Gold, page-1700

We know that global trade is nolonger growing above global GDP growth. For the reason why it is so, see Krugman's wonkish explanation provided bellow. (Wonkish means not designed having in mind the level of knowledge of the commun man) If you are able to grasp what Krugman says then you would realize that the slow down in world trade has nothing to do with the apocalyptic view being advanced by Atomic.

Apart from that, he seems to haveeither forgoten or never having realized this:

"The supply of cargo ships is generally both tight and inelastic—it takes two years to build a new ship, and the cost of laying up a ship is too high to take out of trade for short intervals,^[6] the way you might park a car safely over the winter. So, marginal increases in demand can push the index higher quickly, and marginal demand decreases can cause the index to fall rapidly. e.g. "if you have 100 ships competing for 99 cargoes, rates go down, whereas if you've 99 ships competing for 100 cargoes, rates go up. In other words, small fleet changes and logistical matters can crash rates."


"Explaining Trade Weakness (Wonkish)

And now for something completely different — or anyway not the kind of thing I’ve been writing about lately. But I have been keeping my eye on the ongoing debate over the world trade slowdown, and wanted to weigh in on one issue.

For those who don’t know about it, there seems to have been a break in the trend of world trade. Between 1990 and the 2008 crisis, trade grew much more rapidly than world GDP; this “hyperglobalization” brought trade shares of income to levels unprecedented in previous history. Trade then plunged, as was to be expected, in the slump — most trade these days consists of durable goods, which are very cyclical. It bounced back when the world started to recover. But while it’s more or less at the pre-crisis level relative to GDP, it hasn’t gone beyond, suggesting that hyperglobalization has reached some kind of limit. And many of us are talking about things like supply chains, logistics, and so on to explain why.

But a new piece from the Bank of England suggests a seemingly simpler explanation: it’s just a composition effect, as world output shifts toward countries that have relatively low income elasticities of demand for imports. So is that really the story?

I’d say no, because I don’t believe that the income elasticity of imports is a structural parameter. You need to look underneath to the underlying economic logic — and this pushes you back to stories about supply chains etc..

The notion that income elasticities in trade aren’t structural is one I’ve been pushing for a very long time. Way back when I noted that there seems to be a systematic relationship between estimated income elasticities and national growth rates, what I called the 45-degree rule, which suggested that we were really looking at supply-side, not demand-side effects; a lot of later research seems to support that suggestion.

So how should we think about income elasticities for the purpose of understanding the trade slowdown? I’d argue that other things equal, we should expect trade to grow at the same rate as the world economy. If it grows faster, that’s something to explain with changes in trade policy, transportation costs, and so on. To a first approximation, this says that for any one country we’d expect to see a relationship along the lines

Trade growth = GDP growth + x
where x is the common factor — containerization, say — causing overall world trade to grow faster than income.

This in turn says that the “income elasticity” — actually just the ratio of trade growth to GDP growth, not necessarily a structural parameter — should look like this:
Elasticity = Trade growth / GDP growth = 1 + x/GDP growth
So fast-growing countries should appear to have low income elasticities, but that’s not saying anything about the underlying causes of trade growth.

Let’s take the data on elasticities and growth given in the BoE analysis, and plot it:

That’s China in the lower left corner. It looks pretty good to me. And the clear implication is that China isn’t really a “low trade elasticity” economy. It’s just a fast-growing economy, which more or less mechanically means that it has a low ratio of trade growth to GDP growth. And its rising share of world trade should not be viewed as an explanatory factor in the trade slowdown.

I still think it’s about those supply chains.