With the global pandemic in 2020, global trade took a large hit with trades being hindered and the economy taking a large downfall. However, in 2021, global trade increased and actually started to surpass pre-pandemic stats.
The article, “Global trade hits record high of $28.5 trillion in 2021, but likely to be subdued in 2022” by UNCTAD explains that, “Overall, the value of global trade reached a record level of $28.5 trillion in 2021”.
That’s an increase of 25% on 2020 and 13% higher compared to 2019, before the COVID-19 pandemic struck.
While most global trade growth took hold during the first half of 2021, progress continued in the year’s second half. After a relatively slow third quarter, trade growth picked up again in the fourth quarter, when trade in goods increased by almost $200 billion, achieving a new record of $5.8 trillion” (UNCTAD, 2020). It is remarkable to me that with the large economic hit of the pandemic in 2020, that global trade was able to pick back up in later 2021 and then hit a new record of $5.8 trillion[1].
Going into 2022, it forecasts that these trends will normalize and global trading will be back to normal trading levels or even a little below normal. This is due the economy going into more a recession and due to shorten supply. UNCTAD state, “the International Monetary Fund has revised its world economic growth forecast downwards by 0.5 points, the report notes, considering persistent inflation in the United States and concerns related to China’s real estate sector.
It also points to ongoing logistic disruptions and rising energy prices, saying that “efforts to shorten supply chains and to diversify suppliers could affect global trade patterns during 2022” (UNCTAD, 2020). Research explains that the amount of global debt will also contribute to global trading slowing down and its effect on international trade flows. This shows to me to continuous effect the pandemic has had on the world and how it will continue to have an effect on years to come.[2]
To analyze the global market, one must understand the foreign market exchange. The article, “Understanding the foreign exchange market” by Amanda Nordström she studies the structural changes in the environment and how it evolved over the years.
She details how the market has changes drastically and has been constantly changing, ” Over the last four decades, it has undergone large structural changes, from an opaque and slow-moving, clearly two-tiered market to today’s fast-paced, interconnected yet fragmented market.
Trading is becoming increasingly electronic and automated, and new participants, tools and strategies have entered the market. These structural changes have had considerable impact on the way foreign exchange is traded, priced and monitored” (Nordström).[3]
One important note that she stated in her findings was the market in 2000’s and today. She stated that, “Modern market participants rely on technologically advanced and sophisticated trading solutions. Algorithms became available in FX trading around the early 2000s and grew rapidly with the availability and improvement of data, becoming a tool for navigating an increasingly fragmented market.
In addition, reporting requirements and regulations have increased the demand for traceable execution, which in turn has contributed to the growth of electronic and automated trading” (Nordström). The algorithms in today’s society have become a very important part of the economy and are used in so many aspects of trading.
I found it very interesting how she notes that there are different types of algorithms and how they are used for different things. She states, “Execution algorithms use mathematical models and automated trading programs to create specific sets of trading rules and models and then automatically execute orders and transactions” (Nordström).
Furthermore, research shows another use for algorithms as, “Algorithms are also the key building blocks of high-frequency trading (HFT). HFT refers to the use of algorithms for the purpose of arbitrage on slower market players by very high speed and high frequency, also called latency arbitrage” (Nordström). It is interesting to me how the market and economy has evolved over the years and how the algorithms can play such a key role in various aspects of the economy today.
She concludes these findings that, “the rapid evolution of electronic trading, particularly the use of algorithms, has increased trading efficiency and the speed of trading, but has also had an impact on market liquidity conditions, with potential risks to financial stability and the pricing mechanisms as a consequence” (Nordström).
Other various factors, such as liquidity and market conditions causes diversifying greatly in the marker, but the most interesting aspect to me was the use of the algorithms in today’s society.[4]
With such an importance on global trade, it is also an important consideration to review trade agreements and their critical piece in global trade. The article, “What Do Trade Agreements Really Do?” by Dani Rodrik analyzed the concept of free trade and the benefits of NAFTA.
It notes that previously trade agreements were meant to reduce tariffs and nontariff barriers to trade. However, this is constantly evolving and changing with the changing markets. This is proven by “With post-1995 trade agreements, matters are no longer so simple.
Tariffs and explicit barriers to trade have dropped considerably, and many new areas of negotiation have opened up in which there is typically no efficient “free-trade” benchmark analogous to the role that zero duties play in the context of tariffs” (Rodrik, 2018). It is hard to know whether the evolvements of the trade agreements and economy are trade-creating or not, which I find very interesting.
