• Trade growth in North America and South America has been strong: Much of the higher than expected trade growth in 1997 is attributable to the dynamism of economies in North America and South America. Both regions recorded a higher share in world trade than they have attained in more than a decade. Some slowdown is expected in these regions in 1998.

• Differences in volume export growth among regions narrowed in 1997: Stronger performance from Asia, Western Europe and the transition economies have reduced the dispersion in merchandise export growth rates among regions.

• Exports of merchandise and commercial services exceeded US$6.5 trillion: In value terms merchandise exports amounted to US$5.3 trillion and commercial services to US$1.3 trillion in 1997.

• The strength of the dollar led to large measurement differences in the dollar value and the volume of world trade flows in 1997: The strength of the US dollar vis-?vis the currencies of many major traders, together with low inflation, led to the strongest annual decrease in dollar prices for world merchandise exports since 1950. Declining dollar prices led to only modest increases in the value of world trade despite strong volume growth.

• Manufactures were again the most dynamic product category: Trade in manufactured goods expanded at a rate above total merchandise trade growth despite a marked fall in dollar prices.

• The trade effects of the Asian financial crisis will be felt most within the Asian region: The bulk of the trade of the countries most affected by the financial crisis - Rep. of Korea, Malaysia, Thailand, Indonesia and the Philippines - takes place within the region, and this is where any trade effects will be most apparent. Because the affected countries account for relatively small shares of world output and trade, the impact of the crisis on trade will be limited.

• Trade adjustment among the countries most affected by the Asian crisis has largely been through import contraction so far, but exports are likely to play a significant role in economic recovery: Import contraction usually precedes export expansion in these circumstances. Initial difficulties relating to the availability and cost of credit, as well as the cost of imported inputs for export production, will hamper export expansion in the first instance. But currency re-alignment and slack production capacity will favour export expansion.

I. Main features of world trade developments in 1997 Back to top

World GDP and trade grew at impressive rates in 1997, notwithstanding the effects of the Asian financial crisis. Real GDP grew at 3 per cent, matching the best performance achieved since 1989. Merchandise exports grew at 9.5 per cent, and this is the highest rate of trade growth recorded in more than two decades, with the exception of 1994. In 1994, trade expanded at a rate of 10 per cent (Chart 1). In line with a well-established historical trend, merchandise exports grew much faster than world output - almost three times as fast in 1997.

Trade growth was stronger than expected, largely due to the performance of North and South America. Strong output growth in North and South America boosted export and import growth rates to double digits. Differences in regional output growth rates narrowed in 1997, as economic activity picked up in Western Europe and the transition economies. These two regions together account for about 45 per cent of world trade in goods and services. Despite the improvement in 1997, their trade growth still remained the weakest of all regions. Asia, Africa and the Middle East experienced slower average output growth in 1997 than in 1996. The slowdown in the GDP growth of the Asian region is attributable mainly to Japan. Developing Asia's growth eased on average only sightly, to some 7 per cent, still twice as high as average global growth. According to United Nations data, 120 out of 143 economies, for which data were estimated, registered positive per capita growth in 1997. This matched performance in 1996, the best recorded so far in the 1990s.

While trade volumes were buoyant, the appreciation of the US dollar vis-?vis the currencies of major trading nations in Western Europe and Asia exerted a strong downward pressure on trade growth rates measured in dollar terms. The weight of the Western European and Asian countries in global trade, combined with low levels of domestic inflation, resulted in a sharp decline in dollar export prices. This is why we observe a deceleration of world trade growth in value terms, but an acceleration in real terms.

The dollar value of world merchandise exports rose 3 per cent in 1997, which was somewhat less than the 4 per cent rate recorded in 1996. World exports of manufactured goods grew above the average rate, while those of minerals were below the average, and the growth of agricultural shipments decreased. The value of world exports of commercial services increased by 2 per cent in 1997, which almost certainly masks more significant increases in trade volumes (Table 1). Among the three broad sectors of commercial services, the growth of transportation stagnated, travel services grew slowly, and other commercial services recorded an above average rate of export growth. Exports of merchandise and commercial services both reached new record levels, at US$5.3 trillion and US$1.3 trillion respectively in 1997.

