How Global Trade Is Shifting as the World’s Population Ages

A demographic alarm bell is ringing in Japan, where the birthrate fell last year to its lowest point in recorded history. The sharp drop in births from the previous year marks the eighth consecutive year of decline. Former Prime Minister Fumio Kishida labeled this demographic crisis Japan’s greatest challenge. But this is more than just Japan’s story.

The world is aging, fast. As it does, global trade will shift in unexpected ways. Japan offers a preview of what much of the world will soon face, as economies everywhere start to see record-low birthrates. South Korea recently recorded the lowest birthrate globally, while Italy hasn’t seen an increase in births since 2008. And this is no longer just a challenge for wealthy, industrialized countries.

In Latin America and South Asia, the population ages 65 and older is quickly rising. Life expectancy is rising even as fewer people are being born. The result: Nearly 1 in 4 people worldwide will be 65 or older by century’s end. That shift could reshape the world in ways we’re only beginning to understand.

Countries are scrambling to adapt to the financial strain of aging populations.

Germany has raised the retirement age, a move echoed across Europe. Greece has introduced a controversial six-day workweek, while China, reversing its one-child policy, now urges families to have three children. Japan is turning to automation to fill the gaps left by retiring workers, and is bringing in more migrant workers.

Amid these shifts, Africa’s youthful population remains a demographic outlier, with over half of its population younger than 25 years old. As economies age, they may experience a decline in overall production and consumption. With fewer workers available, production is likely to move away from labor-intensive to more capital-intensive industries, making capital productivity crucial for sustaining output and growth.

The “consumption- retirement puzzle” adds uncertainty to consumption patterns. While traditional theories suggest consumption remains steady throughout life, in reality, some retirees may spend less due to insufficient savings, shifting their focus to essentials. In aging economies, consumption is moving toward goods and services that cater to an older population. Industrial equipment, transport, and work-related expenditures are giving way to increased spending on healthcare and other essentials for seniors.

In Japan, for example, demand for strollers and baby diapers has plummeted while demand for adult diapers has surged. Similar patterns are emerging globally. In China, spending on medical care and food is rising, while expenditures on transportation, household durables, and recreation are declining with age.

Simulations done by economists Sagiri Kitao and Tomoaki Yamada for Japan through 2050 suggest consumption will fall across the board as the population continues to age, with nondurable goods declining the slowest. The U.S. and Singapore are following a similar trajectory, reflecting a broader global realignment in consumption driven by demographic changes.

As populations age, changes in consumption and labor supply will reshape the structure of global trade, though the full impact isn’t yet understood and depends on the import content of consumption. Some studies hint that older economies might altogether trade less, focusing instead on more capital-intensive goods, while the aging workforce may change the skills used in producing traded commodities. Impacts on trade composition, however, remain an open question. Industrial and durable goods are among the top import and export categories globally.

We can expect these categories to shrink as work-related expenditures decline. Similarly, as birthrates fall and fewer children are born, the global market for toys, infant products, and sports equipment may contract. Such imports are already declining in countries with a higher average age, such as Japan. However, these trends are suggestive, as reduced imports could potentially be offset by increased domestic production.

Conversely, we can anticipate an increase in the trade of services, particularly in areas like healthcare and eldercare. Medical services, provided remotely or through medical tourism, will likely become a more significant component of global trade. Japan’s digital health industry is already growing fast. Its telemedicine market is expected to reach $404.5 million by 2025 (due to “shortages in medical specialists”), and broader healthcare IT, including wearable tech and online monitoring, is projected to hit $16 billion.

The changing demographics suggest a major transformation in global trade. And as the goods and services exchanged shift, there will be opportunities for countries to change their standing in global trade. For younger, less industrialized African economies, the challenge is to leverage their demographic advantage and pivot toward sectors that can thrive in a world less reliant on industrial goods.

Traditional paths to higher-income status, like export-driven industrialization, may lose their effectiveness in an aging global economy with diminishing demand for such products. Wealthier nations will need to delay retirements, rely on migrant labor, and invest in technology to sustain productivity.

Developing nations with aging populations face challenges without access to new technologies, potentially relying on older workers for longer. Addressing this demographic shift will deeply affect markets, production, and trade. It will also demand unprecedented global coordination to ensure that the world can produce and afford what it needs, with no one—and not a single country—left behind.

Source: Barrons

Protective trade policies causing high food prices – MAP

Protective trade policies such as implementing high tariffs in the agriculture sector are causing unwanted collateral damage to consumers as it results in high prices of food, a business group said, as it called for uniform tariffs across domestic industries.

In a position paper on the Tariff Commission (TC) and the National Economic and Development Authority’s comprehensive review of the most favored nation tariff structure, the Management Association of the Philippines (MAP) urged for uniform tariffs across all industries.

“High tariffs have long been shown to be counter-productive and lead to reduced investment, low or stagnant wages and higher rates of malnutrition. Using protective trade policy to help farmers causes unwanted collateral damage to the much wider mass of consumers, especially the poor who suffer the long-term consequences of high-priced food,” the group said.

