Author Archives: Dennis Harding

January – Trade Outlook

Trade in 2018: where politics and economics collide

The difficult environment for trade in value terms is likely to continue during 2018. Although oil prices are likely to rise, and inflationary pressures set to build in Europe and the UK, this will still be insufficient to create a strong increase in the value of world trade during the course of the coming year. We expect world trade value growth to be flat or negative and for many countries to follow this pattern. (Figure 1). The only exception is the UAE which may show substantially increased trade in 2018 on the back of the oil price recovery and a diversion of trade from riskier countries in the region.

Figure 1:          World trade growth by country, 2017-18 (%) and CAGR, 2017-21 (%)

NOTE:              Projections are based on long and short term momentum and do not make assumptions about GDP, freight costs, or any future trade negotiations

This picture of trade is very much more negative than that of the World Trade Organisation (WTO). There are two reasons for this. First, the WTO bases its forecasts on volumes rather than values. Thus, while we may see volumes of trade increase, its real value may not increase – either because of inflationary pressures or because the US dollar remains comparatively weak. Second, the WTO picture is often over-optimistic, and its estimates of global volume growth of 3.6% in 2017 made last July already look awry in the light of flat trade towards the end of the year. The WTO is itself forecasting slower trade growth globally in 2018 of 3.2% and the value projections show a similar decline on last year (Figure 2).

Figure 2:          World Trade and WTI spot price (average monthly), January 2010-Dec 2017

 World trade values and oil prices have slowed markedly since mid 2014. Since the correlation between the value of global trade and the WTI spot price is high at 78%, this is unsurprising. Oil prices started to recover at the end of 2017 and this may help the value of trade to grow during the course of the year. However, even during periods of sustained growth in oil prices, for example in early 2015, the long-term effect on trade values has not been affected.

Risks to the forecast

In 2017 we predicted that the year would be dominated by the politics of trade. Our views have not changed and 2018 is likely to be a year where trade is caught in the cross-fire between isolationism in the US, Brexit in the UK and multilateralism in the rest of the world. There is no sign that multi-lateral agreements, say the Trans-Pacific Partnership (minus the US) will falter and similarly Brexit has offered an opportunity for Europe to reform and to tighten its single market over time.

Yet there is little doubt that the weaponised language around trade that was the feature of 2017 will abate. The US will threaten stronger tariff regimes, particularly against China, but the risks of an all-out Trade War are low given the relative weakness of the US compared to China in trade terms and, more importantly, the fact that Russia and China agreed closer ties at the start of the year which will strengthen China’s “one belt one road” initiative and create closer integration in the Eurasia region.

The Middle East’s trade during the course of the year will be driven by two things: first, the oil price itself and, perhaps more significantly, tensions in the region. If the oil price stabilises at a higher level, say $60 per barrel during the course of the year, then this helps to restore the economic health of some of the oil exporters in the region, and particularly Saudi Arabia. However, any economic recovery will not mask the tensions in the region which have spilled over into trade: the blockade of Qatar shows no signs of ending and the UAE is benefitting from that. Egypt, paradoxically perhaps, is part of the blockade but alongside that support is also increasingly trading with Russia and Iran, as is Oman. The geopolitical tensions have the potential to affect both the oil price and the nature and security of trade through the region.

Finally, the UK’s trade picture over the next five years will be defined by the discussions that take place between the European Union and the UK’s negotiators during the course of the year. The UK’s economy is one of the more open of the G20 – the value of total trade (exports plus imports) is 58% of GDP.

Figure 3:          UK trade growth rates compared, 2011-16 and 2017-21 (projected),(CAGR,%)

Figure 3 focuses just on goods trade, which is 52% of the value of the UK’s total trade. Based on momentum projections which assume nothing about the nature of the negotiations, the picture is one of weak growth in trade values beyond 2017. Ironically, this may be because of sterling’s current strength, which makes exported goods cheaper in US dollar terms. But although the growth is strong in some sectors, the growth in the largest export sectors (automotives, electrical equipment, machinery and components and pharmaceuticals for example) is projected to be negative over the next five years.

Overall then, it is likely to be the politics that determine the downside, or indeed the upside, risks of this forecast. That makes the world, and the trade world in particular, an uncertain, potentially dangerous but interesting place.

 

December – Trade Outlook

MERRY IMPORTS AND EXPORTS 2017

At this time of year, it seems appropriate to wish you a Merry Christmas and a Happy New Year for 2018. But of course, dealing with Import and Export data, we just had to make up a card with selected seasonal figures reflecting some key exports from the top trading countries. Fireworks, Whisky and Wine are seasonal best-sellers, but Maple Syrup and Sweet Biscuits and Breads have been surprisingly popular, whilst the diversity of the German economy is reflected by the unexpectedly huge amount of funfair and table games they export.

Cheers!

November – Trade Outlook

A Pivotal Meeting – A Closer look at US – China Trade

On the verge of their summit, Presidents Xi and Trump could not be in more different places. President Xi has become the champion of globalisation and a world order at which China is centre-stage. The National Congress of the Communist Party of China confirmed his leadership of the country for at least the next five years with no clear successor. By incorporating Xi’s philosophy to make China great into its constitution, the Party elevated Xi to the same status as Mao Tse-tung and Deng Xiaoping. China’s One Belt One Road policy, alongside its promotion of trade at the WTO means it is has become the focus, not just for trade between emerging economies in the Southern hemisphere, but also a pivot around which trade power is shifting from West to East.