The financial crisis in some Asian countries had only a modest impact on average global trade growth in 1997, both in value and volume terms. This is not surprising, as the crisis deepened only in the final months of 1997 and it takes time for the depreciation effects to feed through on trade developments. Moreover, the share in world trade of the five most affected Asian countries (Rep. of Korea, Malaysia, Thailand, Indonesia and the Philippines) amounts to only 6-7 per cent (Appendix Table 4).

Table 1
World exports of merchandise and commercial services, 1995-97
(Billion dollars and percentage)

II. World trade developments by region Back to top

In the sixth year of economic expansion, North America's GDP growth accelerated to nearly 4 per cent in 1997, exceeding the expectations of many forecasters. The strength of overall economic activity was reflected in trade flows. Measured in constant prices, both exports and imports recorded double digit growth for the second time in the 1990s (Table 2 ).

Table 2
Growth in the volume of world merchandise trade by selected region, 1990-97
(Annual percentage change)

^aCanada and the United States.

^bChinese Taipei; Hong Kong, China; the Republic of Korea; Malaysia; Singapore and Thailand.

Note: Separate volume data are not available for Africa and the Middle East, although estimates for these regions have been made in order to calculate a world total.

The value of merchandise exports rose by 9.5 per cent in 1997, three times faster than world trade. Intra-North American trade and exports to Latin American countries expanded at double digit rates. For the first time since 1994, North America's imports grew faster than exports. The strength of North America's import demand led to a sharp rise in imports from Western Europe (21 per cent), China (21 per cent) and Japan (14 per cent). North America's trade performance in recent years has led to a recovery of the region's share in world trade. The share of the United States exports reached 13 per cent, the highest level since 1970. As regards imports, the share was 16.5 per cent, the highest level since 1987. North America's exports and imports of commercial services expanded somewhat less than merchandise trade, but still considerably faster than world services trade.

In 1997, Latin America experienced its highest annual GDP growth rate (5.2 per cent) and largest net private capital inflow so far in the 1990s. These two factors contributed to the outstanding trade performance of the region last year. A question arises as to the sustainability of these trends, given the large increase in the region's current account deficit and the appreciation of the real effective exchange rates of most Latin American currencies.

Latin America's merchandise exports rose in real terms by about 13 per cent, while merchandise imports surged by more than 20 per cent. For both exports and imports, the 1997 performance was the strongest so far in the 1990s (Table 2). As both export and import prices decreased on average by about 2 per cent, the rise in the dollar value of merchandise exports and imports was not as high as that recorded in volume terms. A marked difference in import growth over export growth rates was, however, still apparent. The two largest traders in Latin America in 1997 - Mexico and Brazil   -continued to record double-digit trade growth (Table 3). Although the data are incomplete, it appears that trade in commercial services has also grown rapidly. This growth was well above the global average, but less dynamic than the region's merchandise trade growth.

Table 3
Growth in the value of world merchandise trade by region, 1990-97
(Billion dollars and percentage)

^aChinese Taipei; Hong Kong, China; the Republic of Korea; Malaysia; Singapore and Thailand.

Western Europe's trade growth recovered strongly. The export recovery was most pronounced in Germany, France, Spain, Ireland and Turkey, which recorded double digit growth. The depreciation of the ECU vis-?vis the dollar, together with relatively weaker domestic demand in continental Western Europe than in other regions, caused exports to continue to expand faster than imports (Table 2).

Exchange rate developments were the major cause behind the decrease of the dollar value of Western Europe's merchandise exports and imports in 1997. Measured in ECU, the region's exports and imports rose by more than 10 per cent. Currency changes, along with strong domestic demand, explain why only the United Kingdom recorded a strong increase in the dollar value of its exports and imports among the major West European traders (Appendix Table 1).

Exports and imports of commercial services stagnated in dollar terms in 1997. Changes in the methodology applied in data collection, together with divergent exchange rate developments, have resulted in major shifts in the ranking of West European traders. The United Kingdom has replaced France as the world's second largest exporter of commercial services and has also moved ahead of France and Italy on the import side (Appendix Table 3).

The large variations in the trade and output performance of the transition economies in 1997 reflects the uneven progress made in the reform process. Strong and steady trade growth over the last three years has been reported by Hungary and Poland. The Russian Federation, the largest regional trader, recorded a strong increase in imports, and a fall in exports owing to the decline in world oil prices (Appendix Table 1).

