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Free trade is thriving, despite what the headlines would have us believe - LGT Chief Economist Wolfgang von Hessling's view.
Many governments have erected trade barriers, but a look at the big picture shows these aren’t proving very effective.
According to countless media reports, the world’s major economies are increasingly sealing themselves off. And on the face of it, that adds up. When Donald Trump became President of the United States in 2017, people started talking about "trade wars" again. Governments that had once been committed to free trade began to introduce tariffs, create trade barriers and question some of the rules of the World Trade Organization and trade agreements that had been in place for decades.
This did not bode well for trade, a driver of global economic growth and a springboard for developing countries. Then, in 2020, global supply chains collapsed in the wake of the pandemic. The supply bottlenecks for hygiene products and microchips left many countries wishing they hadn’t outsourced manufacturing. In addition to this have come the efforts to combat the climate crisis, with subsidies to promote sustainable energy production and bans on harmful technologies now also altering trade flows.
So how open are the world’s economies in light of these developments? A good tool for determining this is the trade-to-GDP ratio, which is the sum of exports and imports relative to gross domestic product (GDP). It measures the importance of cross-border trade in goods and services relative to the total value added of an economy, thus expressing its global interconnectedness. Almost all economies have seen an increase in their trade-to-GDP ratio in recent decades: the GDP-weighted sum of trade-to-GDP ratios has increased from 25 to 33 per cent since the beginning of the noughties (see chart). China is the exception, but only because its trade activity, which saw strong growth between 2005 and 2015, did not keep pace with its even more rapid GDP growth.
Free trade faces more challenges today than in the past. These affect countries and industries to varying degrees, and range from populist protectionist policy experiments and subsidies that distort competition to geopolitical tensions.
It may, therefore, become necessary for some economies, especially small, open ones like Switzerland and Liechtenstein, to make adjustments. But a look in the rearview mirror shows that the world’s major economies have generally become more interconnected in terms of trade in goods and services. Let’s hope this remains the case in the future.