Challenges to Globalization Remain Daunting, Says IHS Markit

The sharp rebound in global trade volume has been one of the bright spots in an unusually cloudy outlook,” says Nariman Behravesh, chief economist, IHS Markit. Nonetheless, he has concerns about fresh challenges ahead.

“After precipitous declines in the spring, many indicators of world merchandise trade rose by record amounts during the summer,” he says. “A specific example is the Port of Los Angeles, where container imports reached an all-time high in August.”

“More generally, while IHS Markit predicts the drop in global real GDP during the current crisis to be nearly three times as large as during the global financial crisis (4.5% versus 1.7%), the decline in the exports of goods and services (in real terms) should be almost the same (10.5% versus 9.6%).”

The key reason for the relatively less dire performance of trade this time is the disproportionately large impact of the pandemic on nontraded services compared with manufacturing.

This effect is evident in the smaller expected drop in industrial production in 2020 (6.0%), versus 2009 (9.0%). Another differentiating factor is the role of finance. During the financial crisis, trade finance froze up, severely hampering global commerce.

The overwhelmingly large liquidity measures enacted by the US Federal Reserve and other central banks in 2020 have limited the damage during this crisis. Finally, the early and strong rebound in mainland China’s economy has boosted both its imports and exports, helping overall world trade.

“The fitness of global supply chains has been one very positive surprise during the pandemic. As borders were closed and factories locked down, there were early fears of a pervasive breakdown in supply chains,” says Sara Johnson, Executive Director, Global Economics. “The key reason for the relatively less dire performance of trade this time is the disproportionately large impact of the pandemic on nontraded services compared with manufacturing.

Fortunately, the network of world production has been flexible enough to adapt, supporting the strong recovery in trade and manufacturing.”

Going forward, the picture remains murky. The welcome rally in trade could be part of the broader “bounce and fade” pattern of the global recovery. Similarly, the surge in mainland China’s imports and exports could be temporary. Mainland China’s current-account surplus is rising, suggesting its recovery is not helping other economies much. Most troubling of all, rising trade imbalances, along with trade and technology conflicts, could well lead to further actions to limit trade, not just by the US but also by key economies in Europe and Asia.

One measure of globalization, the ratio of world merchandise imports to GDP (in nominal terms), rose from around 12% in the mid-1980s to nearly 25% right before the global financial crisis. It has since stalled in the 20–22% range.

During the coming decade, IHS Markit expects neither a collapse in globalization nor the type of boom we saw in the 1990s and 2000s. The downside risks are almost entirely related to protectionist policies. The upside risks are from technology (especially digitization) and the potential for closer and broader global trade integration.

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