Chart of the Week: The end of globalisation?

It is now almost 200 years since the British economist David Ricardo first wrote at length about the virtues of international trade. His Theory of Comparative Advantage explains why it is advantageous for a country to focus on making whatever goods or services it is best placed to make, and then to exchange those goods or services with other countries whose productive skills lie elsewhere. It has become a fundamental tenet of economics that more trade is good, and less trade is bad.

This week’s chart of the week shows how global trade has evolved over the past 50 years or so. As a share of global GDP, global trade rose steadily from just over 20% in the early 1960s, to as much as 60% on the eve of the financial crisis. It fell off sharply in 2009, only to bounce back again the following year. But since 2010, global trade has stalled. And on some measures it has gone into reverse.

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Part of the slowdown in global trade will reflect the fact that China’s economy is not expanding as rapidly as it was just two or three years ago – and it is certainly expanding far less rapidly than the official statistics suggest. As a heavy user of commodities, economic growth in China is very trade intensive. But some of the slowdown, in our view, reflects a more worrying trend towards growing isolationism in a number of the world’s major economies. The UK’s Brexit vote may be seen as part of that trend. So too is the growing popularity of Donald Trump – a US presidential hopeful who has built his campaign around a protectionist, anti-trade message.

In our Global Economic and Markets Outlook for 2016 Q4, due to be presented to clients next month, we consider the consequences of a significant downturn in global trade. Looking across the major economies, we find that a sharp fall in global trade would lower potential growth. But, interestingly, it would raise the labour share – workers would be less exposed to competition from overseas. So workers get a larger share of a smaller pie. The flipside, of course, is that owners of capital get a smaller share of a smaller pie. We find that a period of growing isolationism would be disastrous for equity investors.