Is trade sinking? - HATICE KARAHAN

Is trade sinking?

The U.S.'s “brand name” exporting; is the dollar rather than the Big Mac, Coca Cola and Levis 501.

This reality, that economist Barry Eichengreen addressed as the dollarization fact in the year 2000, is enough to send a ripple the whole world today in an integrated way from the trade markets to the financial markets. Hearing the three-letter word “FED” that hits the nerves is enough to summarize the whole matter. Yet, I will discuss the topic from the global trade perspective and dwell on it further. Our focus will be exports. Because, data that causes disappointment continues to come in, and the U.S.A's “brand name” exporting has a finger in this pie.

Defeat in the first half

The World Trade Organization (WTO) has released June data, thus officially revealing the unpleasant picture of the first half of the year. According to this data; global exports and imports in the January-June period have shrunk by 10.7 percent and 12.9 percent respectively. We had forgotten to notice a decline in global trade for a while, let alone seeing double-digits.

For example; we had experienced a mild fluctuation in a few quarters of 2012, yet bypassed it rather quickly. If we were to ask when the last serious concussion was hidden; the answer would be, between the last quarter of 2008 and the third quarter of 2009. In other words, right in the middle of a crisis...

Therefore one speculates: Well, there was a crisis then, but why is there such loss now? Other than a few countries, why are the exports of most countries declining?

Let us take a look at data to understand.

Half of the decline belongs to the U.S.

When we look at the WTO data in terms of regions, the EU is first to grab our attention. The reason for this is; both the EU leading in exports and the 14.3 percent decline in the first half of the year. The decline of the EU has decreased the World exports growth rate by 5.3 percent. In other words, the reason for half of the decline in the 10.7 percent global recession is the EU. 3.6 percent of this decline is from domestic trade and 1.7 percent is created by the decrease in foreign trade. Moreover, the non-members of the EU have contributed to this loss by -0.5 percent.

Asia has accelerated the loss in global trade with a -1.9 point decline. This shrinkage of 5.4 percent is at a minor level. Australia, India, Japan and Singapore are some of the prominent countries that are experiencing a decline. In addition to this, North America has experienced a 6 percent decline bringing the rate to -0.9 points. This has happened with the contributions of the U.S.A and Canada...

Russia, one of the fastest faces of the free fall, has contributed to this global loss alone with a 28.5 percent decline equaling to -0.9 points.

We should take a look at the other side of the coin being imports. The EU and Asia have given global imports a hard time with a -5.3 and -4.9 point decline respectively, bringing the global decline rate to 12.9 percent. The Asian leaders of this decline are China and Japan... We shouldn't forget Russia's -0.7 point contribution.

The prominent points that feature on the world trade stage have been discussed above... Now let us go backstage and try and understand the background.

The strengthening of the dollar

As indicated by the data, the major player responsible for the headfirst fall is Europe. How can this happen when the region, when compared to last year, is trying to recover? An important part of the answer lays in the Euro/dollar parity.

The EU does close to 50 percent of its trade outside the region, in Euro. The dominance of the export called “Euro-denominated” is evident in the region. Thus, a serious amount of the total EU exports are done in Euros. And, when we look at the export in the region in terms of the Euro, there is an increase. But, WTO data is calculated in dollars. Therefore, in this period, as the Euro lost 19 percent value against the dollar, even though the EU's Euro-denominated exports rose, there is a decrease in terms of the dollar.

This reality is the reason for the “exaggerated” ratio amount of the decrease in exports: the parity effect. This effect is also true for other currencies used for trade (which lose value against the dollar) in Europe and other regions. On the other hand, we shouldn't forget to state that, the increase in the value of the dollar affects the competitiveness of the relevant countries.

Commodities on the decline

There are, of course, other factors that affect the upside-down fall in exports. The decline in demand and decrease in prices due to the decelerated economy are among these factors. The price of commodities pulling the trade figures down should be examined within this scope. While the indexes state that there are serious downfalls in commodities, there is a 44.7 percent decline in energy prices. This rate for commodities excluding energy is 13.6 percent. There is an 8.9 percent decline in the precious metals category. The explanation for the decline in the Asian, American and Russian markets are found in this data.

Besides, the unit values and the quantum indexes of exports verify these inferences. While there is a minor increase in export quantity, there is a sharp fall in unit values.

Therefore, weak demand, the declining commodity prices and the parity effect, summarize the trade confusion of the first half of the year. The parity effect will weaken in the second half; yet, it is hard to expect a quick recovery in demand and prices.

If you're wondering about our exports, there may be some recoveries soon with the support of base effects, yet there is still some time to see the old attractive prices.


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