2022 Annual Report Examines Global Trade

The 2022 annual report from the Federal Reserve Bank of St. Louis took an in-depth look at U.S. and global trade as well as factors that may be slowing the process of globalization.

This blog post summarizes the report’s main essay, titled “The Shifting Tides of Global Trade,” which was authored by St. Louis Fed economists Subhayu Bandyopadhyay, Maximiliano Dvorkin, Fernando Leibovici and Ana Maria Santacreu.

How Trade Blocs, Geopolitical Tensions Affect Trade

Using the U.S.-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA) in 2020, Bandyopadhyay studied how trade blocs impact overall trade. He wrote that while trade blocs help reach agreements among a small number of countries, there are two major obstacles:

  • Although trade blocs may create new trade among members, they may divert sourcing of imports from more efficient nonmembers to less efficient member nations.
  • The income distribution effects of those agreements could help some industries that see an increase in exports but could hurt others that see greater competition from a rise in certain types of imports.

Despite those concerns, the figure below from Bandyopadhyay’s section of the essay shows how U.S. trade in goods with Canada and Mexico grew rapidly with the implementation of NAFTA.

U.S. Trade in Goods with NAFTA Partners as Share of GDP

A line chart shows U.S. imports from Canada and Mexico, as well as U.S. exports to Canada and Mexico, from 1975 to 2021, with significant expansion occurring around the time that the North American Free Trade Agreement went to effect in 1994.

SOURCE: Haver Analytics.

NOTE: The gray shaded areas indicate U.S. recessions. Since the figure shows annual data, a given year is shaded if a recession occurred during at least two months of that year, including the short recession in 2020.

Bandyopadhyay asserted that geopolitical tensions, such as the Russia-Ukraine war, also can disrupt trade. He highlighted the grain and oil markets, which have been impacted by that war.

“Overall, conflict in any part of the world can be a significant trade impediment. International trade is based on reliable transactions among entities operating in different parts of the world,” he wrote. “Such relationships typically require time and resources to build. To the extent that conflict disrupts such relationships, it also raises the costs and uncertainties related to trade.”

U.S. Trade with China

Next, Maximiliano Dvorkin studied the trade relationship between the U.S. and China. While relations were established in the 1970s, trade did not pick up for the two nations until the early 1990s. He wrote that the U.S. and China are now major trade partners and have levels of trade that are similar to those between the U.S. and Canada, Mexico and the EU.

Dvorkin then examined the top imports and exports from China. Using data from 2015, three years before the U.S.-China trade war, he wrote that about 50% of all U.S. imports of furniture, textiles, apparel and leather products and nearly 42% of all U.S. imports of computers, electrical equipment and appliances came from China.

Top exports were in agriculture, forestry and fishing products, with China accounting for nearly 25% of U.S. exports of these goods. Other significant exports, he stated, were beverages, tobacco products and wood products, with China accounting for nearly 20% of all U.S. exports of these goods.

He explained how the trade expansion between the U.S. and China came to a stop in 2018 when the U.S. implemented several tariff increases. China then retaliated and imposed or increased tariffs on U.S. goods, causing a significant drop in trade.

“This trade war caused U.S. imports from and exports to China, and to a lesser extent those with other major trade partners, to fall. Between 2018 and 2019, U.S. imports from China fell by 17% and exports to China declined by 11.5%,” Dvorkin wrote. “More recently, however, the amount of U.S. trade with China has substantially recovered, partially due to a surge in U.S. consumption of goods during the pandemic years and an increase in U.S. imports from China in goods that did not experience a tariff increase.”

Trade Shocks to Critical Goods

Fernando  Leibovici’s section of the annual report’s main essay noted that critical goods are vital to economic activity and welfare even though they might only account for a small part of aggregate consumption and output. Shocks to those types of goods, he wrote, can expose the U.S. economy to systemic risk.

Using data from the Cybersecurity and Infrastructure Security Agency, Leibovici evaluated which sectors the U.S. depends on international trade the most to access critical goods. He examined the 16 infrastructure sectors identified as critical to the security and resilience of the U.S. economy and focused on seven that are easier to trade in internationally: chemicals, communications, critical manufacturing, energy, food and agriculture, medical and pharmaceutical, and information technology (IT).

Based on 2012 data from the Bureau of Economic Analysis, he found that communications and IT were the critical sectors of the U.S. economy most reliant on international trade. In addition, more than 60% of total U.S. demand for the goods in these two sectors is imported, and these sectors consistently have significant trade deficits, Leibovici wrote.

He also spotlighted the importance of hard-to-source semiconductors, which are critical goods used in a variety of products, such as toys, computers and automobiles. To show the extent to which the U.S. depends on other countries for semiconductors, Leibovici plotted the U.S. trade deficit for them with major trade partners.

“The figure below shows that the U.S. trade deficit in semiconductors with China increased fairly steadily from 2008 to 2018 before reverting to a trade surplus in 2020 in the aftermath of the U.S.-China trade war,” he wrote. “In contrast, the trade deficit in semiconductors with Taiwan accelerated in recent years, likely as a substitute source given the reduction in semiconductor imports from China.”

U.S. Semiconductor Trade Balances with Key Source Countries

A line chart shows U.S. semiconductor trade balances with China, Taiwan and the rest of the world. The deficit in chip trade grew steadily with China until 2018 before reverting to a surplus by 2020.

SOURCE: Census Bureau.

Using Census Bureau data, Leibovici concluded that the U.S. is a net importer of semiconductors and those imports have grown over time. Furthermore, he stated that geopolitical relations among China, Taiwan and the U.S. may be vital to the semiconductor industry and corresponding sectors.

Protecting Supply Chains

In her section of the annual report’s main essay, Ana Maria Santacreu explained how most international trade consists of intermediate goods and about 70% of that trade is organized in global value chains (GVCs) that see materials and services traveling between countries. She showed how GVCs’ share of total trade rose steadily from 1970 before plateauing in the early 2000s due to an increase in automation and other factors.

“An important benefit of GVCs is that firms can take advantage of specialization,” she wrote. “Instead of producing everything in-house, firms can outsource parts of the production process to countries that have a comparative advantage (such as faster production or lower costs) in that particular stage.”

Despite those advantages, she noted that shocks to GVCs can cause bottlenecks, supply shortages and price increases, as the COVID-19 pandemic showed.

Citing previous St. Louis Fed research, Santacreu noted that U.S. industries that were more exposed to foreign shocks through GVCs saw larger declines in economic activity and more inflation during the pandemic.

Because of shocks such as the pandemic, the Russian invasion of Ukraine and geopolitical risks in China, many countries have implemented protectionist measures to help safeguard GVCs, Santacreu stated.

“For instance, in the first months of the pandemic, countries introduced export controls on personal protective equipment necessary to mitigate the spread of COVID-19. By the end of April 2020, 279 country-product pairs (such as masks from China) were subject to these export restrictions,” she wrote. “In October 2022, the Biden administration banned certain chip exports to China; and more recently, in response to Russia’s invasion of Ukraine, the U.S. and other governments have limited high-tech exports to Russia.”

Read the full annual report here.

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