A Transatlantic, Transpacific or Eurasian Global Economy?

Yves here. As virtually all forecasts do, this one assumes that the trajectory of increasing trade and reliance on extended supply chains will continue. Yet rising inequality and resource pressures push in the direction of relocalization and more emphasis on national sovereignity.

By Nicolas Moës, a Research Assistant in the Innovation & Competition Policy at Bruegel. Originally published at Bruegel

A look at the data on bilateral trade, services, investment and protectionism between Asia, Europe and the US in recent years gives some indication of the future shape of the world economy.

As the US trade policy has changed with the new administration, manynow consider that the EU and Asia have to step up as champions of globalisation. However, Eurasian economic relations have already been more intense than each side’s relations with the US in some dimensions. In this post we look at the data on bilateral trade, services, investment and protectionism between Asia, Europe and the US in recent years.

The chart below shows the evolution of trade volume in recent years – the sum of exports of goods in both directions. EU-Asia trade in goods is by far the most important, peaking at $1.8tn in 2013, consistently more than double the Transatlantic trade. Even looking at the more narrow EU-China trade shows that this trade relation is already bigger than US-China trade.

To Asia, the EU is a greater export destination than the US and likewise, to the EU, Asia is a greater export destination than the US, as shown below. This means the Eurasian trade relation is more important to both partners than their relation with the US.

Another facet of trade is services. The chart below shows the Transatlantic relation is the most important one with regards to trade in services, with a peak at $500bn-worth of services exchanged in 2014.

The Transpacific and Eurasian services relations have experienced moderate growth over the past six years, reaching $299bn and $321bn in 2015 respectively. The Eurasian trade in services is slightly higher than the Transpacific one, although the gap has narrowed.

As can be seen in the chart below, the Transatlantic foreign direct investment (FDI) relations are also far deeper than the other relations. In fact, these strong relations have resulted in deeply intertwined investment stocks across the Atlantic, with $5.8tn-worth of bilateral FDI in 2015. Nevertheless, the Eurasian relation was already deeper than the Transpacific one back in 2009, with $1.1tn- vs $0.8tn-worth of disclosed bilateral FDI.

This gap has persisted over time: in 2015 the Eurasian figure was $1.6tn against $1.3tn for the Transpacific disclosed FDI. We see that Europe is the main investor abroad among the three regions: in 2015, Europe owned $1.2tn-worth of investment in Asia and $2.9tn-worth of investment in the US.

So far we have looked at the exchanges between the US, Europe and Asia. What about policies? The chart below presents information on how trade policies affect the three intercontinental relations we consider. It leverages the Centre for Economic Policy Research’s database on trade policy.

Specifically, the database records every protectionist announcement made by one partner that concerns products currently imported from the other partner. For example, in 2015 the US made 96 protectionist announcements affecting its imports from the EU and the EU made 53 protectionist announcements affecting its imports from the US. We then compute the sum of these two numbers (149) as an indicator of how friendly the EU and US trade policies were towards each other in 2015.

As we can see, Eurasian and Transpacific policies are still much less friendly than Transatlantic policy, with almost twice as many protectionist announcements. Though the gap has narrowed, the Eurasian relation seems slightly less developed than the Transpacific one in terms of trade policy. All three trade relations have seen an increase in protectionist announcements impeding their mutual exchanges since 2012.

The data presented in this post shows that in many aspects, the Eurasian relation is already running deep and, for trade in goods, deeper than their Transpacific and Transatlantic counterparts. For FDI and services, we see that the Eurasian relation is already slightly deeper than the Transpacific one. Nevertheless, in terms of trade policy, the Transpacific relation has been friendlier than the Eurasian one since 2009.

With the current US administration, the One Belt One Road initiative and the trade agreements the EU and some Asian countries currently negotiate, the Eurasian relation might develop further. Rather than a Transpacific one, we are already well on our way towards a Eurasian century.

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  1. Thuto

    So, the US exerts outsize influence on both Europe and Asia relative to its importance as a trading partner. Could military might have something to do with this I wonder? Also, the US “retreat” aka Trumps America first policy seems to be curious in that it’s supposed to revitalize ailing domestic industries yet one wonders, and US readers can enlighten me on this, whether internal US demand can absorb all of the output resulting from its success. If not, retaliatory protectionist measures by other countries will leave this surplus output trapped on the mainland, with its free movement curtailed by trade barriers imposed in retaliation to the America First policy. Maybe the military could pry open these barriers if need be, as Obama once famously stated that “twisting the arms of countries to make them do what we want” isn’t frowned upon in DC.

