Why global trade growth has slowed

One thing you can be sure of is that international trade grows much faster than the world economy. It's the classic proof of growing globalisation, and it's been happening for ages. Except that it seems to have stopped.

For two decades from the mid-1980s, world trade – measured as exports plus imports – grew at more than double the rate of growth in gross world product.

Between 1986 and 2007, the volume of trade grew at an average annual rate of 3.4 per cent of world real gross domestic product, meaning it went from being equivalent to almost 30 per cent of gross world product to almost 60 per cent.

But then it dipped sharply in 2008 and 2009, thanks to the fall-off in trade after the global financial crisis and the onset of the Great Recession.


It bounced back in 2010 but, since 2011, its growth has been only a little faster than world production of goods and services.

In the decades before 1986, the volume of trade grew faster than production, but at much slower rates than in the two decades that followed. That's how we know to date the modern era of globalisation – the breaking down of economic barriers between national economies – from the mid-80s.

So, why has trade growth slowed so noticeably, and is this merely cyclical (temporary) or is it structural (lasting)?

According to a study by the Organisation for Economic Co-operation and Development, a fair bit of both.

The study estimates that about 40 per cent of the slowdown between 2011 and 2015, as compared with the period from 1991 to 2007, is explained by the weak growth of demand in the global economy.

In particular, the crisis saw a sharp fall-off in businesses' investment spending on new physical capital – which happens to be import-intensive – but it hasn't recovered all that much in the years since then.

But that leaves roughly 60 per cent of the slowdown explained by deeper, more structural forces, ones that won't just go away if we wait a few more years.

Part of the explanation is that, in the two decades before the crisis, certain factors contributed to making trade growth exceptionally strong, but these factors have now lost their force.

The biggest cause of this exceptional growth in trade was various measures to reduce tariff and non-tariff restrictions on trade.

In 1989, and partly at Australia's instigation, the Asia Pacific Economic Co-operation partnership between 21 countries was established to promote free trade.

The European Union moved to a single market in goods, services, labour and capital in 1992, increasing trade between its members. Because Europe consists of a number of separate countries, it's highly (international) "trade intensive" in a way that America – composed of states rather than countries – or even Australia, isn't.

In 1994, the "Uruguay round" of multilateral negotiations – the biggest of the many rounds of reductions in protection organised by the General Agreement on Tariffs and Trade since World War II – was reached.

This round extended membership of the GATT from the developed countries to about 150 developing countries – thus doing much to increase trade between the two groups. It also reached trade agreements covering new areas such as textiles, agriculture, services and intellectual property.

And, for good measure, the round turned the GATT into the World Trade Organisation.

The North American Free Trade Agreement between the US, Canada and Mexico began in January 1994.

And also hugely important to the growth of trade, China – now the world's second-largest trading nation – joined the WTO, cutting much of its protection as a condition of entry.

A second factor promoting the growth of trade in the two decades before the crisis was the widespread development of "global value chains" – value as in "value-added" – under which manufactured goods (cars, for instance) are assembled in one country using parts from many countries.

As trade liberalisation measures slowed in about 2000, continued growth in trade was supported by China's rapid emergence into the world economy.

By the second half of the noughties, however, these structural sources of growth had waned.

In this century, the WTO's Doha round of multilateral negotiations, launched in November 2001, has ground to a halt. According to the study, this halt in liberalisation explains about a quarter of the slowdown in the growth of trade between 2011 and 2015, compared with 1991 to 2007.

Many bilateral and regional trade agreements have been signed since then, but the only really significant agreement, the Trans Pacific Partnership, signed in February 2016, has since been scuttled by US President Donald Trump.

Add to this, "creeping protectionism from myriad small measures" in various countries, which has put trade liberalisation into reverse.

The spread of global value chains seems to have reached its limit, even declined.

Meanwhile, China's period of export-led growth has ended, with its authorities now aiming for growth led by domestic demand.

So what happens next, and what should be done?

The study says some cyclical recovery in the growth of trade is likely but, without further trade liberalisation, a return to the glory days seems unlikely.

"Trade", it reminds us, "and the related expansion of global value chains, boosts [economic] growth through increased productivity, by improving resource allocation, increasing scale and specialisation, encouraging innovation, facilitating knowledge transfer, fostering the expansion of more productive firms and the exit of the least productive ones."

All true. But, as the study acknowledges, the benefits of increased trade aren't spread evenly between or within the countries involved.

