Six trading myths threaten US, Europe
Trade has been a key growth driver in China, India, Russia and Brazil and promises to boost the wealth of other developing countries in Asia, Latin America and Africa. But that doesn’t mean trade has been detrimental to mature economies in the US and Europe, a McKinsey Global Institute analysis suggests.
The analysis examines six common trading myths, many of them rooted in the misconception that offshoring of manufacturing jobs to countries with cheap labour is raising trade deficits in mature economies.
“We find that the reality is often at odds with conventional wisdom, raising important implications for policy makers and corporations,” the McKinsey researchers write in the introduction of the analysis, which was based on the performance of 17 mature economies in tradable sectors.
The researchers argue that increasing investment and net exports could help boost growth and lower unemployment in mature economies, while they are paying down high levels of public and private debt.
“But efforts to stimulate exports face a threat from a growing risk of direct protectionism and actions to weaken currencies to improve competitiveness,” the researchers write, and argue that tit-for-tat trade restrictions would imperil a global recovery.
“It is therefore vital that the political and public debate around trade and its impact be rooted in facts,” they add.
The analysis found that:
Rather than losing out to emerging markets in trade, mature economies stabilised aggregate trade deficits in the past decade to about 1.5% of their combined GDP. But total exports as a share of GDP varied widely among countries in 2011, from 105% in Ireland, 50% in Germany and 47% in Sweden to 32% in the UK, 22% in Greece and 14% in the US.
Imports of increasingly expensive primary resources, particularly oil and coal, more than anything, drove up trade deficits of mature economies in the past decade. But exports of knowledge-intensive manufacturing and services, including pharmaceuticals, electronics, and financial and business services, contributed the equivalent of 2.3% of GDP to the trade balance in mature economies in 2008.
The number of manufacturing jobs in mature economies has been declining for 30 years. Rather than trade, a rising demand for services such as healthcare, IT and tourism and productivity increases is driving this trend. By 2030, manufacturing employment in mature economies is expected to drop below 10% without a negative effect on manufacturing output.
Jobs created in mature economies are not all in low-paid, low-value domestic services. Between 1996 and 2006, about 46 million service jobs were created in mature economies and about 8 million manufacturing jobs were lost. About 15 million of the new service jobs were in finance, research, customer care and the like – high-skilled and well-paid.
Services trade in mature economies isn’t at the mercy of low-cost emerging economies. Services make up about one-fourth, or $1.9 trillion annually, of mature economies’ exports and represent about 16 million jobs. Despite offshoring, these services exports could raise their share to one-third by 2030.
The US service economy isn’t the world leader in service trade. Strong manufacturers can be robust service exporters. In 2009, the EU generated $173 billion in service exports compared with the US’s $129 billion. Germany’s service exports amount to 7.1% of GDP, compared with 3.5% for the US.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.