    1. Jim Haygood

      No doubt the postwar tableau of Bretton Woods, NATO and the Marshall Plan led to the large legacy stock of transatlantic FDI. Europe had developed-country legal systems but much of its capital stock had been destroyed in the war.

      Asia at the time — even now-wealthy countries like the Little Dragons of Korea, Taiwan, Hong Kong and Singapore — was dirt poor in the 1940s and 1950s. China didn’t emerge from its Iron Curtain phase of communism till the 1980s, so FDI got a late start in China and is still hampered by an opaque legal regime.

      As for Trump’s little autarkic jabs, they lead nowhere in a country that’s maxing out its credit cards to fund current consumption. Where is the capital to rebuild industrial infrastructure going to come from? It’s not.

      If Trump goes too far the global corpocracy may be obliged to neutralize him. :-0

  2. PlutoniumKun

    As any cultural anthropologist or archaeologist will tell you, the Eurasian axis, aka Silk Road, has long been the most important trade route in human history. It always struck me as strange that all the South American plants which are such a central part of Asian cooking (chilli peppers, tomatoes, etc) came via Europe, not across the Pacific, but in reality humans prefer travelling by land than sea.

    Years ago, I found myself camping (long story) by a remote lake on the China/Mongolian border. There were strange mounds all around the lake, which a quick dig revealed to be deep deposits of charcoal – the remains of generations of Silk Road traders stopping to replenish before continuing along the desert. I wondered then if ever these routes would be rediscovered – but now it seems the Chinese never forgot, and are determined to reopen those land and land/sea links and rid itself of a dependence on strategic chokepoints like the Suez Canal and the Malacca Strait for trade with the Atlantic/Mediteranean lands.

    The US strategic obsession with the Middle East and central Asia has always been seen as a focus on oil, but maybe there are deeper reasons (even if the strategists don’t always understand those reasons). If the great trade corridor between Asia and Europe and the Mediterranean opens up fully again, this will hugely benefit countries like Iran and Russia, and the great European-China axis will again become the most important on the planet.

    1. visitor

      For hundreds (nay, thousands) of years, Persia was the gateway to Europe on the Silk Road(s). Most paths North of Afghanistan and many South of it had to cross the Persian empire (which for a long time included what is nowadays Pakistan, among other territories), or ended up on a port controlled by the Persians (to navigate through the Persian Gulf, or towards the Red Sea). Persia obviously benefited greatly from that position.

      Rome had a massive trade deficit (and corresponding outward monetary silver flow) because of its massive imports of Asian merchandise, and was, for hundreds of years, in conflict with Persia to dominate the Armenian kingdom — which itself controlled a branch of the Silk Road through the Caucasus and ending in Asia Minor.

      Interestingly, Central Asian states and Persia derived a lot of their wealth from one major export item to China, which that country could never get enough of: horses. While caravans bringing silk, tea and other products travelled westwards, enormous herds of horses were conveyed eastwards — so that the Chinese army could replenish its cavalry units fighting the Xiongnu, Mongols, and assorted steppe warriors. Nowadays, hydrocarbons seem to have replaced horses in that relation.

  3. Louis Fyne

    if i was dictator i’d mandate that all ocean cargo ships docking in the US be held to the same emissions standard per BTU as new passenger cars.

    just that one law would help price the massive negative externalities of the global supply chain.

    econ 101 students cover negative externalities in the first month of class. guess that’s why most of the ‘professional’ economists forget about it

  4. Jeremy Grimm

    As dictator, I would mandate that all ocean cargo ships docking in the U.S. brought goods we didn’t or couldn’t make here or raw materials we had in short supply or produce we could not grow here. Wait — I’m not sure I would disallow much. Oh well!

  5. The Rev Kev

    “To Asia, the EU is a greater export destination than the US”

    Well that explains one of the main reason for China’s push to have a solid connection to Europe via the One Belt One Road. That would be a strategic nightmare for the US to have a market stretching from Hong Kong to Scotland out of its control. It would then be this zone making the rules of world trade instead of Washington as Obama demanded with the Trans-Pacific Partnership.
    With the end of the unipolar world it seems that we are seeing the evolution of trade blocks such as Transatlantic, Transpacific and Eurasian ones. I have the impression from the news that there is a lot of shuffling going on as too many nations unhappy with the present world trade structure at present. I am not sure where this would leave the US dollar. Last I heard, only 40% of world trade was being conducted in that currency though don’t quote me on that figure. And that figure is decreasing. This may all add a bit of healthy competition in world trade – so long as they did not evolve into Oceania, Eurasia and Eastasia.

