I don't know about you, but over the past year, I've wondered how to escape the economic storm churning overhead. As positive data trickles in, it looks like economic skies are finally beginning to clear. And as this recessionary storm begins to dissipate, it's likely those menacing clouds will be pushed out (at least in part) by more pleasant economic trade winds.
It's no secret global economic activity was hit hard by the financial crisis and global recession—not surprisingly, international trade declined significantly over Q4 2008 and Q1 2009. However, recently, signs recovery is on the horizon abound—just last week economists announced global trade volumes increased 2.5% in June, marking the fastest increase in almost a year. Returning to pre-crisis trade levels won't happen overnight—recoveries rarely do—but gradual monthly increases in absolute activity is a sign those trade winds are picking up.
Trade happens every day, worldwide—between individuals, groups, businesses, even municipalities and states. But we don't calculate trade deficits for individuals—that would be absurd. We don't often do it for states either—that also seems tedious. Yet, we're often hyper-focused on trade deficits for nations as if it were all that mattered. Economically speaking, it doesn't. If you take it just one level higher—to the "global" level—this becomes clear. There can be no "deficit" globally—trade will always "balance" for the global economy since one country's imports are another's exports. From the global perspective, there are just levels of trade. And that's important because it allows investors to see what trade does in a clearer way—which is facilitate wealth creation. Basic economics 101: Trade is mutually beneficial. If a trade is accepted between two parties, without coercion, then each party valued what they received more than what they gave up—one of the few true win-win scenarios in economics and in life generally. So, by examining trade levels in absolute terms, we get a general sense of economic activity and a significant way wealth is created.
With absolute global trade levels back on a path to growth, the winds are at our backs—leaders worldwide are seizing opportunities to fill their sails and steer toward renewed prosperity. This has been a global recession, and despite the trend of globalization in recent years, barriers remain. Tariffs impede activity between trading nations, and embargoes prevent the free flow of goods and services.
Recessions are often a time when protectionist policies prevail. Encouragingly, however, government officials are combating these obstacles, with a number of significant trade accords between developed and emerging economies alike dotting the headlines recently. By reducing trade hurdles, governments broaden opportunities for their companies—a broader customer base means higher potential demand for goods and services.
For example, the European Union (EU) and South Korea reached a free trade agreement that will likely be ratified by year's end. South Korea also signed a free trade agreement with India on August 7th, encouraging investment between two of Asia's largest economies. India and the Association of Southeast Asian Nations (ASEAN) signed a similar agreement in early August with the goal of boosting the annual trade between the regions from $40 billion last year to an estimated $60 billion by 2016. News also circulated recently that Mexico and Brazil are considering a free trade agreement, as Mexico seeks to diversify its exports (currently, 80% go to the US). Additionally, as one of the first major nations to begin its economic recovery, China's trade activity jumped in recent months—surpassing Germany as the world's biggest exporter just days ago.
Evidently these countries see the opportunity for increased economic activity and aren't afraid to grab it. Perhaps this serves as a lesson to those who believe it takes a major international meeting (often fraught with bureaucracy and rhetoric) to seal these deals. It doesn't—folks don't need politicians to coerce them to trade, they just need a clear path to do business.
In today's globalized world, economies are inextricably linked and reducing trade barriers encourages productivity and economic activity—undisputed positives for a global economic recovery. As the storm clears, and investors see bluer skies, some heavy trade winds at our backs certainly wouldn't hurt.