Coleman Nee: The impact of the 2023 trade slump on LDCs is a matter of concern

Coleman Nee is senior economist at the Economic Research and Statistics Division of the World Trade Organization (WTO), where he has worked since 2004. Kamal Dev Bhattarai of ApEx spoke with him about global trade, problems faced by LDCs, and how geopolitics is affecting global trade.

How do you see the prospects of global trade in 2024?

We expect a gradual rebound in global trade volume for goods throughout 2024 and 2025, following a decline in 2023 primarily due to the persistent impact of elevated energy costs and inflation in developed economies, notably in Europe. Specifically, we project a 2.6 percent increase in merchandise trade for 2024 and a further 3.3 percent growth in 2025, following a 1.2 percent dip in 2023. Nevertheless, the presence of various downside risks has contributed to the uncertainty inherent in all economic predictions, particularly those concerning trade. These risks encompass regional conflicts, geopolitical tensions, and uncertainty in economic policies.

It seems we are making progress towards global trade recovery, what are the reasons behind it?

Inflation diminished real household earnings and reduced net earnings of businesses in 2023, leading to a decline in the demand for manufactured goods, which play a significant role in global trade. Conversely, as inflationary pressures diminish and policy interest rates eventually decrease, this should have a contrasting effect this year and the following, progressively boosting consumption and increasing the demand for imports.

What are the downside risks?

Geopolitical tensions and policy uncertainty could limit the scope of any trade rebound. While export growth should improve in many economies as external demand for goods picks up, food and energy prices could again be subject to price spikes linked to geopolitical events. Choosing an appropriate pace of interest rate cuts will also be challenging for central banks in advanced economies, and any miscalculation could lead to financial volatility later in 2024. The resilience of global trade is also being tested by disruptions on two of the world’s main shipping routes: the Panama Canal and the Suez Canal. 

The Panama Canal handles six percent of global trade, with over 70 percent of traffic destined for or originating from the United States. It is currently operating at partial capacity due to freshwater shortages, with restrictions likely to remain in place for some time. Meanwhile, the Suez Canal handles about 12 percent of global trade, and roughly one-third of container shipping between Asia and Europe. The diversion of traffic away from the Red Sea and around the Cape of Good Hope has added around 10 days to Asia-Europe journeys while boosting fuel costs.

Overall, risks are tilted to the downside, although there is some upside potential if trade in the European Union recovers faster than expected.

How does geopolitics affect global trade?

The global economy has been hit by several economic shocks in recent years while geopolitical tensions have been rising. In response to these and other concerns, some governments have become more skeptical about the benefits of trade and have taken steps aimed at re-shoring production and shifting trade towards friendly nations. These actions have had some impact on trade patterns, but evidence of a sustained trend toward deglobalization remains scant. One early sign of changing trade patterns is bilateral trade between the United States and China. Despite a record high in 2022, total bilateral trade between the world’s two largest economies grew 30 percent more slowly since 2018 than their trade with the rest of the world. 

In services, there are early indications also as data from the United States appear for example to show evidence of recent ‘friendshoring’ in information and communication technology (ICT) services. US imports of ICT services by region from 2018 to 2023. During this period, US imports from North American trading partners (mostly Canada) increased from 15.7 percent of total ICT imports to 23 percent. At the same time, US imports from Asian trading partners (mostly India) fell from 45.1 percent to 32.6 percent. 

Regarding the regional aspects, what are the prospects of growth in Asia?

In 2023, weak demand reduced export volumes in Europe and prevented a stronger recovery in Asia, while the picture in other regions was mixed. If the WTO’s trade forecast for 2024 is realized, Asia will contribute more to merchandise trade growth than it did over the last two years. The region is expected to add around 1.3 percent points to the projected 2.9 percent growth in world exports this year, or around 45. On the imports side it should add 1.9 percentage points to the anticipated 2.3 percent growth in world imports, or around 81 percent. Asia’s exports will grow 3.4 percent in 2024 and 3.4 percent in 2025. Asia’s imports meanwhile will grow 5.6 percent in 2024 and 4.7 percent in 2025. 

What are the key problems faced by LDCs countries in the global trade?

The impact of the 2023 trade slump on least developed countries (LDCs) is a matter of concern since these countries have limited resources to deal with global economic shocks. The drop in merchandise exports of LDCs last year was in line with the decline at the world level, but the contraction on the import side was larger, limiting consumption possibilities for LDCs. Merchandise exports of LDCs fell from $269bn in 2022 to $256bn in 2023, corresponding to an annual percentage change of -4.6 percent. This was roughly equal to the decline at the world level, leaving the share of LDCs in world exports stable at 1.1 percent. Meanwhile, merchandise imports of LDCs fell from $355bn in 2022 to $316bn in 2023. The -11 percent decline was roughly twice as large as the decline in world imports. As a result, the share of LDCs in world imports fell from 1.4 percent in 2022 to 1.3 percent in 2023.

LDC oil exporters recorded large merchandise trade surpluses in both 2022 ($24bn) and 2023 ($14bn). Other groups of LDCs experienced trade deficits last year, ranging from $36bn for countries that mostly export agricultural products to $4bn for ones that primarily export non-fuel minerals. According to preliminary WTO estimates for 2023, the US dollar value of LDC exports of fuels and mining products fell 16.5 percent in 2023. Their exports of agricultural products were also down 8.7 percent while shipments of manufactured goods dropped 12.6 percent. Exports of other products (including non-monetary gold) increased by four percent. These developments in value were influenced by corresponding price changes (for example, an eight percent rise in gold prices) as well as trade volume developments.