Submitted by Taps Coogan on the 16th of February 2017 to The Sounding Line.
In ‘Dissecting US Trade – Part I’ (here) we detailed the US balance of trade since 1790 and the factors that have undermined the normal balancing forces of international trade, resulting in large perennial US deficits since the 1980s.
Looking globally, since early 2014 the world has struggled with a dramatic decline in global trade. The value of global trade declined sharply in early 2014 and has remained suppressed ever since. This has led to a dramatic economic slowdown for many export oriented economies.
Several factors conspire to keep global trade low: the Trump Administration priority to balance US trade, the fracturing of UK-EU trade relations, and uncertainty about the future of the Eurozone. Therefore it is prudent to ask:
Which economies are most threatened by declining international trade?
Without knowing exactly where trade conflicts will emerge and what goods they will effect, the most direct way to measure which economies are the most vulnerable to decreases in trade is by comparing countries’ ratio of exports to GDP. It may surprise some readers to learn that of the ten largest economies (plus the EU) it is Germany and the EU, not China, India, or Brazil whose exports comprise the largest fraction of their GDP. In fact, exports account for two times the percentage of GDP in the EU (43%) than in China (22%). Of the world’s largest economies, the US has the lowest exports in relation to its GDP (12%). The relatively small contribution that exports make to the US economy insulate the US to trade restrictions as compared to a country like Germany where nearly half of the economy is a result of its exports.
Given the growing instability of the EU and the Eurozone, the dependence of EU economies on exports is particularly concerning. Highlighting this concern is the fact that 26% of EU GDP is tied up in intra-EU exports.
As we detail the US trading relations with many of these same countries in upcoming articles, keep in mind that potential trade conflicts between the US and other major economies are likely to do more damage abroad than in the US according to this metric.
As an aside: For a more in depth discussion of the importance of the ‘exports to GDP’ ratio we recommend listening to this lecture by George Friedman (founder of Stratfor and Geopolitical Futures) which covers the subject among other relevant topics.