  6. djrichard

    The CDIS data from IMF goes back only to 2009. I was curious if there was something that went back further and came across this: https://www.researchgate.net/figure/Foreign-Direct-Investment-Increases-Ten-Fold-since-1971_fig1_312587418 . This graph is a world-wide rollup apparently, so it’s not US specific. Which is a shame, because I wanted to compare it to the trade imbalance graphs on http://www.econdataus.com/tradeall.html, e.g. the 3rd graph, which is US specific. If we could get a US specific FDI chart, it should be the inverse (more or less) to the trade chart. Basically the FDI is what “balances” the trade.

    Why don’t the elite come clean on this and tout that we actually do have balanced trade? Maybe it’s because FDI doesn’t contribute to GDP? One obvious issue we have is that the greater the trade deficit, the more the negative impact on GDP. We just saw this recently I believe, for the revisions to the Dec 2017 GDP number.

    But even though it doesn’t contribute to GDP, it doesn’t mean somebody in the US isn’t benefiting from that trade deficit. In particular:
    – the parties who are “adding value” on the supply chain that’s imported, and sell for a higher profit (compared to the profit they would have had if they used supply chains in the us)
    – the parties in the US that are in the FDI supply chain going the reverse direction, from the US, being sold to parties in other countries, to achieve a balance of trade. So basically the financial biz. This is the financialization that the corresponding paper (which used the graph) is referring to.

    In fact, the paper (click on the “go to publication” square above the graph) gets into how that financialization has driven up the price of assets in the US. The paper gets into how leverage was a part of that, but even ignoring leverage, it’s easy to see that all our trade deficit was being recycled back into assets. Initially treasuries when our trading partners were manipulating their currencies with a vengeance. But then into other assets: corporate bonds, stocks, MBS, even real-estate (though I’m not sure real-estate shows up in FDI). And who owns those assets? Not the working class, that’s for sure.

    Separately, what’s interesting is that this graph only goes back to 1971, which so happens is when Nixon took us off the gold inter-exchange standard. I’m guessing FDI was pretty much nil before then, corresponding to trade in goods and services being pretty much balanced before then as well (though there were years where that wasn’t true).

    So assuming we had a world of negligible FDI before 1971, presumably all the asset purchases going on inside the US was from money being recycled within the US, rather than from trading partners. But back then, there was more a balance of trade between corporations and labor. It wasn’t completely balanced, but it’s even less balanced today (corporations getting higher profit margins due to labor being on its heels). And any surplus after that was still subject to tax (in contrast to our trading partners, which we can’t tax). So my guess is the recycling into assets was much more limited. Another example: they certainly weren’t using their currency hoards to buy housing from under the working class.

    So I sort of have this impression that the economy had reached an equilibrium back in the 1970s. How could even greater profits (at least decreased costs if not increased revenue) be realized? Answer: globalization. Look at the productivity graphs vs GDP and they diverge starting early 1970s. Combine that with the Volker Fed in 1982 killing labor’s ability to spiral its wage inflation, and this was a one/two punch.

    Except for the financial side of the economy. We now have an incredible growing economy for the FDI-portion of the economy: the side that sells assets to our trading partners, to balance the trade.

    1. UserFriendly

      Not Quite.

      Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):

      (2) GNP = C + I + G + (X – M) + FNI

      To render this approach into the sectoral balances form, we subtract total net taxes (T) from both sides of Expression (3) to get:

      (3) GNP – T = C + I + G + (X – M) + FNI – T

      Now we can collect the terms by arranging them according to the three sectoral balances:

      (4) (GNP – C – T) – I = (G – T) + (X – M + FNI)

      The the terms in Expression (4) are relatively easy to understand now.

      The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way). In other words, it represents private domestic saving.

      The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

      In other words, the left-hand side of Equation (4) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.

      The term (G – T) is the government financial balance and is in deficit if government spending (G) is greater than government tax revenue minus transfers (T), and in surplus if the balance is negative.

      Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAD). It is in surplus if positive and deficit if negative.

      In English we could say that:

      The private financial balance equals the sum of the government financial balance plus the current account balance.

      We can re-write Expression (6) in this way to get the sectoral balances equation:

      (5) (S – I) = (G – T) + CAD

      which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAD > 0) generate national income and net financial assets for the private domestic sector.

      Conversely, government surpluses (G – T < 0) and current account deficits (CAD < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.

      Expression (5) can also be written as:

      (6) [(S – I) – CAD] = (G – T)


  7. Desmond Maddalena

    The massive increase in trade will bring one thing for sure and that is an increase in Global Warming as most international trade is via ships and ships use the most polluting of fuels- that is bunker oil- the left over dregs from the crude oil after every thing of value has been taken out. Shipping is already responsible for about 7% of world CO2 pollution. This will increase because last year the world shipping magnates refused to make their ships less polluting.

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