The Middle East region, more than 70 per cent of whose exports are fuels, recorded a stagnation in the dollar value of its exports and imports, largely due to the changing fortunes of oil. After rising nearly 20 per cent in 1996, spot crude oil prices fell by 6 per cent on average in 1997. An increase in the region's oil export volumes partly offset the negative price effect on export earnings of lower oil prices.

In 1997, Africa's GDP and agricultural output growth slackened and nominal oil prices fell. Export earnings rose at 3 per cent in dollar value terms, which is the world average rate, but considerably less than the rate attained in 1996. Imports expanded at 5 per cent in 1997, which was sharply higher than the 1996 rate (Table 3). Commodity price developments varied in 1997, with rises in the prices of beverages (coffee, tea and cocoa) contrasted with a fall in many food prices. Overall, price developments favoured many least developed African countries. A fall in wheat and rice prices has lowered the import bill of net food importing countries, at least to the extent that they relied on imports through commercial channels.

Not only did economic growth slacken in Asia in 1997 - particularly in Japan, the region's major market - but changes in major exchange rates (especially the rise of the dollar vis-?vis the Yen) caused concerns in regard to the competitiveness of East Asian developing countries. These countries, which had closely linked their currencies to the US dollar, were the most dynamic traders in the world during the last decade. Exchange rate developments, together with sluggish intra-Asian trade, as measured in dollar terms, added to the erosion of confidence of foreign investors.

Despite slowing growth in Japan and the countries hit by the financial crisis, the Asian region managed a real import growth rate of 5.5 per cent in 1997. Exports recovered strongly in comparison to 1996 and at a 11.5 per cent growth rate, expanded faster than world trade (Table 2). In dollar terms, Asia's exports expanded by about 5.5 per cent, while imports stagnated. Japan, China and the Asian developing countries that suffered from financial crises all experienced higher export growth than import growth. Within the latter group of countries, trade growth varied considerably in 1997. The Philippines recorded strong export and import growth, while Malaysia's trade stagnated in dollar terms. Imports of Indonesia, the Republic of Korea and Thailand declined (Table 3 and Appendix Table 7). Commercial service exports of Asia increased somewhat faster than global trade, while imports remained unchanged from the previous year.

III. The trade implications of the Asian financial crisis Back to top

Any attempt at this juncture to identify the trade effects of the Asian financial crisis is bound to be partly speculative. Not enough time has elapsed since the crisis began last year for its full effects on trade flows to have become apparent. Moreover, the future evolution of the economies of the five most affected countries - Rep. of Korea, Malaysia, Thailand, Indonesia and the Philippines - is still uncertain. For these reasons, the discussion below is somewhat tentative in character. Moreover, it is important to note that significant differences in the situation facing the individual countries involved tend to be obscured by a summary treatment of the question at the regional level.

Appendix Table 4 contains some basic data on the five most affected countries. The central point illustrated by this table is that the countries concerned account for a relatively modest share of global economic activity. They account for 3.6 per cent of world GDP, around 7 per cent of world trade, 6 per cent of global foreign direct investment (FDI) inflows and 4 per cent of FDI stocks, and less than 4 per cent of gross international bank lending. The effects of the crisis may be severe for the countries concerned, and can spill over in various ways into other countries and the world economy in general. But while the effects of the crisis remain concentrated on this group of countries, its likely impact must be assessed in light of the relative size factor.

As a number of the Asian countries affected by the financial crisis seem to move towards recovery, a question that arises is how far renewed economic activity will be driven by exports. Strong currency depreciations should contribute to rapid export growth. Observers who subscribe to this scenario fear that a flood of imports will damage some industries and lead to lower GDP growth and higher unemployment in the industrialized countries. These fears would seem to be largely unjustified, at least as far as countries outside the Asia region are concerned.

Appendix Table 5 and Appendix Table 6 show that no country outside Asia relied on the markets of the five most affected countries for as much as 10 per cent of their total exports, or received as much as 10 per cent of its total merchandise imports from these countries. While the United States imported 8.6 per cent of its merchandise imports from this group of countries in 1996, all West European economies imported less than 5 per cent of the total from the countries in question. The share of the five most affected Asian countries in EU imports and exports was 2.5 per cent in 1996. Japan, by contrast, received 16.5 per cent of its imports from the five Asian countries. Thus, even a very substantial increase in the exports of these countries - say, by 20 per cent - would not cause a significant problem in relation to the overall trade or current account for countries outside Asia. Particular industries with large spare capacity, on the other hand, could expand exports rapidly, thereby putting pressure on those industries in the importing countries.

