World Trade

World trade growth averaged 10.2 percent in 2004, reflecting rapid increases in industrial production and investment activity. The expansion in trade volumes in 2004 is reminiscent of the increase observed in 2000 and mirrors the rapid recovery in industrial production that began to take shape in the second half of 2003 and continued into 2004. More than 20 percent of the increase in world merchandise trade volumes was represented by China.

Trade in raw materials and investment goods was particularly strong. Robust demand for raw materials was an important factor underlying the trade expansion in a number of developing countries. Fast-growing global investment expenditures were particularly important in spurring export demand in countries such as Germany and Japan that specialize in the fabrication of machinery and other physical capital.

As a whole, developing countries have grown their share in world markets by about 19 percent up from 19 to 23 percent since 2000. Excluding China, the improvement in the export share of low- and middle-income countries has been more modest (from 16 to 17 percent), although developing countries in the South Asia and Europe and Central Asia regions have increased their market shares considerably. Other regions either maintained their market share (the rest of the Eastern Asia and Pacific and the Middle East and North Africa) or lost market share (Sub-Saharan Africa and Latin America and the Caribbean).

Major imbalances in the world trading environment persisted during 2004 and will likely continue to play a large role in 2005–06. The U.S. current account deficit reached 5.7 percent of GDP in the second quarter of 2004, as American consumption and investment volumes exceeded domestic production by a wide margin.The expansion in the trade deficit since the mid-1990s has been the main factor behind the rise in the U.S. current account deficit. Barring a substantial increase in domestic savings by, for example, a tightening of fiscal policy, downward pressure on the U.S. dollar is likely to resume as U.S. foreign borrowing requirements remain high, and the already large amounts of external debt continue to accumulate.

Failure to address the twin U.S. deficits could have significant impacts on developing countries, especially if that failure leads to an increase in protectionist behavior. This is especially relevant because the substantial improvements in living standards, wages, and incomes in many upper-lower and middle-income countries have been the result of expanding their world market share in manufactures. An increase in protectionism could halt these countries’ progress and deny other poor countries the same avenue to development. Moreover, a retreat from recent efforts to reduce trade barriers or a failure to make further progress – especially concerning agricultural subsidies – could have substantial negative consequences on many of the world’s poorest countries.