Citing the Bangko Sentral ng Pilipinas, the MAP noted that on the average, food and agricultural items have accounted for 38 percent of inflation since 2017. “The recent and disheartening episodes of inflation on specific food items such as pork, fish, sugar, garlic and onions, highlight the disproportionate impact of high tariffs that underlie high domestic food prices,” the group said. The MAP stressed that Filipino families have historically been burdened with higher food prices than consumers in other countries across ASEAN and beyond.

The group highlighted that Philippine tariffs on agricultural and food commodities are higher than those applied to goods in general, citing data from the TC showing that the average tariffs applied on agricultural products is 12 percent while the average for all products is eight percent.

The MAP said that the removal of existing peaks and achieving low uniform rates in a tariff structure that provides equal incentives across domestic industries will encourage more and wider agricultural processing and value-adding, help control inflation and enhance the country’s food security.

Citing the 2018 Trade Policy Review by the Philippines and the World Trade Organization, the MAP noted that the tariff peaks translate to reduced incentive for domestic value adding.

As an example, it cited the 40 percent tariffs on corn that dampened incentives to manufacture livestock and aquaculture feeds in the country.

While it is pushing for uniform tariffs, the group also pointed out the need for effective implementation of focused adjustment and assistance measures aimed at adversely affected sectors, especially small farmers.

Overall, the MAP urged the government to move towards a tariff structure that supports food security for Filipinos, especially accessibility and affordability of competitively priced food via low tariffs on food products and strengthen sustainable agri-food value chains, especially domestic agricultural value-adding through a rational tariff structure where tariff rates on inputs do not exceed those on finished products.

Source: Philstar

Has the global trade recession already started?

Economic forces put risk appetite of investors towards emerging economies in jeopardy.

As economists fret about whether we face a big or a small global recession, and whether we’ll face it sooner or later, it is worth bearing in mind that trade is already showing signs of deep stress. Risk appetite towards emerging economies might be shaken as a result.

The annual growth rate of global import volumes turned negative late last year, remained negative in early 2023, according to Citi data, and there are few reasons to think that things will improve. As long as that’s true, it will be open, trade-dependent economies — especially in the developing world — that are hit hardest.

There are three main reasons why trade growth seems so muted these days. The first is that we’re simply suffering a trade hangover after a Covid-era surge. That surge can be largely pinned on the different economic policy responses adopted in the pandemic.

While the US and other liberal governments were bent on using fiscal transfers to shore up citizens’ purchasing power, China’s approach was more characterised by getting workers back into factories. In other words, China aimed to boost supply while its trading partners boosted demand. The result was an acceleration in trade growth, the likes of which we hadn’t seen since the economic recovery that followed the 2008 financial crisis.

A second reason for the trade slump is the evident switch in expenditure, especially in advanced economies, from goods to services. There are only so many new TVs and computers one can buy in a short space of time, and services are less traded.

Third, trade growth is being undermined by the nature of China’s economic recovery. Since this is an essentially “stimulus-free” recovery so far, a big part of the spending increase in China today is on services, rather than on officially-funded investment spending that tends to generate a much bigger import bill.

And since confidence is so weak in China, what is called “consumption downgrading” — or more prosaically, bargain-hunting — is a widespread phenomenon among Chinese households. Without a “big bazooka” stimulus from Beijing, this is unlikely to change.

Why won’t things get better? A couple of factors are worth mentioning. The first is the deteriorating outlook for global demand. Global economic growth this year looks as if it will come in at about 2.3 per cent, and next year will almost certainly be weaker than this, not least because big central banks are, in effect, aiming to induce slowdowns to regain control over inflation.

A slowdown in growth will certainly create a more hostile environment for trade, and it is worth pointing out just how bad is the global demand environment that we’re entering. The last time the world saw two consecutive years of sub-2.5 per cent growth was in the wake of the financial crisis.

Another reason why it’s not easy to be optimistic about trade is simply that we’re in a world that is clearly beyond “peak globalisation”, a fact that has been putting downward pressure on global trade growth for more than a decade now. In the early 1980s, world exports were equivalent to 15 per cent of global gross domestic product, according to IMF data. Globalisation took that ratio to 25 per cent just around the time of the 2008 crisis, after which a steady decline set in, bringing it down to 20 per cent in 2020.

Another way of illustrating this sagging of global trade is to consider the relationship between global trade growth and global GDP growth. In the 10 years to 2020, the average rate of global trade growth fell below that of global GDP growth: this was the first decade since the second world war for which that statement holds true. When the rate at which the world is integrating falls short of income growth, the countries that rely most on that integration — emerging economies — will suffer disproportionately.

The World Trade Organization thinks that global trade growth will once again fall below GDP growth in 2023, and rising protectionism, geopolitical tension and the localising of supply chains might well make this true for the foreseeable future. What that means is that if you’re a developing country without the cosmic good luck of being situated next to a big market — like Mexico, say — your chances of attracting export-related industries might now be constrained.

Whatever one thinks of globalisation, it offered the hope that an emerging economy anywhere might attract long-term capital that could raise income levels by boosting exports. Those prospects look grim now, and not just for the next year or so.

Source: Financial Times