Wednesday, November 21, 2012

Why the U.S. Doesn't Trade

My latest in Bloomberg View discusses why the United States has such a low trade-to-GDP ratio. There are a variety of possible causation stories, including geography, transport infrastructure, economic size, and perhaps also trade policy:
One of the greatest ironies of the 2012 presidential campaigns was that both candidates framed the U.S. as a champion of free trade under assault from malevolent "cheaters." In fact, the U.S. is basically the world's biggest loner.

Trade accounted for about 29.2 percent of U.S. economic activity in 2010. That makes the U.S. the most closed of all developed nations according to "trade intensity," which is calculated as the sum of exports and imports, divided by gross domestic product.

Only one other developed nation came close: Japan, whose domestic markets have long been seen as practically impenetrable to foreign companies. Every other major economic power has nearly double the trade intensity of the U.S.

Standard measures of trade intensity, if anything, probably understate the degree to which the U.S. is a closed economy. A recent study by the Federal Reserve Bank of San Francisco suggests that the Bureau of Economic Analysis overvalues the value of imports by 36 percent by ignoring domestic value-added in transport, marketing and retail.

The U.S. has made some progress toward a more open economy over the last half century. (In 1960, trade was less than a 10th of all GDP.) But with the European Union's economic integration and the rise of East Asia in global trade, the rest of the world has moved far more quickly into a single market.

Why does the U.S. have such a closed economy?

2 comments:

  1. One obvious factor is size. If goods were produced and consumed independently at random locations on the globe, then a country's trade intensity would be two times (one minus its share of world GDP). So a large country would tend naturally to have lower trade intensity. A country that accounted for 100% of the world economy would have zero trade by definition.

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    Replies
    1. Yes, that's my first explanation, if you read the article.

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