By David Gruen, Deputy Secretary, Economic and Australia’s G20 Sherpa, and Sam Bide, Economic and G20 Policy Adviser at the Department of the Prime Minister and Cabinet

When the Prime Minister goes to the G20 Leaders’ Summit in Hangzhou late next week, it will be against the backdrop of an underperforming global economy. A key indicator of this is the marked slowdown in global trade. In the two decades before the global financial crisis (GFC), international trade grew at roughly twice the rate of economic growth. Since then it has barely kept pace (see Figure 1).

Figure 1: Average Global GDP and Trade Growth Source: IMF World Economic Outlook (September 2011 and April 2016)

This matters not only because trade is a driver of global growth, but also because it is a key contributor to economic development. Many emerging economies owe their high growth rates to their participation in an open global trading environment. Trade is a harbinger of globalisation. Where trade goes, investment, ideas, new technologies and poverty alleviation tend to follow. But few countries have as much riding on maintaining an open global trading environment as Australia.

Weakness in global economic growth since the GFC is part of the reason why trade growth has been so sluggish. During the GFC, trade volumes plummeted and have since failed to return to their pre-GFC growth rates. Yet a lack of demand cannot explain all of the trade slow down. Since the GFC the global economy has returned to modest growth, but trade growth has remained unusually subdued (see Figure 2).

Figure 2: World Merchandise Trade Volume*

*2005=100, seasonally adjusted. (Source: World Trade Organisation and UNCTAD)

This may partly reflect the fact that investment goods are traded more across national borders than consumption goods (see Figure 3), and investment in advanced economies has been particularly weak. Yet investment as a share of global output was steady during the rapid growth of the 1990s – if investment can’t explain the earlier rapid trade growth, it’s hard to see how it can now explain the slowdown. Some of the slowdown may reflect difficulties in measuring services relative to goods trade, as services become an increasing proportion of global trade.

Figure 3: Investment and Consumption Shares of Global GDP and Goods Imports, 2014

Sources: UN COMTRADE, World Bank

If we want a more convincing explanation for the global trade slowdown, we need to also consider ‘supply-side’ explanations. Some important economies – particularly emerging economies – appear to be turning inward to domestically generated sources of growth. China’s growth is shifting towards domestic consumption, and is thereby less dependent on exports. As its economy moves up the value-added chain, China is likely to produce a lot more of the things their consumers want to buy.

Further, the effects of previous rounds of substantial global trade liberalisation have probably worked their way through the global economy by now. The Uruguay Round of multilateral trade negotiations and the subsequent creation of the World Trade Organization (WTO) date from 1995, China acceded to the WTO in 2001, and the expansion of the European Union from 15 to 25 countries happened over a decade ago. And since then, the GFC has spurred protectionist pressures that have been difficult to resist.

The G20 is the premier international forum for cooperation on global economic governance and trade is a key driver of global economic growth. Trade is – and should be – central to the G20 agenda. The G20 represents around 85% of the world economy and more than three-quarters of global trade. G20 members are making trade commitments as part of their growth strategies, including measures to reduce barriers in trade-enabling services (such as transport, logistics and port services) and measures to finalise or ratify free trade agreements, and reduce non-tariff barriers. Given the longevity of the global trade slowdown, the G20 needs to vigorously prosecute the case for an open global trade regime.

There are signs around the globe of rising protectionist sentiments. Partly, this reflects the perception that the gains from trade have not been broadly distributed, particularly in some advanced economies. China has elevated trade as a key issue for leaders to discuss at Hangzhou. G20 Trade Ministers have also called for improved communication of the benefits of trade and are seeking analytical support from relevant international organisations. A key part of this is improving the evidence for how trade lifts GDP, and also how key groups, industries and regions are impacted. Such evidence helped Australia open up our trading system in the 1980s and 1990s, and to develop policies to help those most affected.

Improved economic modelling and analysis can help prioritise those trade reforms that make the greatest contribution to raising output and make sure trade reforms are inclusive. Understanding how much we benefit as nations, and also how those within our nations are affected, will help ensure we all benefit from a more open trading environment.