Global Trade: As the world turns

Global trade cooled sharply in late 2022

Global merchandise trade slowed materially in the final months of last year. The CPB’s World Trade balance index – measuring goods trade in volume terms – dropped for three consecutive months (October – December), by 2.1% qoq and -0.2% yoy in Q4-2022. This was in line with our expectations; see our October 2022 update Global Trade: Outlook worsens, but supply bottlenecks ease). The forward-looking exports subindex of the global manufacturing PMI has fallen sharply since mid- 2021, diving into contraction territory in March 2022 – just after the start of the Ukraine war – and reaching a trough of 46.2 in Q4-2022. The slowdown in global trade volumes has been broad-based, with both advanced and emerging economies showing a decline in import and export volumes in late 2022. This reflects the combination of 1) an economic slowdown in many advanced economies, impacted by the surge in inflation and unprecedented sharp monetary tightening, and 2) renewed disturbances in China stemming from pandemic outbreaks and a broadening of lockdowns in Q4-2022, followed by an abrupt and messy Zero-Covid exit starting in December.

Outlook mixed: Slowdown in developed economies versus China reopening

So far this year, the global manufacturing PMI exports subindex has risen by 2.1 points to an eight-months high of 48.3 in February, although remaining below the neutral 50 mark separating expansion from contraction. This improvement goes hand in hand with a firming in global industrial production over the past months, with the global manufacturing PMI having risen back to the neutral 50 mark in February – led by EMs. This improvement partly relates to the positive impact of China’s reopening on global industry and trade. Although China’s reopening largely reflects the rebound of services and construction, sectors with typically limited spillovers to foreign trade, it has a wider (‘lifting all boats’) impact on the Chinese economy, and will likely also support China’s import demand over time. At the other hand, in many developed economies the impact of unprecedented rate hikes (with more rate hikes still to come) is making itself increasingly felt. On balance, we expect annual growth in global trade to remain subdued this year, more or less halving compared to the pace of 3.2% reached in 2022.

Bottlenecks in global supply chains and supply-demand imbalances for traded goods have eased sharply

In recent years, due to the pandemic, global trade was regularly disrupted by supply-side problems, such as the closure of terminals at some Chinese ports, or lack of staff to offload containers at US ports. Imbalances between global supply and demand for goods were exacerbated by a shift in global demand from services to goods during the pandemic, but also as a result of stimulative monetary and fiscal policies in the US and (to a lesser extent) other developed economies. All this was reflected, among other things, in longer waiting times for offloading container ships, increased delivery times in global production chains and a sharp increase in freight rates in container transport. We developed an index to measure these types of bottlenecks and global imbalances in the supply of and demand for goods. This index showed a sharp increase during 2021, indicative of the increasing imbalances between supply and demand. However, since mid-2022, our index points to a sharp reduction in these imbalances, not least due to a sharp cooling on the demand side. Delivery times for manufactured good, including for electronics equipment, have now completely reversed. Lead times for semiconductors have also eased, although are still clearly above historic averages. Container freight rates have fallen by more than 80% since the peak reached in September 2021 and are much closer to pre-pandemic levels now.

Shifting patterns: Trade ties between Russia and West shrink, but Russian ties with other BRICs strengthen

The war in Ukraine did not only contribute to a surge in inflation and subsequently higher interest rates/lower growth of global GDP and trade, but also to shifting bilateral trade patterns. Due to the stepping up of sanctions and the reduction of energy flows from Russia, bilateral trade between Russia and the US/eurozone clearly came down in the second half of last year, and a further reduction is likely. The West’s withdrawal from Russia has gone hand in hand with a stepping up of bilateral trade between Russia and the other BRIC countries (Brazil, China and Russia). Although this partly reflects the impact of higher energy prices, and bilateral trade data between BRIC countries are lagging a bit, this suggests that energy flows between Russia and these other large emerging markets have held up well. While this has helped to contain the upward pressure on global energy prices, it also poses new risks, particularly to the (trade) relationship between China and the US (see below). China stands out among the BRICs given the large size of its trade relationship with Russia (which is quite natural between two large, neighbouring countries), but also reflecting its importance for Russia as a key buyer of energy and an important seller of so-called ‘dual-use’ technologies such as semiconductors and drones.

…and this complicates the already tense relationship between the US and China

China’s intense trade ties with Russia complicates the already tense relationship with the US/West. The US has made clear that it will not accept China selling lethal military equipment to Russia, and has threatened with unspecified consequences if it does. Apart from this ‘red line’, a related question is how the US will react if China’s role as Russia’s key off-taker and supplier keeps expanding. This issue comes on top of tensions over recent balloon incidents, Taiwan and technology, with the US having broadened its alliance to restrict the exports of advanced semiconductors and related machines to China with countries such as the Netherlands and Japan. Meanwhile, US imports from China dropped by almost 20% qoq in Q4-2022, but this could also reflect other domestic factors in the US, such as the cooling in demand, and China (renewed pandemic-related disturbances). Looking more broadly, despite the stepping up of China-related restrictions and sanctions under the Biden administration, trade between the US and China has clearly picked up from the trough seen after the bilateral trade war and the pandemic, while the annualised US bilateral trade deficit versus China has moved back towards the record levels seen in 2018.