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Chapter 1. Introduction

Author(s):
Nagwa Riad, Luca Errico, Christian Henn, Christian Saborowski, Mika Saito, and Jarkko Turunen
Published Date:
January 2012
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The global trade landscape has witnessed dramatic shifts over the past several decades. World trade has grown steadily since World War II, with the expansion accelerating over the past decade. Despite a post-crisis dip, the current level of world gross exports is almost three times that prevailing in the 1950s (Figure 1). With the exception of commodity price booms in the 1970s and more recently in 2004–2008, commodity trade accounted for a declining share of this growth, with the share of noncommodity trade rising to more than 20 percent of global gross domestic product (GDP) in 2008. The expansion in global trade was characterized by three important trends: the rise of emerging market economies (EMEs) as systemically important trading partners; the growing importance of regional trade; and the shift of higher-technology exports toward dynamic EMEs.

Figure 1.World Exports Relative to Production

(Percent of GDP)

Sources: IMF, Direction of Trade Statistics and World Economic Outlook database; UN Comtrade.

Note: The ratio for 1949–61 is calculated based on 15 major exporters.

Trade expansion was further associated with growing trade interconnectedness. Not only has the number of systemically important trading nations increased over time, their trade links have also multiplied. A chief contributor is the growing role of global supply chains in overall trade, facilitated by lower tariffs and technology-led declines in transportation and communication costs. With vertical specialization, production of certain goods is fragmented into several stages, with each stage produced in the most cost-effective location or country. As a result, goods cross borders several times before being transformed into final products, further increasing trade interconnectedness. Outsourcing of production stages from advanced “upstream” countries to neighboring EMEs has also supported a shift in the technology content of exports toward the latter.

The aim of this paper is to examine the evolution of these trade patterns and explore the implications of sectoral linkages for the outlook for global trade. Three approaches are used to investigate trade interconnectedness and the evolution of sectoral trade patterns: network analysis to determine systemically important trading countries; input-output-based analysis to examine the growth of global supply chains at the aggregate and sectoral levels; and, finally, a partial equilibrium approach to analyze the implications of sectoral trade patterns on global rebalancing and the outlook for global trade. The analysis complements ongoing work within the IMF that looks at the adjustment of trade and global balances at the aggregate level.

The paper is structured as follows. Chapter 2 presents a historical analysis of the evolution of global trade patterns over the past several decades and their implications for trade patterns going forward.1 It examines the change in key players in global trade, the increase in trade interconnectedness, the growing role of global supply chains, and the change in technology content and export structures across countries.2 The likely impact of rebalancing by key players on trade patterns at the sectoral level is explored in Chapter 3 through the use of a partial equilibrium approach based on highly disaggregated trade data and sectoral elasticities. The exercise considers a hypothetical change in relative prices in four systemically important trading partners—China, the United States, Japan, and the euro area—without explicitly modeling the specific drivers that could induce such relative price changes. Chapter 4 concludes with policy implications.

While recognizing the growing contribution of services to global trade, the focus of this paper is on merchandise trade. Much of our analysis attempts to shed light on trade patterns and necessitates trade flows on a bilateral basis, which are generally not available for services. The focus of the paper is on noncommodity (manufacturing) trade, which was more impacted by the recent trends, whereas commodity trade was generally less impacted and is less affected by changes in relative income.

This paper makes reference to different concepts of Europe in part reflecting data availability limitations but also appropriateness to the scope of the underlying analysis. The concepts used include euro area, EU15, and EU accession. In some sections, the analysis relies on sources that include European countries as three blocks—EU15, EU accession, and European Free Trade Association (EFTA) countries—without allowing for analysis of individual European countries. In other sections, reference is made to Europe’s largest economy, namely Germany (with no assumption of representation for Europe), whereas analysis on trade structures and interconnectedness is done at the individual country level. Different groupings include: euro area (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovak Republic, Slovenia, and Spain); EU15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, and United Kingdom); and EU accession (Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovak Republic, and Slovenia).

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