Rodrick continues by saying, “Potential trade-offs arise in all of these areas: regulatory harmonization may spur trade, but it could also prevent regulations from reflecting domestic preferences. A proper negotiating process would take both sides of the ledger into account” (Rodrik, 2018). It seems to me that there are so many factors that can change the economy, supply and trades so quickly. [5]
Another important anecdote from the article that I found very interesting was some key aspects that the trade agreements never touch on. It states, “One such area that touches directly the interests of large firms is global tax-and-subsidy competition.
In a world with mobile capital, governments are tempted to offer better terms to globally mobile corporations in order to compete for investment. This results in a sub-optimal Nash equilibrium with larger transfers to corporations and their shareholders than is globally desirable….Yet trade agreements never touch on this issue” (Rodrik, 2018).
I think the use of trade agreements and tariffs is also ever-evolving and constantly changing. It is interesting to me to see what is written within the trade agreements and what is not that possibly should be.[6]
Trading costs and the associated costs of trades are also key to understanding in global trading. The article, “Trading Costs” by Andrea Frazzini, Ronen Israel and Tobias J. Moskowitz state that “Understanding the role of liquidity and trading costs in asset pricing is an empirical challenge in academia due to lack of access to order and execution data from a live trading platform.
We aim to fill this void using a unique database of orders and live executions from a large institutional money manager. Doing so, we find that real-world costs based on live trades are very different than those estimated in the literature from daily or intra-day data and provide new insights into the distribution of trading costs along several dimensions not previously studied” (Frazzini, Isreal and Tobibas, 2018).
They discovered that, “We examine the trading costs of a large institutional trader using a dataset of live trade orders and executions in 21 international equity markets over a 19-year period. The trading costs represent those of a large arbitrageur, who is likely the marginal investor in markets, and are many times smaller than those claimed in the literature.
Building a trading cost model calibrated to our live trade data, we find that the model provides more reliable trading cost estimates out of sample that subsume other measures in the literature, match the costs of live portfolios and other institutional sources of costs, and deliver less extreme and more stable estimates over time and across firms in an intuitive way that other models fail to accomplish” (Frazzini, Isreal and Tobibas, 2018).
All in all, the model looked at various factors, such as trade size, market structure, costs associated, etc to come up with a best fit model for trading costs and assessing costs in other settings.[7]
Overall, global trading is critical for the worldwide economy. The Coronavirus pandemic had a huge effect on global trading and will still continue to feel the effects for years to come. Understanding trading costs, market conditions, tariffs and trade barriers are so critical in global trading.
The economy is ever-changing and it is very important to stay fluid and current with the environment and new market conditions.
[1] Global Trading
[2] Global Trading
[3] Foreign Market Exchange
[4] Foreign Market Exchange
[5] Trade Agreements
[6] Trade Agreements
[7] Investing Abroad and Trade Agreements
Bibliography
Global trade hits record high of $28.5 trillion in 2021, but likely to be subdued in 2022 | UNCTAD. Home | UNCTAD. (n.d.). Retrieved February 4, 2023 from https://unctad.org/news/global-trade-hits-record-high-285-trillion-2021-likely-be-subdued-2022.
Trading Costs by Andrea Frazzini, Ronen Israel, Tobias J. Moskowitz :: SSRN. Search eLibrary :: SSRN. (n.d.). Retrieved February 4, 2023 from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3229719.
Understanding the foreign exchange market. https://www.riksbank.se. (n.d.). Retrieved February 4, 2023 from https://www.riksbank.se/globalassets/media/rapporter/pov/artiklar/svenska/2022/220314/2022_1-understanding-the-foreign-exchange-market_sv.pdf.
What Do Trade Agreements Really Do? – American Economic Association. American Economic Association. (2017). Retrieved February 4, 2023 from https://www.aeaweb.org/articles?id=10.1257/jep.32.2.73.
Author
My name is Amanda Penny and I work as a Payroll Consultant Manager at Charles Schwab. I’ve been in the retirement plan services industry for eleven years and work on primarily plan conversions to Schwab, to ensure all data is coming over accurately to effectively administer the retirement plan. I have a Bachelor’s degree in Mathematics with specialization in Actuarial Science.
I am actively pursuing my Master’s degree at Lake Erie College and will be graduating in summer of 2023. I am passionate about fitness and have coached cycling class for many years in my free time. I love spending time with my family and friends and enjoy traveling and the outdoors. I am part of a transformational Masters’ program looking at the modern supply chain conducted by Lake Erie College led by Ron Emery.