After dramatically declining in the first half of 2015, global trade recovered but at a slower pace over the rest of the year, so that world imports grew by only 1.7 percent in 2015 compared to 3 percent in 2014. 

According to a new World Bank Group paper, Global Trade Watch: Trade Development in 2015, by World Bank Group Economists Cristina Constantinescu, Aaditya Mattoo and Michele Ruta, global trade in 2015 reflected persistently weak demand and structural changes in world trade, compounded by falling commodity prices and China’s transition to a new growth path.

“This paper builds on our earlier research that showed the global trade slowdown began in the early 2000s but has become more evident since the great recession, and had both cyclical and structural determinants,” the authors said. “Now we have found that in the context of the broader global trade slowdown, 2015 appears to have distinct characteristics compared to previous years. And our estimates suggest that cyclical factors dominated in 2015, accounting for approximately two thirds of the trade slowdown.”

The authors found that while weak import demand was mostly concentrated in advanced economies in previous years, trade developments in 2015 can be traced to emerging economies. Emerging Asia which makes up more than a quarter of world trade was the epicenter of the global trade slowdown and the initial rebound. Other regions also played a role. In particular, trade developments in Latin America, Europe and Central Asia mostly reflected lower imports of recession hit commodity exporters such as Brazil and Russia.

In addition, the paper also says that lower commodity prices and China’s transition to a new growth path were two mutually reinforcing factors that created weak import demand in emerging economies.  Lower commodity prices reduced commodity producers’ incomes leading those countries to import less from all other regions, including China. At the same time, China’s gradual shift from investment to consumption and the decline in its industrial production reduced China’s imports from other regions, including commodity producers. If China’s imports had not fallen in 2015, world merchandise import volume growth would have been 2.1 percent instead of the actual 1.7 percent.

China’s transition is affecting the pattern of production and trade in East Asia and beyond, and the impact can also be seen in changes in manufacturing and services trade. Manufacturers, particularly in East Asia, suffered significant declines in export quantities but are now recovering. Since the slowdown was concentrated in China’s industrial sector, which is both more import intensive and more strongly linked to global value chains, the impact on trade was magnified. However, in the longer term, rebalancing from investment to consumption is also likely to create opportunities.

“We could see gains in global trade going forward as a result of China’s transition. Rebalancing from investment to consumption is likely to create opportunities for exporters of final goods and may eventually boost upstream intermediate and capital goods sectors that are now adversely affected,” according to the authors. “In addition, China’s increasing demand for services could spur growth in the global services sector.”

The move from investment to consumption is already shifting China’s demand from goods to services. Part of this demand is being served by cross-border imports and consumption abroad, in which growth is already visible. China’s share of services in imports has grown – from around 15 percent at the beginning of 2011 to close to 22 percent in the first half of 2015.

Report traces trade slowdown in 2015 to commodities and Asia economic dynamics

Emerging economies in East Asia were the “epicenter” of the 2015 trade downturn and also of the rebound later in the year, according to the report. Other regions also played a role. In particular, trade developments in Latin America, Eastern Europe and Central Asia mostly reflected lower imports of recession hit commodity exporters such as Brazil and Russia.

The sharp decline in commodity prices and China’s diminished growth and a gradual shift away from industrial production and investment contributed to weak import demand in emerging economies.

These two factors were mutually reinforcing: Lower commodity prices reduced real incomes in commodity producing countries, leading those countries to import less from all regions, including China; at the same time, the gradual shift from investment to consumption in China and the sharp downturn in Chinese industrial production in early 2015 reduced China’s imports from other regions, including commodity producers.

Looking ahead, world trade growth is likely to remain sluggish on account of the persistent economic difficulties and structural factors. However, the long term impact of the decline in commodity prices and China's transition on global trade may be more benign.

A focus on China’s rebalancing

The fluctuations in global trade are occurring during a time of transition and rebalancing in China’s economy from industrial production and investment to services and consumption. If China’s imports had not fallen in 2015, world merchandise import volume growth would have been 2.1 percent instead of the actual 1.7 percent.

“Recent experience suggests that how rebalancing takes place is likely to affect how much global trade fluctuates in the transitional period,” according to the report. “The trade consequences of rebalancing are also likely to have positive aspects.”

The economic transition in China had an immediate impact on manufacturing in East Asia, which experienced a sharp contraction in regional trade in the first half of 2015 and is now beginning to rebound. China’s industrial sector is import-intensive and closely linked to East Asian value chains, which magnified the impact on the region.

In South Asia, the adverse effect was felt primarily by India, both in terms of exports to China and other countries in East Asia, and because of the unfavorable effect on its markets in Africa and the Middle East, which accounted for one-quarter of India’s exports in 2014.

Commodity exporters in Africa, the Middle East, Eastern Europe, Central Asia, and South America experienced a sharp decline in export values rather than export volumes. The glut in fuels was an important factor – though expectations of diminishing demand for commodities in China may also be playing a role. China accounts for 13 percent of world commodity imports and its share is as much as 40 percent for certain metals. The impact of the transition on different commodity exporters depends on their exposure to demand in China.

The beneficiaries over the longer term could include exporters of consumption goods – evidence of which is already emerging from current data – and, eventually, of upstream intermediate and capital goods used in their production. Rising wages in China may also encourage industrial production and exports from lower-cost developing economies.

The gradual rebalancing of the economy from investment to consumption is also shifting China’s demand from goods to services. Part of this demand is being met by cross-border imports and consumption abroad, and growth in these areas is already visible. Services imports have grown from around 15 percent of all of China’s imports at the beginning of 2011 to close to 22 percent in the first half of 2015. If services markets become more open, China’s increasing demand for services could spur further trade growth in the services sector.

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The Global Trade Watch series is a joint product of the Trade & Competitiveness Global Practice and the Trade & International Integration Team of the World Bank’s Development Economics Research Group. It provides up-to-date data from various sources along with analysis of recent trade developments.