decades. International trade therefore will see a turnaround of almost 22 percentage points. Slow down in trade was much lower in previous recessionary periods. It declined by 0.2 per cent in 2001, two in 1982 and seven per cent in 1975. As measured in dollar terms rather than volume, the drop was even larger. The value of trade fell by 25 per cent to $12.15 trillion. This was because of sharp decline in commodity prices, particularly oil and agricultural products. The decline in shipments was accentuated by lower demand for consumer durables such as automobiles and investment goods like industrial machinery.

There is consensus among trade economists that the measured decline in exports might have been exaggerated by some of the structural changes in the pattern of trade. Global supply chains have multiplied over the years in which goods cross national borders several times during production process, getting counted as exports more than once, before arriving at their final destination.

“We see the light at the end of the tunnel, and trade promises to be an important part of the recovery”, said Pascal Lamy, the Director General of WTO. The anticipated increase in international trade will come from both large exports and imports by China and India, the two economies that are growing most rapidly.

Export declines were greater last year for the major trading nations than the overall decline in world trade. Japanese exports fell by 24.9 per cent; the European Union by 14.8 per cent and the United States by 13.9 per cent. Exports from China also declined but by a smaller percentage – 10.5 per cent – compared to decline in international trade. The WTO confirmed that China overtook Germany as the world’s largest exporter of merchandise in 2009. It now accounts for 10 per cent of world trade.

This means there are significant structural changes taking place in global trade. Developing countries are carving out a larger presence in world trade. Exports from developed countries are expected to increase by 7.5 per cent, two percentage points lower than the increase in international trade. The increase for rest of the world, mostly from the large emerging economies, is projected at 11 per cent. What do these changes in the pattern of global trade imply for a strategy for Pakistan? It is correct to focus on increasing exports in order to pay for imports as well as becoming the source of investment in the economy. But as suggested, it is important to change the direction as well as the content of trade.

Trade figured prominently in the strategic dialogue with the United States held in Washington in late March. However, I believe that the approach taken by the government was not correct. Islamabad sought larger access for textiles in the US market and to expedite the establishment of special export processing zones in the areas that border Afghanistan. There are problems with both policies. Obtaining a larger share in textiles in the United States will only keep emphasis on an industry that does not have much future in the global economy.

It is important for Pakistan to wean itself away from this sector than to continue to emphasise its importance for the economy. While it is correct that the sector accounts for the bulk of formal employment in manufacturing. It is also correct that by increasing exports to the United States, it will be possible to increase immediately the number of people employed. But these are short-term improvements in an economy that suffers from a number of structural weaknesses. To remove them will need greater understanding of the dynamics in international trade.

Policy makers should pay attention to two significant changes in international trade. One, Asia is now playing a larger role in the increase in international trade than the more developed parts of the global economy. And, trade in parts and components is much more significant than that of finished products. Given these changes in the pattern of international trade, it is important for Pakistan to pay much greater attention to trade with the countries that are near and to produce the products for export that have high and growing international demand. For instance, developing strategic relationships with the rapidly expanding automobile industries in China and India would help to develop the vendor industry.

I also believe that an emphasis on the creation of special processing zones in some sensitive parts of the country in which production will be directed at the United States is a mistake. It will only introduce more distortions in the economy.

It will also lead to misuse of the incentives as happened in the case of the Gadoon industrial estate that was set up decades ago to provide opportunities to entrepreneurs from the backward areas. However, in that case industrialists from the more developed parts of the country simply created a token presence in the estate to draw benefit from the tax incentives that were given.

The main conclusion that I draw from this analysis is that in framing a structure of incentives to promote trade as a driver of economic growth and modernisation, it is important to understand the opportunities that are available in the global economy. Ignoring the trends will only retard progress.