Previous episodes of large devaluations such as the Mexico crisis, the CFA-Franc devaluation in West Africa, and the Swedish and Italian devaluations in the early to mid-1990s featured rapid export growth for the three years following the devaluations and import contraction in the first year after devaluation, before import growth resumed. The consistency of this pattern may suggest a similar scenario in the present case.

Several factors speak in favour of reasonably strong export-led recovery in the case of the five most affected Asian economies. First, excess capacity for use in export production will be available as a result of slack domestic demand. Second, the countries concerned have a strong track record as successful exporters. Over the last decade, the export and import growth rates of the five countries exceeded the growth of world trade by at least 50 per cent. Third, for many of these countries, the share of foreign multinationals in total trade is large, which means that a significant segment of trade is partly sheltered from the turmoil of the financial crisis.

On the other hand, some observers question the scope for a substantial rise in exports from the affected countries, as financial sector difficulties undermine trade expansion, at least in the short-run. The argument is that a severe liquidity crisis, together with the steep devaluations, has brought such turmoil to the banking sector that financial intermediation essential for production and external transactions has been weakened. Banks with no liquidity cannot provide new credits or roll over outstanding credits, leading to the closure of businesses in some cases. In other cases the absence or the high costs of trade financing undermine export prospects.

Furthermore, imports (especially inputs for export processing) are largely contracted in dollar terms, which means higher production costs for exports that depend on imports. This, together with inflationary pressure on domestic inputs brought about by higher import prices and higher interest rates lead to a smaller real than nominal exchange rate depreciation. In addition, the fact that the affected countries are important trading partners for one another further mitigates the competitiveness gain that might be expected from the currency depreciations.

The nominal depreciations vis-?vis the US dollar between January 1997 and January 1998 ranged from 40 per cent to more than 75 per cent. Taking into account the inflation differentials and exchange rate developments of the five most affected Asian countries, the real effective exchange rate depreciation ranged from 27 per cent to nearly 70 per cent. Even if inflation accelerates in the affected countries in the months ahead, the devaluations that have occurred represent a substantial boost in price competitiveness.

External factors may also limit increases in the exports of the five most affected countries. Most notably, North America's GDP growth will probably slow down in 1998, implying slower growth in import demand. Slow import growth in the rest of Asia is also likely to lessen export prospects, given that more than 50 per cent of the exports of the most affected Asian countries go to other Asian countries. Concern has also been expressed regarding the evolution of imports of the two largest markets in Asia - Japan and China. Imports of Japan and China were already sluggish in 1997, and the latest data available (December 1997-January 1998) point to a continuation of weak import growth.

Chart 2 shows the most recent information available on the evolution of merchandise trade in value terms for the five most affected countries. A significant pattern discernible from these data is that the contraction of imports has so far been more pronounced than export expansion. As suggested above, this is to be expected, and conforms to the experience of other countries that have faced large and sudden reductions in the value of their currencies.

In summary, it is probable that exports from the five most affected Asian economies will accelerate in 1998, but perhaps not as rapidly as might have been anticipated as a result of the strong currency depreciations that followed in the wake of the financial crisis.

 
 

IV. Global trade outlook for 1998 Back to top

The prospects for world trade and output in 1998 have been clouded to some degree by the Asian financial crisis. Projections for economic growth have been scaled down markedly in Asia. The five countries which are at the core of the crisis are expected to record average GDP growth of 3 per cent or less in 1998. As intra-Asian trade and investment links have developed dynamically over the last decades - more than one half of Asia's trade was intra-regional in 1996 - the repercussions of the crisis are foremost within the region. Intra-regional trade, which has more than tripled since 1990, could even decrease.

The Asian crisis will also have some repercussions on trade and output in other regions. Asia became the largest net-importing region for fuels in the 1990s, and slower Asian growth is expected to keep trade volumes and prices for oil under pressure. In the first two months of 1998, oil prices had already fallen 20 per cent below the 1997 average. These developments will clearly affect oil-exporting countries. Enhanced export competitiveness in the affected countries could also affect the export prospects of countries whose exchange rates have maintained a close value relationship with the dollar, including some Asian, Latin American and transition economies.

