The Economist ran a piece today deploring the sluggish growth of international trade over the past two years. According to WTO data, since the 1980s and up until the financial crisis, global trade grew by an average of 7% every year—often double the growth in world GDP—but by only 2-3% in 2012 and 2013. Most common explanations point to the increase in global supply chains, within which goods cross national borders to be assembled and sold in different locations, and to a reduction in tariff barriers led by the good work of the WTO.
In an earlier post, and in a recent journal article, I argue against the widespread impression that the WTO has indeed contributed to freer world trade. In fact, since the WTO’s creation in the early 1990s, the lion’s share of trade liberalization—such as it was—has been due to unilateral tariff reductions or bilateral agreements, not to the multilateral framework of negotiations the international organization militates for. On the other hand, this liberalization has been, unsurprisingly, a double-edged blade: what tariffs were reduced, were soon replaced by non-tariff barriers (red-tape, environmental and health standards). The latter are much harder to track, and so penalize businesses more harshly. But in spite of this constant—or rising—protectionism, worldwide commercial transactions grew rapidly. Was this growth healthy, though?
There are several signs that international trade has been going through its own boom and bust. First, there has been a disproportionate increase of trade in capital goods— driven by the cross-border ‘slicing-up’ of production stages and trade between firms’ subsidiaries—and in financial services. Second, in 2009, world trade collapsed by an estimated 12%, the steepest fall in recorded history, and the deepest fall since the Great Depression. Technological or political factors are found wanting in explaining the change in composition of trade flows, or the volatility of trade volumes and prices before and after the boom. More likely, international trade—like domestic production—grew (and shrunk) as a result of the monetary policy.
Entrepreneurs in the trade sector are most sensitive to monetary changes, as they must constantly keep an eye on the evolution of foreign exchange markets. Their business decisions are furthermore dependent on the availability of working capital loans, trade credit, or on the evolution of commercial and sovereign risks. During booms, banks happily lend out new money to traders for little conditionality, for poor collateral, and at artificially low interest rates, such that more firms find international projects profitable, or international transactions less risky or costly. And as more investment goes into the higher stages of production, trade in higher-order goods also grows within global supply chains. This would also explain why trade rebounded quickly during early rounds of quantitative easing, and why—with Europe going through a triple-dip recession—it began to slow down again in the last two years.
One thing is for certain: international trade is not immune to fiat inflation. On the contrary, sound money is equally as, if not more important than, innovation and politics in allowing trade to enjoy a healthy growth, rather than wax and wane every few years.
