Weak Trade

Trading Blows

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It could become quiet at Hamburg's port.
  • Why it matters

    Why it matters

    Germany’s export-focused economy could be hit if growth of global trade slows down.

  • Facts

    Facts

    • Global trade is expected to grow by 3.4 percent this year, the same as last year.
    • The trend to outsource and specialize production seems to have come to a halt, economists say.
    • A majority of German firms with foreign operations expect business conditions to improve in the next 12 months.
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    Audio

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The new deep-sea port in Wilhelmshaven has a problem. The facility can handle more than 2.5 million containers annually, but in 2014, fewer than 100,000 were unloaded.

The main reason is that there isn’t much happening on the oceans as the growth in freight volume continues to slow.

Wilhelmshaven symbolizes a global phenomenon: International trade is no longer as dynamic as it once was. It seems as if globalization has come to a halt.

Although the amount of products and services sold internationally continues to rise steadily, it’s clear the heady days prior to 2008, when global exports increased at twice the rate of global economic output, are over.

“German companies abroad have an extremely optimistic view of the future.”

Volker Treier, Executive, Association of German Chambers of Commerce and Industry

The world economy remains in good shape, according to an exclusive poll of 3,000 German companies with foreign operations, conducted by the German Chambers of Commerce Worldwide Network.

“German companies abroad have an extremely optimistic view of the future,” said Volker Treier, deputy chief executive officer responsible for international and European economic affairs at the Association of German Chambers of Commerce and Industry.

In fact, he said, the majority of companies (52 percent) expected an upswing rather than a downswing in the next 12 months. Only 6 percent of those polled expected a deterioration of business conditions.

About a third of the companies surveyed expected to create new jobs.

German employers have also regained confidence in the euro zone, especially when it comes to Spain, one of the debt-ridden countries which was on the verge of needing a bailout during the 2010-2012 sovereign debt crisis.

German firms also have a moderately positive outlook on Russia, whose economy is expected to shrink this year, the poll showed. Only 19 percent of respondents expected business conditions to worsen in Russia.

German firms were most worried about global economic policies and currency exchange rate fluctuations, the poll showed. A slowing growth of global trade was not among the top risks despite the fact that Germany’s economy is focused on exports.

Trade, however, is not the engine anymore and the global specialization or division of labor is no longer widening. “The trend toward increasingly longer value chains has reached a limit,” said Rolf Langhammer of the Kiel Institute for the World Economy. For many years industry has been using more and more parts from abroad in the production process, but not any more.

 

World Trade and global economic growth Losing Momentum-01

 

What’s the cause for the global slowdown? Certainly, business activity plays a role. After the financial collapse in 2009, global trade naturally was depressed, but there are also a number of long-term, structural issues, said Deutsche Bank economist Stefan Schneider, especially since the economy is certainly running more smoothly now. “All of the developments that were stimulating world trade in the last decades have slowed down,” he said.

In fact, emerging economies that were quickly integrated into the world economy after 1990 are no longer booming. At the same time, those countries are concentrating more on the consumption of domestic products.

China, above all, is changing its economic model with far-reaching consequences. Many Western companies now produce directly in China and no longer deliver goods made in their home countries. This trend will gain in strength, the poll showed: All companies in the survey active in China expect business to improve.

These firms aren’t active in China simply because they want to be, but because they must, said Mr. Langhammer. There is growing pressure from Beijing to source intermediate products from China and process them domestically whenever possible.

Researchers are noticing a basic shift in thinking at industrial corporations. “The fact that a few cents can be saved by having parts produced abroad is often no longer an argument,” Mr. Schneider said.

Production scattered around the globe also presents a greater risk, he added, and euphoria has given way to a sense of caution.

Meanwhile, the dismantling of trade barriers isn’t having much impact these days. The founding of the World Trade Organization 20 years ago spread out the international division of labor, but little has been done to build on that initial success.

“The Doha rounds are at a standstill,” Mr. Langhammer said.

More bilateral agreements are being negotiated since there has been little agreement on global rules such as lowering tariffs and conforming standards, but only the partner countries will benefit, Mr. Schneider said. Those not included in the deal will face problems.

Additionally, these agreements don’t promote free world trade.

Instead, the trend frequently moves in the opposite direction. The number of protectionist measures governments use to protect domestic production from outside competition remains high. This is noted in the Global Trade Alert, a collection of incidents regularly compiled by researchers at the University of St. Gallen in Switzerland.

Economists no longer believe world trade will again be the major driver of the global economy. The international Monetary Fund has forecast a slight boost by 2020, but nothing more.

“When we assume that more division of labor means more prosperity for all, then we can’t think that’s good,” Mr. Schneider said.

 

Hans-Christian Müller-Dröge is an editor for Handelsblatt, covering economics and monetary policy. Dana Heide is a correspondent for Handelsblatt in Berlin and writes about energy policy, German small and medium-sized companies and innovation. To contact the authors: h.mueller@handelsblatt.com  and d.heide@vhb.de

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