There are more and more signs that domestic demand - reflected particularly in non-residential fixed investment - is picking up in continental Western Europe. Lower interest rates, together with the likelihood of lower oil prices, should contribute to a strengthening of GDP growth in Western Europe, despite the Asian crisis. The Asian financial crisis is likely to result in reduced capital outflows, in particular from Western Europe. Smaller private capital outflows, together with lower public deficits, will tend to reduce interest rates further and encourage both investment and consumption. This in turn will stimulate import demand, and support both trade and output in its major trading partners. On the other hand, US output growth is expected to slow down in 1988, but the extent of the slowdown is highly uncertain. Latin America's economic growth is also projected to slacken from its record rate in 1997, returning to the average rate for the period 1990-95.

If the financial crisis can be largely contained to the five countries which have been seriously affected, the repercussions should not result in more than a small dent in global economic growth. As world output is expected to slow moderately, and as slower growth in the Americas and Asia is expected to be offset partly by stronger growth in Europe, a decrease in global trade of 2 to 3 percentage points may be expected. This, however, would still leave the rate of global trade expansion above the rate recorded in the first half of the 1990s.

Appendix Table 1 Back to top
Leading exporters and importers in world merchandise trade, 1997
(Billion dollars and percentage)

aRetained imports are defined as imports less re-exports.

^bData exclude trade with the Baltic States and the CIS. Including trade with these States would lift Russian exports and imports to $86.6 billion and $65.7 billion, respectively.

^cIncludes significant re-exports or imports for re-export.

Appendix Table 2 Back to top
Leading exporters and importers in world merchandise trade (excluding European Union intra-trade), 1997
(Billion dollars and percentage)

^aRetained imports are defined as imports less re-exports.

^bData exclude trade with the Baltic States and the CIS. Including trade with these States would lift Russian exports and imports to $86.6 billion and $65.7 billion, respectively.

^cImports are valued f.o.b.

^dIncludes significant re-exports or imports for re-export.

Appendix Table 3 Back to top
Leading exporters and importers in world trade in commercial services, 1997
(Billion dollars and percentage)

Note: Secretariat estimates based on incomplete or preliminary data.

Appendix Table 4 Back to top
Share of Asia and selected Asian countries in the world economy in 1996

^aIndonesia, Republic of Korea, Malaysia, Philippines and Thailand.

^b"Gross lending": assets of BIS reporting banks to all sectors in country/country group as a percentage of total international bank lending (outstanding assets). "Net": "assets" less "liabilities" as a share of total (gross) lending.

^cValuation at the end of 1996. World total excludes some emerging stock markets (China and India). Including these emerging stock markets, China's market capitalization accounted for 3.7 per cent of the world total at the end of 1995 (International Federation of Stock Exchanges, FIBV).

Sources: BIS, FIBV, IMF, UNCTAD, World Bank and WTO.

Appendix Table 5 Back to top
Merchandise traders with a high share of exports to Asia in 1996
(Percentage shares)

^a Indonesia; Rep. of Korea; Malaysia; Philippines and Thailand.
^b Includes significant re-exports.
^c Adjusted to include Singapore's exports to Indonesia.
^d 1994 instead of 1996.
^e 1995 instead of 1996.

Note: Ranking according to share of country group with a financial crisis. Retained reporters are those with an export share of total Asia (or Asia 5) in excess of 20 (or 5) per cent. Other developing Asia includes the five Asian countries with a financial crisis.

Source: UNSD, Comtrade database.

Appendix Table 6 Back to top
Merchandise traders with a high share of imports from Asia in 1996
(Percentage shares)

^a Indonesia; Rep. of Korea; Malaysia; Philippines and Thailand.

^b Includes significant imports for re-export.

^c Adjusted to include Singapore's imports from Indonesia.

^d 1994 instead of 1996.

^e 1995 instead of 1996.

Note: Ranking according to share of country group with a financial crisis. Retained reporters are those with an import share of total Asia (or Asia 5) in excess of 20 (or 5) per cent. Other developing Asia includes the five Asian countries with a financial crisis.

Source: UNSD, Comtrade database.

Appendix Table 7 Back to top
Growth in the value of world merchandise trade of the Asian countries with a financial crisis, 1990-97
(Billion dollars and percentage)

Appendix Table 8 Back to top
Real effective exchange rates of selected Asian economies
(Year to year percentage changes)

Source: WTO calculations based on Morgan Guaranty Trust Company (http://www.jpmorgan.com).