Trade accounts, much ado about nothing ?

Trade accounts, much ado about nothing ?

by Pininvest Analysis

Global Trade & Maritime Transportation on pininvest.com

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Global trade

Growth of international trade has brought huge advantages to trading partners worldwide by allowing businesses to sell beyond their domestic market, to upgrade the quality and the efficiency of their product and to lift millions out of poverty

Merchandise trade of WTO members has increased to US$ 15.4 trillion, up from US$ 11.7 trillion in 2006

WTO Member countries merchandise trade 2006-2016 growth by region
Africa 37.36%
Asia 60.2%
Europe 15.8%
Middle East 46.9%
North America 25.7%
South / Central America and the Caribbean 28.3%

Source - WTO - World Trade Statistical Review 2017 - chap 2  page 6

In the late 1970s, more than half of all agreements involved trade between developed and developing countries (North-South trade). Today, the majority of preferential trade agreements are between developing countries (South-South trade)

Source : Our World in Data - Report on international trade


Notably, the US is an outlier amongst developed countries with a GDP trade percentage (28%) between half and a third the trade percentage at its closest G-7 allies

In 2016, the US rank in GDP % also remains at the low end of the global trade, along with Brazil, Argentina, Egypt and Soudan (!)

However, America  has tripled its international trade over GDP ratio over the last 50 years (1960 – 9% vs 2016 – 28%) as  nominal GDP itself multiplied 35 times over the same period (from 543 billion in 1960), putting the US in second place with total exports of $1.55 trillion behind China ($2.27trillion)

Source : World Bank - US trade as % of US GDP - 1960-2016

This observation may explain that international trade, though it matters for the US, is not, by a long shot, as vital as it is for its allies  – Mexico (80% of GDP), Germany (84%), Canada, Great Britain and France (more than 60%), setting apart the Netherlands (150%) and all the Eastern European countries (at least 100% and up to 175% for Hungary)

China tells an entirely different story – with trade as a % of its GDP dropping by almost half in the space of 10 years from 64% (2006) to 37% (2016) while its GDP quadrupled ($2.7 trillion – 2006 vs $11.2 trillion – 2016)

Source : World Bank - China trade as % of China GDP - 1960-2016

Rather than view potential trade wars in terms of global devastation, we see the weak hand of those countries that have the most to lose

 

Balance of trade accounts

US trade is vastly out of balance today, and has been for years as only US recessions (shaded in grey on the chart below) seem to stem an irresistible downward trend since 1980

The US trade account deficit reached  $514 billion in the first quarter of 2018 and approx. $1.94 trillion over 12 months (against $1.78 trillion over the previous 12-months period)

This is not to say the US has lost out in global trade – it has not, as shown on this WTO comparison between world’s leading exporters

Source World Trade Organization - Leading traders & World merchandise exports 2006-2016

Though China's export growth dominated, the US (green line) has noticeably improved its ranking compared to Germany (whose export trade is closely comparable to US volumes today) while Japan has lost out

Based on 2016 data, according to the World Trade Statistical Review 2017 - chapter 5

China’s share of world merchandise trade in 2016 declined for the first time since 1996, falling to 11.8 per cent compared with 12.2 per cent in 2015. The three top regional destinations for China’s exports of manufactured goods in 2015 were Asia (37 per cent share), North America (26 per cent) and Europe (20 per cent)

The United States exported goods with a value of US$ 1.45 trillion in 2016 and imported goods totalling US$ 2.25 trillion. The United States’ two partners in the North American Free Trade Agreement (NAFTA) – Canada and Mexico - received over 34 per cent of all US merchandise exports in 2015 and were responsible for 26 per cent of all US imports

The United States ran a trade deficit of US$ 87.7 billion in goods with its NAFTA partners in 2016: US$ 67.7 billion with Mexico and US$ 20.4 billion with Canada

Within the European Union, Germany was the largest exporter of goods (totalling US$ 1.34 trillion) followed by the Netherlands (US$ 569.7 billion) and France (US$ 501.3 billion). Germany recorded a trade surplus of US$ 284.8 billion in 2016 compared with US$ 43.5 billion for the European Union as a whole. Germany remains the main recipient of world exports to the European Union, with imports valued at US$ 1.05 trillion, or 20 per cent of the EU’s total imports. The Netherlands remained the fifth largest exporter of goods in the world, with a share of 4 per cent of global trade

Japan was the world’s fourth-largest exporter of merchandise trade and fifth-largest importer in 2015, with a 4 per cent share of total trade. Japan’s trade balance was positive in 2016, with a surplus of US$ 38.0 billion, after recording a deficit of US$ 23.2 billion in 2015 and US$ 122.0 billion in 2014

Source Statista - Top exporters in 2017 (in USD per billion)

But to make sense of current trade measures and counter-measures, occuring today outside the WTO framework, the actual meaning of a current account deficit (or surplus) is worth considering


A current account measures a country’s trade activity

A current account measures a country’s trade activity with foreign countries; it is said to be in deficit when the value of goods and services brought into the country (imports) exceeds exports to foreign countries

This deficit is intuitively understood by everyone: more cars are imported from Germany than exported from the US to Europe – more smartphones are imported from China than exported from the US and so on

Turning the commercial deficit into a political argument, the implication – and the misunderstanding – finds its roots in the assumption that German cars, the engine, the power train and the frame are all made in Germany, taking jobs from US autoworkers in the process

In the same fashion, one may look at imports of smartphones made in China as a loss to US industry

All of this is rarely exactly true, and in fact most often not true at all

One brand, so many part suppliers

Car engines may be produced in one place (Germany), the car built in another (the US) and exported to a third country (China)

Smartphones are put together in China but the chips may come from the US (or South Korea or Taiwan) and hundreds of component providers are involved the world over…but the software representing the better part of the phone’s value is being developed in-house, at the Apple’s headquarters… and a license may be paid to a US semi-conductor company such as Qualcomm by many of the Asian smartphone producers…

In summary, a current account deficit (or a surplus) is a mix of in- and out-flows of any country

 

Being a mix, the current deficit does not prove anything by itself and, to  complicate matters, the current account interacts with capital flows in- and out- of the domestic economy because overall all the cash movements have to balance

Our follow-up report will discuss the  current accounts and the economic and monetary factors underlying the balance of payments