As a consequence of this – and the politicians' failure to ensure the losers from globalisation were compensated by the winners – the electorate in many rich countries is "increasingly polarised into pro- and anti-globalisation groups".

We have a lot of ground to make up before much enthusiasm for further globalisation returns.

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Where to next with The Great Gonski

I was in Moscow, recovering from a 12-day train trip from Beijing via Mongolia and Siberia, when I heard that Malcolm Turnbull's Gonski 2.0 shift to needs-based funding of schools had been passed by the Senate in the early hours of the morning.

So forgive me for being late to the party, but I can't let this key economic and social reform – surely one of the Coalition government's greatest achievements – go without acknowledgement and explanation.

The new act seeks to allocate government funding to schools, public and private, on a rational basis – the needs of individual students – rather than on what you got last year and what special deals you've done with politicians.

It seeks to phase out the decades-long sectarian basis for funding, where how much government assistance a student gets varies with the denomination of the church – or religion, or secular state – running their school.

Remarkably, Turnbull's success was achieved against the implacable opposition of the very people who spent the past four years professing to want "the full Gonski" – Labor, the teachers' union and, in the end, the Greens.

I'm still deciding whether Labor and the Greens were subservient to the union, or the union was staying loyal to Labor in hope of future largesse.

That Turnbull and his capable Education Minister, Simon Birmingham, were nevertheless able to win sufficient support from the minor parties, tells us the Senate isn't as unworkable as many suppose.

And whereas efforts to win minor-party support usually involve watering down the proposed measures, this time they significantly strengthened them – paradoxically, thanks largely to the efforts of Greens Senator Sarah Hanson-Young.

These improvements included a new independent body to review the accuracy of the various measures of student disadvantage (as recommended by David Gonski's review, but rejected in Labor's "full Gonski") and shortening the phase-in from 10 years to six (so that all schools reach their proper funding levels long before they would have under the "full Gonski").

Because the act will unwind the special deals the previous Labor government did with particular state- and private-school systems, moving federal funding on to a uniform basis across the country, it produces both winners and losers among the states and religious school systems. Be sure we'll be hearing more special pleading from them.

To acknowledge the Turnbull government's achievement isn't to suggest its job is done.

For a start, although the amended act includes a mechanism that would claw back federal funding to the states should they fail to maintain their own funding, the states need to realign their own funding of public and private schools to fit with the new formula under which, by 2023, the feds will fund 20 per cent of the assessed needs of government schools and 80 per cent of the needs of private schools.

So the states should provide 80 per cent of the funding needed by their own schools and 20 per cent of that needed by their private schools. This will require increasing grants to some schools, but cutting them to others.

More importantly, ensuring public funding goes to schools on the basis of their students' needs is just the first step towards the ultimate objective of improving our schools' performance.

As we well know from the regular local NAPLAN and international PISA ratings of students' academic performance, our schools' performance hasn't improved, and in some respects has deteriorated from earlier years, while slipping back in comparison with other countries.

To me, however, the clearest evidence of our schools' poor performance is the shockingly high proportion of students – about a quarter – who leave school without an adequate education. That's a terrible failure rate.

Doing more to help our most disadvantaged students do better is almost certain to require more money. That's why basing our school spending on the needs of particular students is essential.

But it's just step one. If we could be certain the extra money going to needy students would be spent well without further intervention, our schools' performance wouldn't be as poor as it is.

No, the next step is to ensure the redirected money is spent as effectively as possible, on teaching techniques and interventions proven to be most effective.

There is, for example, a lot of evidence that "targeted teaching" – where teachers keep checking to ensure particular students have actually learnt what they've just been taught, and don't press on until they have – stops kids falling behind.

Similarly, there's evidence that using expert teachers to help younger teachers improve their teaching style, and to help introduce new teaching methods, works to lift performance.

The need to ensure taxpayers' money is being spent as effectively as possible is, of course, the object of the new inquiry Turnbull has asked The Great Gonski to perform.

It would be good to see him recommend setting up a national outfit to develop a body of evidence on the most effective teaching techniques, pass this to schools, and also conduct independent evaluations of new approaches tried in particular states or schools, making the results public.

And once we've lifted our schools' ability to teach conventional academic subjects, we should turn our minds to helping kids gain the softer skills – to communicate well, think critically, be creative and resilient – they'll need to survive in an ever-changing working world.

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