Trade tensions
rumble on, with whiplash-inducing tweets from the White House: from ‘tariffs
are the greatest’ to we are ‘believers in no tariffs, no barriers and no
subsidies’ within 24 hours. And although there was good news as well –
the EU/US truce (for now) and the EU/Japan FTA – the global trade system faces
deep challenges. Unfortunately, the emerging global trade tensions are
unlikely to be resolved quickly.
A cottage industry
has emerged to identify those economies that are most exposed to trade
conflict. One of the common themes is that small economies are
particularly exposed.
For example, Danske Bank recently identified Nordic
and Swiss currencies as highly exposed because of a combination of high export
shares as well as exports to China. And last week, Maurice Obstfeld, IMF
Chief Economist argued that small open economies were highly exposed: ‘the more
you are dependent on exports, the more vulnerable you will be’.
This is a
plausible argument on the surface. The average small advanced economy
export share is 58% of GDP, about twice that of large advanced economies (even
after removing re-exports from Singapore and Hong Kong). But the relationship
between export shares and trade war exposure obscures as much as it
reveals. Clearly small economies will be negatively impacted by trade
conflict, but I am not persuaded that this exposure is disproportionately
higher for small economies. The specifics of national exposure matter at
least as much as the aggregate.
Indeed, small
economies continue to travel well. GDP growth across the small advanced
economy group strengthened to 2.9% in the year to Q1, ahead of most large
advanced economies; eight of 13 small economies were growing at 3.0% or
above. And small advanced economy export growth has strengthened over the
past couple of months (to 6.1% in the year to May) even as world trade growth
has softened.
Similarly equity
markets provide little evidence of a disproportionate impact of trade tensions
on small advanced economies. Since February, small economies have
performed broadly in line with key global benchmarks. It is equity
markets in the large economies that are directly in the firing line – from
Germany and South Korea to Japan and China (and Hong Kong by extension) – that
have performed worse. And although several small economy currencies have been
depreciating, this is more likely due to the strong USD and looming monetary
policy normalization.
Of course, it is
still early days. But the absence of a disproportionate economic or
market impact on small advanced economies from international trade tensions is
instructive. This response is consistent with my analysis that identifies
several reasons why small economies are more resilient to trade wars than might
be thought.
First, many small
advanced economies are deeply integrated into regional groupings such as the
EU, or have a portfolio of FTAs that cover a large share of their trade.
This institutional integration reduces the share of their exports that can be
directly impacted by protectionist measures.
For small economy
members of the EU, exports to other EU countries commonly amount to over 60% of
merchandise exports. Adding the EU’s existing and prospective FTA coverage,
this covers a substantial share of the exports from the small economies in
Europe. For example, Norway, Austria and the Netherlands have around 80%
coverage of their merchandise exports; although Ireland’s coverage is just over
60%. The situation is more complicated outside the EU, but small economies like
New Zealand and Singapore have been active in securing FTAs. About 95% of
Singapore’s exports are covered by FTAs, and about 60% of New Zealand’s.
Second, small
economies tend to have relatively limited export shares to the US and China,
the key protagonists in the trade dispute. There are some notable
exceptions: Israel and Ireland are heavily exposed to the US, and Singapore and
New Zealand to China. But geographically proximate markets (Canada to the
US; Japan and South Korea to China) are much more directly exposed. Small
economies also benefit because their bilateral deficits with the US are
(unsurprisingly) small in an absolute sense; and the US runs surpluses with
five small economies.
Third, small
advanced economies have a relatively high proportion of services in their
export profile (tourism, financial and business services, royalties, and so
on). Across the small economy group, about one third of exports are
services – compared to about 25% for large economies. Exports of services
are less likely to be impacted by protectionism, at least as these measures are
currently framed.
Fourth, a key mode
of international expansion for small advanced economies is through outward
direct investment. The ODI shares of small economies are markedly higher
than for large economies (135% of GDP, or 76% of GDP excluding Singapore,
Ireland and Hong Kong, versus 41% of GDP). This ODI intensity provides a
measure of resilience against tariffs and sanctions.
Finally, it is
worth noting that the global export market share of small advanced economies
has been fairly stable over the past 20 years (relative to larger economies),
indicating that small economies are resilient to disruptive changes in the
global trading system – such as the emergence of China.
Dr David Skilling, the founding Director of the Singapore based Landfall Strategy Group, was formerly the Chief Executive of the New Zealand Institute, and before that, a Principal Advisor at the New Zealand Treasury.
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