The role of China in the recent trade slowdown, G. Gaulier's slides, June 2016

The role of China in the trade
slowdown
Guillaume Gaulier, Walter Steingress
& Soledad Zignago
Banque de France

• After the 2008 financial
crisis, international trade
of goods and global
industrial production
grew nearly at the same
pace implying an implicit
Global Trade Elasticity
(GTE=growth of trade/growth
of output) of 1
• This stands in sharp
contrast to the pre-crisis
period, when global trade
increased twice as fast as
industrial output
GTE>2
GTE
=1
Source: Author’s computations using CPB World Trade Monitor

• Among the conditions to have a GTE of 1:
balanced trade and symmetric shocks
• Not true in the short and medium run
• Some countries or regions are big enough to
weight on the GTE for a long period of time
GTE instability:
in search of a smoking gun

Does China hold the smoking gun?
• Building on Gaulier, Santoni, Taglioni and
Zignago (2015) we argue that there was in
China an asymmetric shock capable of moving
the GTE
– “With […] a large production base compared to
the world total, China generated a large export
surplus that drove down the world price for goods
in which it specialised and reinforced
specialisation patterns based on Ricardian
comparative advantages and the reallocation of
global demand for those products towards Chinese
exports”

Does China hold the smoking gun?
• We do not have a formal model from which
we could estimate the contribution of
China/Emerging countries integration into the
global economy
• But we bring various empirical evidences that
we think are consistent with China’s guilt!

Main results/evidences
– A simple time-series model with a long run GTE of
1 fits the historical data and has the best
predictive performance
– Emerging Asia contributes disproportionally to the
(short or medium run) GTE
– Supply shocks in this region “cause” global trade
– China’s contribution to global trade growth
through supply declined and became similar with
its contribution through demand
– China’s supply shock triggered a decline of world
prices of the goods it exports, which is now over

The long run GTE was always 1
• Before discussing China’s role, we show that based on
time series analysis one cannot reject the hypothesis of a
long run GTE of 1
• Given large persistent deviations to the LR equilibrium,
we generally observe elasticities different from 1
• We estimate an ECM using the CPB WTM dataset, varying
the long run GTE:
𝑑𝑑𝑑𝑑𝑑𝑑 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑡𝑡 = 𝜌𝜌 𝑙𝑙𝑙𝑙
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐺𝐺𝐺𝐺𝐸𝐸
𝑡𝑡−1
+ 𝛽𝛽𝑑𝑑𝑑𝑑𝑑𝑑 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑡𝑡−1 + 𝛼𝛼 𝑑𝑑𝑑𝑑𝑑𝑑 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑡𝑡−1 + 𝜀𝜀
– Fits and in-sample dynamic forecasts are as good with a long-
run GTE set to 1 or to 2
– But speed of convergence to the long run (𝜌𝜌) is not stable for
a GTE of 2
– And out-of sample dynamic forecast better with a GTE of 1

In-sample (1991-2007) forecasts are the
same with GTE of 1 or 2
140
120
100
80
60
40
1992 1994 1996 1998 2000 2002 2004 2006
world trade volume CPB
dynamic forecast elast=1
dynamic forecast elast=2

Recursive estimates of the speed of
convergence to the long run (𝜌𝜌) does
not stabilize when the GTE is 2
GTE=1
GTE=2
Break in 2008-2009

The long run GTE was always 1
• We continue the horse race with out-of-sample
dynamic forecasts for the crisis and post-crisis period
• Models with GTE of 1, 2 or zero (no long run
equilibrium) are tested [estimate over 1991-2007]
• To start addressing the question of country shocks in
the short run part, we take country or regional
Industrial Production (IP) instead of global IP (US, Japan,
EA, Emerging Asia, CEEC, Latin America, Africa and Middle East)
𝑑𝑑𝑑𝑑𝑑𝑑 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑡𝑡 = 𝜌𝜌 𝑙𝑙𝑙𝑙
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐺𝐺𝐺𝐺𝐺𝐺
𝑡𝑡−1
+ ∑ 𝜷𝜷𝒓𝒓
𝑑𝑑𝑑𝑑𝑑𝑑 𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑟𝑟
𝑡𝑡−1𝑟𝑟 +…

Whereas short run elasticity (𝛽𝛽𝑟𝑟
) for EA is in line with
the region’s weight in global trade, the elasticity for
Emerging Asia is much higher than its share in trade
Source: Author’s
computations using CPB
World Trade Monitor

Out-of-sample dynamic forecasts
(growth rate of actual and predicted global trade)
Model with GTE=1 tracks well Global
Trade whereas models with GTE=2 or
GTE=0 over-estimate trade by 2 to 3% pts
per year during the recent period
ZOOM

Does China/Emerging supply “causes”
global trade, or does the causality goes the
other way?
IP X M IP X M IP X M
IP 5.4 4.5 7.5 4.4 8.1 8.5 5.2 9.2 4.6
X 0.7 4.8 3.2 2.3 11.6 3.3 4.3 4.5 1.5
M 2.7 1.7 4.6 2.5 9.6 2.8 2.7 4.8 1.4
IP 2.8 2.8 2.4 5.0 9.8 3.2 5.3 3.9 5.7
X 1.6 4.1 5.4 2.1 6.8 4.6 3.9 4.7 4.4
M 1.3 2.6 0.9 1.3 4.0 4.5 5.8 3.1 4.6
IP 1.4 3.0 2.1 3.5 2.8 11.0 10.0 13.8 8.7
X 2.1 2.5 2.3 2.9 2.4 13.1 5.7 2.9 2.4
M 1.5 1.1 1.6 3.2 1.8 8.4 3.3 1.0 4.8
2.3 3.2 4.2 4.9 5.1 14.9 8.7 5.1 7.6
Emerging
Asia
US
EA
Global Trade
Emerging Asia US EA Global
Trade
Granger-causality analysis
This Table gives the Fisher test statistic for each pair of variables. The null
hypothesis is that “variable in row does not cause variable in column”. A high
Fisher means that non causality can be rejected. Significant statistics at the 1%
level are in bold.

