11 November 2019

The Countries Most at Risk from a Trade War

While the global economy has thus far avoided a major slowdown over the course of 2019, it is also clear that growth has slowed in many of the world’s largest economies.  A large number of the economies that have experienced the sharpest slowdowns in growth this year are those that are most dependent upon international trade to generate growth and to create jobs.  Many of these are the same economies that benefitted disproportionately from the surge in global trade in the 1990s and the early 2000s.  

However, over-dependence upon international trade has left many economies exposed to the downturn in trade that began many years before the recent trade disputes grabbed the headlines.  In fact, global trade has been stagnant for much of the past decade and the trade disputes such as the one between the United States and China that get much of the blame for the current economic slowdown have simply worsened what was an already weakening outlook for international trade and investment.

Recent trade figures have indicated that international trade levels remained depressed.  With just a few weeks remaining in 2019, it appears that global trade will barely record any growth at all in 2019 and could yet experience an overall contraction in international trade for the year. Looking around the world, it is clear that major exporting countries are feeling the pinch.  

For example, Chinese exports have declined slightly over the first ten months of 2019, a far cry from the soaring export growth rates of previous years.  Likewise, Germany, another major exporting country, has recorded almost no growth in exports so far this year.  In fact, those countries that rely upon exporting manufactured goods to generate growth have suffered disproportionately from the downturn in demand and the increase in trade-related tensions.  Overall, this can be characterized as a very difficult period for exporters, and conditions could deteriorate further in the months ahead.

There are a number of factors that make a country (or a business) vulnerable to the impact of trade disruptions. These include:

  • Weak domestic markets (A country or business that is based in a market that has weak levels of domestic growth or low levels purchasing power is dependent upon export markets to generate much of its growth.)
  • Over-reliance on a single export market (Some countries or businesses have a single market that comprises most of their exports.  Mexico’s dependence upon the United States export market is a prime example.)
  • Over-reliance on weak export markets (Some countries or businesses focus their exports on markets that have low levels of purchasing power or relatively poor prospects for future growth.)
  • A poor export mix (Many countries or businesses simply are focused on exporting goods or services that are not in demand, offer few growth opportunities, or are exposed to major price fluctuations.)

Several major economies are at risk from their dependence upon exports to generate growth.  Among them are:

  • Germany (47.0% export-to-GDP ratio)
  • Italy (31.8% export-to-GDP ratio)
  • France (31.3% export-to-GDP ratio)

Meanwhile, some mid-sized economies are heavily dependent upon exports to generate growth.  These include:

  • Singapore (176.4% export-to-GDP ratio)
  • Vietnam (95.4% export-to-GDP ratio)
  • Netherlands (84.3% export-to-GDP ratio)

As for the world’s three largest economies, their dependence upon exports is somewhat smaller: 

  • China (19.5% export-to-GDP ratio)
  • Japan (17.8% export-to-GDP ratio)
  • United States (12.1% export-to-GDP ratio)

There are many ways that a country can work to mitigate the risk posed by weakened international trade growth and the proliferation of trade barriers.  These include:

  • Boosting domestic demand through policies aimed at increasing consumer, business and government spending.
  • Diversifying a country’s trade markets to avoid over-exposure to a single export market.
  • Diversifying the goods and services that are exported by a country in order to avoid falling demand for individual goods and services.

Of course, each of these solutions are quite obvious to economic and trade policy-makers in most countries and their implementation is often easier-said-than-done.  Nevertheless, in the poor trade climate of today, countries must do everything in their power to reduce the risk posed by trade-related issues. 

The next few months will be crucial for the outlook for global trade.  First, it remains to be seen if the current economic downturn is near bottoming out, or if global economic growth could still fall much further.  This will go a long way towards determining the level of demand in key export markets around the world.  Second, there is the potential for a reduction in trade tensions between the world’s leading economies in the coming months, but there is also the potential for an escalation of tensions in many trade disputes. Of these disputes, the one between the United States and China will remain the one in focus, and there are hopes for some sort of a resolution in the months ahead.  At the same time, other key trade relationships have the potential to significantly deteriorate in the coming months, most notably the trade relationship between the United States and the European Union.  

For countries and businesses that need to export to generate growth, this is a pivotal moment in time.  While there are hopes that the worst is over with regards to slower economic and trade growth, this is no time to be complacent.  Given the large number of major threats facing the global economy and international trade, companies and businesses must be preparing themselves for any scenario in order to ensure that they do not fall prey to an over-reliance upon exports at a time of great uncertainty for the international trading system.