Consider a small country that has $1 billion of consumption, $1 billion of investment, and $1 billion of government spending. Next, we analyze their exports and imports. This country has a large factory that produces more goods than the country consumes, and exports $2 billion of goods. GDP is now $5 billion ($1B+$1B+$1B+$2B).
The country uses that money from exports to import goods and services worth $2 billion. Imports are subtracted from GDP, so total GDP is again $3 billion ($5B – $2B). Local consumers benefit from this trade by virtue of lower prices and a broader selection of goods and services. For this small country, total trade (exports of $2B plus imports of $2B) is $4 billion compared to GDP of $3 billion, so trade represents 133% of GDP and is clearly important to the economy.
What To Look For Next
In general terms, the larger the ratio of trade to the size of an economy, the more important trade is to the success of that economy. It makes sense then that the greater the proportion of trade is to an economy, the more vulnerable that economy is to a disruption in trade, such as a trade war. Of course, the size of the impact will be dependent on the nature of the trading relationships. For example, though trade represents 64% of the Canadian economy, much of that trade is with the U.S. and is unlikely to be affected by a trade war. Other countries are likely to be more vulnerable.
Based upon the facts as we know them today, we do not see a large scale trade war in the future. More importantly, we do not think these tariff talks and trade threats will cause a major disruption in the global economy. As we mentioned after the surprise Brexit vote and the following market selloff, the people who negotiate these deals understand their economic history and the importance of trade to economic wellbeing. Though markets may go through bouts of panic, we expect global trade to continue largely unabated and economic fundamentals to remain solid.
This article was written by Gary Stringer, CIO, Kim Escue, Senior Portfolio Manager, and Chad Keller, COO and CCO at Stringer Asset Management, a participant in the ETF Strategist Channel.
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