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Why the days of booming world trade may be over

The drivers that underpinned years of booming global trade, once the engine of the world's economic growth, may be fading.

In the past few decades, trade has played an increasingly important role in the growth of the global economy. But more than three years into one of the weakest recoveries in decades, slack demand from consumers in the U.S. and Europe is weighing on exports in the developing world.

Shipping container trucks at the port in Long Beach, Calif.
Getty Images
Shipping container trucks at the port in Long Beach, Calif.

"Typically we would want to see trade growing at a few percentage points above growth in gross domestic product," said Sara Johnson, an IHS Global Insight economist. "The fact that trade is so sluggish just reflects the weak nature of the global economic expansion."

But the days of rapid globalization—and the surge in trade flows it produced—are apparently gone.

Merchandise trade—the total import and exports of goods—rose steadily through the 2000s to make up nearly 53 percent of the world's economy in 2008, before plunging the following year as the Great Recession went global, according to the World Bank. Massive government stimulus in the developed world helped revive growth, but as those programs wound down, global trade began declining again in 2011.

With the European Union mired in a recession and the United States hit hard by a series of nasty winter storms, that slowdown picked up markedly in the first quarter of this year, according to data released this week by the Organization for Economic Cooperation and Development.

On Thursday, a separate report showed that U.S. gross domestic product dropped by 1 percent, on an annual basis, much worse than economists expected. The U.S. economic reversal was led by a 6 percent drop in exports year over year, until recently hailed as a key driver of the U.S. recovery, and which had risen 9.5 percent in the last three months of 2013.

The slackening of trade has spread to the developing world, where emerging economies are seeing less demand from the U.S., Europe and China for raw materials and other exports.

Most economists expect the U.S. economy to bounce back this year, which should revive spending on imported goods. But Europe continues to wrestle with high unemployment, a broken banking system and a credit drought for small and medium-sized businesses.

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European exporters—especially those in the continent's weaker economies—are also saddled with a strong currency that makes their products less competitive in overseas markets.

"They've got a bunch of countries locked in at the wrong exchange rates," Austan Goolsbee, former chairman of the Council of Economic Advisers, told CNBC. "And it's gruesomely difficult to try to get yourself back to being competitive if the exchange rate can't move."

Emerging markets 'have seen their run'

But even as Europe and the U.S. economies get back on track, the growth in global trade isn't likely to return to pre-recession levels. That's because many of the forces driving rapid globalization in the past two decades have faded.

"I think we're past the inflexion point with globalization," Johnson said. "It's not going to proceed at the same pace as in the early 1990s up until the recession in 2008."

That's because the cost savings from outsourcing and offshoring have diminished. Labor costs have been rising much more rapidly in emerging economies than in the developed world, where relatively high unemployment rates have kept a lid on wage gains. For U.S. companies, falling energy costs have further narrowed the cost benefits of moving factories offshore.

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That "re-shoring" of production, in turn, has dampened the once-rapid expansion of exports for developing economies such as China, where overall economic growth has slowed. With global trade slowing, emerging countries are seeing their overall growth rate slowing.

"There still will be vibrant growth in a number of emerging and developing markets, particularly as more households reach middle-income status and their consumption patterns change," Johnson said. "But I think the emerging markets have seen their run of exceptionally high growth rates."

By CNBC's John Schoen

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