Peak trade? No big deal.

An interesting piece from The Economist on “peak trade”:

In the two decades up to the financial crisis, cross-border trade in goods and services grew at a sizzling 7% a year on average, much faster than global GDP. But although trade bounced back fast from its post-crisis plunge, rising by 6.9% in 2011, it has been decidedly sluggish since, growing by only 2.8% in 2012 and 3.2% in 2013 in dollar terms, even as global GDP grew by 3.1% and 3.2%.

The author posits some possible explanations. One says that the world is exhausting gains from trade made possible by the removal of trade barriers following the completion of the Uruguay Round in 1994 and the creation of the World Trade Organization, and the integration of China and the former Soviet bloc into the world economy. Another blames the trend on a “post-crash rise in protectionism.” Both seem plausible to me.

The more interesting question to me, though, is not what’s causing “peak trade,” but whether it really matters. I think the author’s quote from Paul Krugman is spot on: “ever-growing trade relative to GDP is not a natural law … we should be neither amazed nor surprised if if stops happening.”

That said, increasing rates of global trade only boosts economic growth. But a decline in global trade it’s not something worth fighting, per se. In fact, I think rapid growth in trade is due almost entirely to liberalization and development in individual countries, and has less to do with mostly-for-show “trade agreements” and trends in global demand than we might be tempted to believe. Fighting the decline in trade by targeting the decline in trade, then, is just fighting a symptom and not a cause. What’s needed is freer markets in less-than-free economies that make international trade something worthwhile for entrepreneurs to engage in.

Author: Nick Freiling

Founder/Director of PeopleFish. I write on technology, market research and economics. Bylines at Startup Grind, FEE, the American Enterprise Institute and the Mises Institute.

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