Emerging Asia IP is the only variable that “causes” other
variables, including Global Trade
But is not (significantly) caused by any other variable
IP X M IP X M IP X M
IP 5.4 4.5 7.5 4.4 8.1 8.5 5.2 9.2 4.6
X 0.7 4.8 3.2 2.3 11.6 3.3 4.3 4.5 1.5
M 2.7 1.7 4.6 2.5 9.6 2.8 2.7 4.8 1.4
IP 2.8 2.8 2.4 5.0 9.8 3.2 5.3 3.9 5.7
X 1.6 4.1 5.4 2.1 6.8 4.6 3.9 4.7 4.4
M 1.3 2.6 0.9 1.3 4.0 4.5 5.8 3.1 4.6
IP 1.4 3.0 2.1 3.5 2.8 11.0 10.0 13.8 8.7
X 2.1 2.5 2.3 2.9 2.4 13.1 5.7 2.9 2.4
M 1.5 1.1 1.6 3.2 1.8 8.4 3.3 1.0 4.8
2.3 3.2 4.2 4.9 5.1 14.9 8.7 5.1 7.6
Emerging
Asia
US
EA
Global Trade
Emerging Asia US EA Global
Trade
Notice that US imports caused by all variables, but does not cause Emerging Asia
variables, including exports

Supply (adjusted exports) and Demand (adjusted imports)
contributions to global trade growth
Decomposition using
Measuring Export
Competitiveness
(mec.worldbank.org)

China provided much less stimulus to global trade
through demand/import than through supply/export.
In the recent period, the stimulus was balanced
Supply-side contribution
has shrunk
Demand-side contribution
was more resilient

Before the global trade collapse: China supply-push effect
was strong, but export growth in value was hampered by
slower world prices for the mix of goods exported
World market share gain >10% per year
once we control for specialization
Declining relative prices of the good China is specialized in

More recently (2011q3-2015q2) the product mix
became favorable: terms of trade increased
Push effect still positive, but much
weaker
Favorable product mix (in terms of prices, not volume)

• Our interpretation is that the pre-crisis terms of trade
loss was self inflicted, China was big enough to weight
on the prices of the goods it exports
• This was necessary for the goods produced in China to
find sufficient demand
• Local competitors were ousted by Chinese export prices
• It contributed to a decline in the relative price of
tradables, causing an increase in the trade to output
ratio at the world level
• It ceased as China’s growth model became more
balanced: Higher relative costs, more diversified supply,
use of more local inputs, etc.
• Less asymmetric shocks : industrial production growth
rate more similar across countries/regions

Link with global current account
imbalances?
• Notice that excess supply in China implies a current
account surplus
• It was possible because the exchange rate was not
allowed to appreciate
• This contributed to growing global imbalances
during the “hyperglobalization” period
• It may not be a pure coincidence that trade slew
down at the same time as global imbalances
narrowed
• Recently: Capital outflow from China + higher rates
in the US=> reemergence of global imbalances +
GTE>1?

A zoom on the recent periodBACK

Decomposition of market share growth
• Measuring Export Competitiveness (BdF, WB, ITC)
• From bilateral (200×200 countries) disaggregated (5000
products) data, using fixed effects model, we extract
exporter, importer and product contributions to market-
share growth
• Exporter effects are associated to supply, importer
effects to demand
• For each country we can compute the contribution to its
export growth of his own specific performance (push
effect or adjusted growth) and of the dynamism of
foreign demand he faces: how is the demand in his
partner countries and for the products in which he is
specialized?
BACK

Growth of industrial production
Due to emerging Asia: asymmetric shocks before the
global crisis, more symmetric shocks recently
BACK

• As stated in the task force report, the GTE should
be one, except if:
• Demand is non homothetic: when income
changes, relative demand of tradable changes.
– For instance, higher demand for non tradable services
when income increases, or higher demand for
electronic goods…
• The trade wedge changes: the relative price of
international trade changes. This can be due:
– Biased technological progress (containerization, ICT,
renewables)
– Liberalization/protectionism
– Asymmetric shocks: (big) shocks in the export sector
of (big) countries

other aspects we don’t address
• Cyclical component of the trade slowdown:
– Role of the composition of demand and the
weakness in business investment among
advanced economies (Boz, Bussière & Marsilli
2014)
– Role of low demand in the EU/EA, the most trade
integrated region in the world (Ollivaud &
Schwellnus 2015)
• Commodity-price decline, contraction of
global value chains, etc

Prospects
• In the short run, very high GTE are possible
(for instance due to a strong recovery in the
EA, with countries trading with each others)
• But given limited scope for further trade
liberalization (new treaties could favor FDI
more than trade) and unless another big
country or region integrates into world trade
with a very export-oriented growth model, we
shouldn't expect to see GTE persistently above
1

Short run/Long run
• The global elasticity was
high when global
imbalances were
building up in the 90’s
or the 00’s
• But it was low in the
early 90’ and 00’s global
recessions
• And now

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The role of China in the recent trade slowdown, G. Gaulier's slides, June 2016