World Trade and Income Remain Exposed to Gravity

The world’s economy did not suffer de-globalisation after the 2008-2009 Global Crisis, but entered a phase of "New Normal". While trade-income elasticity has been returning to its pre-1990s long-term values, the world is much more open to trade today than it was 25 years ago. We show that part of the slowdown in trade can be attributed to a reduction in the rate of convergence between developed and developing countries, after a phase of high growth differential from the mid-1990s to the mid-2000s. The rise of global value chains was another factor that contributed to this phenomenon, itself linked to a significant reduction in trade frictions in the 1990s, explained both by technological innovations and by important trade agreements. On the other hand, with the rise of income, household consumption of services such as housing, health and education increases more rapidly than demand for goods. Most of these services are less tradable than merchandises and the trade-in-services frictions in a gravity model tend to be higher than for goods. Though in the long run, rising income will induce a shift in demand towards less trade-intensive services, there is still a long march ahead for many developing countries while trade costs remain quite sizeable. In the shorter term, the WTO Agreement on Trade Facilitation creates an opportunity for reducing those trade costs