How important is trade to the global economy?
Global trade is an important engine of the global economy—trade as a share of global GDP has risen from 25% in 1960 to about 60% in 2019.47 Greater openness to trade and trade reforms worldwide have been linked to higher growth in productivity and real incomes, as well as reduced poverty worldwide.48 For decades since World War II, annual real global trade growth outpaced GDP growth, growing on average 1.5 times faster. This trend has not held in recent years as the global economy recovered from the financial crisis in 2008; merchandise trade volume fell by 0.12% in 2019, after having grown 2.89% in 2018. Weakened trade growth had been attributed to several factors, including weak import demand, exchange rate fluctuations, and falling commodity prices. The slowdown in investment and China’s rebalancing toward a consumption-driven economy were seen as major structural factors, while others considered growing trade protectionism to be an important factor.
Trade growth rebounded in 2017—the strongest rate since 2011—and in 2018, driven mainly by cyclical factors, in particular increased investment and consumption expenditure. With the improving global economic outlook, the IMF and the WTO had projected a rebound in trade growth for 2019 and 2020. Amid several downside risks, including rising trade tensions between major economies like the United States and China, heightened trade policy uncertainty, and the COVID-19 pandemic, the IMF and WTO now estimate the volume of global trade to have fallen by 9.2% in 2020 (and to grow by 7.2% in 2021). Restrictive trade policy measures imposed by the United States and some of its major trading partners may be affecting trade flows and prices in targeted sectors. Analysts claim that some recent policies also have harmed businesses’ outlooks and investment plans, due to heightened concern over possible disruptions to supply chains and the risks of potential increases in the scope or intensity of trade restrictions.
What are the largest global trading economies?
In 2019, the top-five largest trading economies in terms of share of global trade were the European Union, the United States, China, Japan and the United Kingdom (UK). Considering EU member states individually, China was the largest exporter, while the United States was the largest importer. In goods trade, the United States was the largest importer and second-largest exporter (behind China). In services trade, the United States was both the largest importer and exporter.
The U.S. share of global goods trade has fallen over the past several decades—from 15% in 1970 to 9% in 2019—largely due to the rapid increase of global trade, especially among developing countries and emerging markets. Historical data on global trade in services is limited; in 2019, the U.S. export share of global services was 14%, and import share was 10%.
In 2019, U.S. exports and imports of goods and services combined were equivalent to 26% of GDP. Although the United States is a major global trader, the size of trade relative to the size of the U.S. economy is smaller compared to other major trading economies. Various organizations have developed indexes to assess the “openness” or “competitiveness” of the U.S. economy relative to other economies. The United States ranked second (behind Singapore) out of 140 economies in the World Economic Forum’s (WEF) latest “Global Competitiveness Index.”
How important is trade to the U.S. economy?
In 2019, the United States exported $2.5 trillion in goods and services and imported $3.1 trillion. Over the past decade since 2009 and the financial crisis, U.S. exports have grown more than 60% in nominal terms, while U.S. imports have grown more than 55%. Since 1960, trade relative to GDP has risen markedly. U.S. exports as a percent of GDP expanded from 5% in 1960 to 12% of GDP in 2019, while U.S. imports expanded from 4% to 15% of GDP.
What countries are the top U.S. trade partners?
In 2019, Canada was the top U.S. trading partner, with $725 billion in total goods and services trade, followed by Mexico, China, Japan, the UK and Germany. China was the largest source of U.S. imports, while Canada was the largest destination for U.S. exports. However, considering the 28 EU member states as a single trading partner, the EU was both the largest export destination and source of imports for the United States. The majority of U.S. global trade, about 65%, is with countries with which the United States does not have a free trade agreement.
How do global value chains complicate interpretation of U.S. trade data?
The growth of GVCs, intra-firm trade, and trade in intermediate goods means that traditional accounting methods may not fully reflect the source of inputs used in producing goods and services, a limitation that may ultimately distort trade data tallied using such methods. As more products are effectively made globally, concepts such as country of origin and bilateral trade imbalances may take on different meaning. This shift makes it increasingly difficult to understand and interpret the implications of trade data trends for the U.S. economy. In addition, conventional data that often drive policy discussions may underestimate trade in services, because the data do not attribute any portion of the traded value of manufactured and agricultural products to services inputs. As mentioned above, intermediate services such as transportation and distribution, R&D, and design and engineering are embedded within a value chain as inputs and thus are often not visible in the data. Moreover, these data are not disaggregated enough to identify trends in GVCs or their impact on the U.S. economy.
To illustrate, when the United States imports such products as iPhones and iPads, it attributes the full value of those imports as occurring in China, even though the value added there is quite small. Apple Inc., the U.S. firm that developed these products, is the largest beneficiary in terms of the profits generated by the sale of its products, and most of its product design, software development, product management, marketing, and other high-wage functions and employment occur in the United States. Some partners have a larger value-added role in the Apple GVC than others; for example, Taiwan-based Foxconn handles the sourcing, manufacturing, and logistics. In other words, U.S. trade data may show from where products are being imported, but they often do not reflect the country or countries that ultimately benefit from that trade. In many instances, U.S. imports from China are really imports from many countries. Yet, the full value of the final imported product is attributed to China, which results in what some might consider to be an inflated trade deficit figure.
Measuring trade in value-added (TiVA) terms can mitigate these problems by enabling domestic content embedded in exports to be assigned to each country that participated in the production of the final good. In contrast to traditional trade statistics, measuring trade this way can provide a more detailed picture of the location where value is added during the various stages of production. The OECD and WTO developed a TiVA database, considered to be the most comprehensive and widely used trade database that provides insight into domestic and foreign value-added content of gross exports by exporting industries. Despite a significant time lag, such statistics provide a detailed picture of inter-industry relationships in the supply and uses of goods and services between sectors of the economy. In other words, TiVA data provide a better indication not only of the production and movement of goods and services, but also of where they are being consumed.