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2017-09-28Macro `n Cheese

Trading Ideas

This week Roger shares some thoughts on global trade, which he presented at the NABE conference in the US over the past weekend.

I had the good fortune to participate in a panel on regional trade at the recent 2017 Annual Meeting of the National Association of Business Economists (NABE) where Janet Yellen, Adair Turner, Raghuram Rajan and many other noteworthy economists participated (in other fora, however) ;).

Speaking about trade, my message was that in the canonical Samuelson-Stolper trade theorem, increased inequality was an obvious outcome and without addressing that issue, the possibilities for future trade deals risk a public and populist backlash (no, nothing sensational1). Here, in this short post, I would, however, like to look at a few graphs on what the trade slow down might be all about.

1 Both Krugman and Rodrik have recently brought up that argument.

Macrobond chart

Figure 1: The trade slowdown is a shift in both level and slope

This of course mirrors the developments in global GDP:

Macrobond chart

Figure 2: Similar developments in world GDP

But the trade elasticity to GDP has fallen from “above 2” to “below 1” which indicates that there might be more going on with global trade, and why both increased protectionism and changes to demand have been put forward as arguments for the lower trade intensity.

Macrobond chart

Figure 3: Trade intensity decreasing

However, after updating the World Input Output Database some time ago, a paper from Groningen University2 suggested that it might be a natural consequence of China becoming more advanced, with domestic demand becoming ever more directed towards services (and other related effects). More specifically, the researchers suggested that as long as China grows faster than global GDP, the trade intensity of global GDP is set to decrease.

A simple, but illustrative way of looking at this is via estimating two models up until the financial crisis, and augmenting one of the models with an Asia/China factor. As the chart below suggests, a model that incorporates a changed Asian/Chinese behaviour does indeed seem to do a better job explaining world trade intensity post-GFC:


Macrobond chart

Figure 4: A model is only worth 347 words, it seems

Could this be something for those interested in trade to investigate further?

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We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.