China has a trade surplus with many countries. It is the natural order of things when it comes to trade. Overall the global deficits and surpluses must square to zero. The US, in particular, enjoys spending and consuming – the household savings ratio is now very close to its all-time low, the level of consumer credit outstanding relative to personal income is at a record high, personal consumption as a percentage of GDP is also around its record high and the federal government consistently runs loose fiscal policies. A proportion of this exuberant spending naturally spills abroad. Foreign savers effectively fund the US overspend.
A significant trade skirmish would be very bad news. In the US it will raise domestic price levels and impede growth. A tiny minority will benefit at the expense of the majority. Yet Mr Trump tweets that “trade wars are good”. Even the most cursory examination of economic history demonstrates that tariffs, embargoes, subsidies and other techniques to distort trade flows do nothing to advance a nation’s prosperity over the long haul.
Australia only recently gave up on its domestic motor vehicle manufacturing industry after 60 years and billions of dollars of taxpayer-funded subsidies. At last count the Australian population was around 24 million – far too small to support a domestic industry of this type yet political opportunism and vested interests rode roughshod over basic economics. It is ironic that the subsidies went to foreign-owned companies. Most other countries also play the subsidy/tariff/tax game so that the much vaunted level-playing-field resembles a rocky outcrop. Politics invariably triumphs.
We have been concerned about the state of world trade for some time. It is a great puller of GDP growth – invariably growing much faster than GDP and adding to global wellbeing. However, since the financial crisis the “pull” has been extremely subdued relative to the past.
The OECD recently put some valuable flesh on the trade bones and we have reproduced their findings below.
All information as at April 2018, unless stated otherwise
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Pyrford International is an independent investment boutique operating as part of BMO Global Asset Management.