China, not the US, is fuelling global trade

An incredibly interesting analysis of the Baltic Freight Index (now renamed the Baltic Dry Index) from Morgan Stanley's Eric Chaney and Rebecca McCaughrin yesterday. The main conclusion: China, not the US, is fuelling global trade. According to their calculations, over the last three quarters, US imports have been virtually flat, whereas Chinese imports have rocketed by 40%. They estimate that Asia is contributing 55% of global trade growth (measured by imports) this year, versus 15% each for Europe and the US. They also attribute the low contribution of US domestic demand to global trade, especially compared with Europe, to the gain in market shares US producers have been able to achieve as a result of the devaluation of the US dollar.

Over the last 20 years, the Baltic Freight Index, now renamed the Baltic Dry Index, has been tracking very successfully the gyrations of global trade. In the third quarter, the BDI index jumped 120% from one year ago. This growth rate climbed further to 205% in October and did not slowdown in the first three weeks of November. Based on past correlations, this implies that global trade flows in US dollar terms should be up by 40% compared with one year ago. Several special circumstances have probably distorted the link between freight indexes and actual trade. In particular, we believe that very strong demand for raw materials from China must have propelled the index much higher than trade of all goods and services. In addition, the depreciation of the US dollar may have increased dollar-denominated prices. Last, years of downsizing have left the shipping industry in short supply. However, we believe the boom in global trade is a reality that cannot be denied. The vital questions are: where does it come from, and can it last?
Source: Morgan Stanley GEF
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They also note the possible impact of a China slowdown (on this I think it better to adopt a wait-and-see approach) - and argue that if the Asian growth engine pauses next year, the fate of global trade recovery will be in the hands of the two giants of world trade: Europe (19% of global trade in 2002, excluding intra-European trade) and the US (17.5%). The tricky bit is the forecasting: they expect import growth in both Europe and the US to more than double next year, from 2.1% to 5.1% for Europe and from 3.8% to 9.3% for the US. If this were to happen, global trade would accelerate significantly. But as they wryly comment: "at this stage, nothing can be taken for granted". I couldn't agree more.