The Limited Exposure Of The U.S. Economy To Trade

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by: Timothy Taylor

Listening to complaints about the effects of globalization on the US economy, one might be tempted to believe that the US economy is more exposed to the pressures of global trade than most other countries, and that the US market is uniquely open to world trade countries.

But these beliefs are not true. A common pattern is that large economies have lower levels of global trade relative to GDP - because so much of their economy happens inside their own borders. Moreover, countries like the US with some geographic separation from most other substantial economies have less trade. Thus, the ratio of exports/GDP for the world economy is about 30%. But the export/GDP ratio for the US is only about 13%. Japan has an export/GDP ratio of about 17%. Canada is near the world average, with an export/GDP ratio of 31%, while Mexico is above the world average with an export/GDP ratio of 38%. For a small economy in the middle of the European Union, like Belgium, the export/GDP ratio is 84%.

Moreover, US markets are not especially open to international trade. The evidence comes from the fourth edition of the International Chamber of Commerce Open Markets Index 2017. The index rates 75 large economies across the world in four broad areas: observed openness to trade; trade policy settings; foreign direct investment (FDI) openness; and trade-enabling infrastructure. These scores are combined to a ranking on a scale from 1 (least open) to 6 (most open). The US economy is in a tie for 40th place in openness. Here are the rankings:

Among the group of larger economies around the world known as the G20, the US ranks 8th, behind Japan, Germany, Canada, Korea, and others in this measure of trade openness. In the more detailed analysis, the US scores higher in the categories of explicit trade policy and trade-enabling infrastructure, about average on openness to foreign direct investment, and below average on "observed openness to trade."

Globalization and trade are forces of economic disruption and change, and those forces have grown stronger in recent decades. But the notion that the enormous US economy is vulnerable to international trade or especially buffeted by the winds of trade just doesn't hold up.

Disclosure: No positions