Sometimes a picture is worth 1000 words. The chart above, from the New York Times, highlights the massive changes that are taking place in world trade flows. These are of critical importance to the chemical industry, one of the world’s most globalised businesses.
• Firstly, the volume of world trade has fallen to 2006 levels, with the World Bank forecasting 2009 will see “the largest decline in 80 years“.
• Secondly, China (red line) has now become the world’s largest exporter, overtaking Germany during H1 2009.
The rationale for China’s success is its ability to offer low prices. It can supply jeans for just $2.85, thus allowing its textile exports to soar as quotas were removed earlier this year. And the government has pulled out all the stops to support exports, by:
(a) keeping the currency’s value fixed and low
(b) providing $1trn of low-cost loans and
(c) providing export tax rebates (worth $39bn in January-August).
Two conclusions follow from China’s success:
• Contrary to European hopes earlier in the year, it seems that export success in the ‘new normal’ will be based on price, and not necessarily on the ability to produce high quality, more expensive items.
• Trade frictions will increase with the West as a result. Governments are unlikely to sit back and watch jobs disappear. Anti-dumping measures will increase, as will pressure for the currency to appreciate.
And whilst financial markets worry about the return of inflation, China’s success suggests deflation is the more serious near-term concern.