In contrast, Donald Trump travels to Asia on the tide of economic nationalism and isolationism. His anti-trade rhetoric is, at best, damaging many of the multi-lateral structures that have been central to the way in which globalisation, such as the North America Free Trade Area, the EU, and, most recently, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). Trump’s discussion with Xi will focus on reducing, even eliminating, China’s trade surplus with the US (Figure 1). This trade surplus is nothing new, but has been widening since the mid 1990’s when China’s market first started to open up; Microsoft, for example, moved into the market around 1996. In 1996 China’s imports from the US were 27% of their exports to the US. This peaked at 35% in 2013, but the gap has been narrowing since and now stands at 31%.

Figure 1:          Value of Chinese Trade with the US ($US bn), 1996-2018 (2017-18 forecast)

Source:            Equant Analytics, 2017

Indeed, it is possible to argue that Chinese exports to the US are a function of the globalisation of US electronics companies. Figure 2 shows the top five Chinese export sectors to the US in 2016 and projected for 2017. The first two, electrical machinery and equipment and components and machinery include mobile phones, washing machines, semiconductors and computers. Clearly, they inherently contain intellectual property which is a key focus for the discussions between the two leaders. These sectors also dwarf trade between the two countries in other sectors which actually might reflect more closely a pattern of trade between an emerging economy and a developed one: furniture, toys and clothing. Top US exports to China include the catch-all “Commodities Not Elsewhere Specified” which proxies well for oil and arms trade, and aerospace. Most of the top export sectors from the US to China show slight declines between 2016 and 2017 except aerospace.

Figure 2:          Value of China’s top five export and import sectors with the US (US$ bn), 2016 & 2017

Source:            Equant Analytics 2017

President Trump’s mantra since his election has been “America first” and most recently his actions in relation to Canada’s Bombardier were directly to support Boeing. In his discussions with President Xi, therefore, it is likely that aerospace could also be a key part of the trade negotiations (Figure 3). For example, exports of large aircraft were worth US$ 124 billion in 2016 and exports of large and smaller helicopters are projected to grow at 24.6% and 11.1% between 2017 and 2018.

Figure 3:          Chinese imports of aircraft from the US, 2016-17 and 2017-18 compared (year on year change, %)

Source:            Equant Analytics, 2017

In spite of all this, between China and the US it is clear who is in the weaker position. Perhaps because the US is realising that the period of globalisation up to around 2014 tilted trade, indeed economic power, towards emerging economies like South Korea and China, President Trump is now fighting a rear-guard action to maintain the central role in global trade that US companies have historically played. Using China’s trade in arms and ammunition as an example; China’s exports have grown at an annualised rate of 6% since 2009 while its imports have shrunk by 20% annually. Its imports are now just 2.5% of its exports in this sector. This tells its own story: while the US assumed it had global trade power leadership, it can no longer take this for granted. Globalisation and trade power is pivoting towards China. Trump’s meeting with Xi may merely confirm this as inevitable.

October – Trade Outlook

The aftermath of Germany’s election: how does trade help?

Germany’s election at the end of September was predicted to be dull. Angela Merkel was to be re-elected, possibly on a larger share of the vote, and the country would be able to focus on defining its role at the heart of a re-generated Europe. In the end, the Alternative für Deutschland won 12.6% of the share of the vote – the largest share of parliamentary representation of any extreme right wing party since the World War II. Germany’s parliament is now divided between six parties and the centre right CDU-CSU and the centre left SPD parties have been given a warning by voters that “business as usual” is not enough. Their votes shrank to 36% and just over 20% respectively.

Inevitably there will be a period of domestic uncertainty. The SPD has already stated that it would not be part of a new Grand Coalition. This leaves Angela Merkel the complex task of forming a “Jamaica” coalition of the CDU-CSU, the liberal FDP and the Greens (so called because the colours are those of the Jamaican flag). This will not be an easy process. There are rumours, following the departure of Wolfgang Schäuble from the Finance Ministry that this post is being left open as a negotiating tool for Angela Merkel as she starts discussions with the other two parties.

However, it is possible that trade offers a solution to at least one of Germany’s persistent problems: under-investment in some of the infrastructures in the country that are weak and that may have contributed to the sense of social as well as economic exclusion that the voters in the eastern regions exhibited. In 2016 Germany posted its largest trade surplus ever at some USD 230 bn – 15% higher than China’s at USD 200 bn (Figure 1). Germany’s budget surplus, to which the trade surplus contributes, was EUR 18.6 bn in the first half of 2017. Much of this surplus has been achieved through its adherence to stringent, and well-documented, austerity measures. But even in Germany economists and politicians alike are beginning to worry that the surplus is unsustainable: the broadband and road infrastructures in the country are under-invested, for example, and some fiscal stimulus would further boost the European economy.

Figure 1:          Germany’s trade with the world, selected years, 1996-2016 (USD m)

Source:            Equant Analytics, 2017

Germany is to some extent a victim of its own success. The Hartz reforms in the 1990s and aggressive austerity in the wake of reunification provided the country with a more flexible labour market alongside lower government borrowing than any of its European counterparts. But Germany has also been hugely successful in its main economic focus – trade. Its goods are competitive abroad and its supply chains extend throughout Europe and beyond.

Yet this causes political problems in terms of its foreign relations. Throughout his presidency so far Donald Trump has branded Germany and its surplus as “bad, very bad” in his tweets. He has attributed Germany’s success in exporting to the US as a product of the under-valuation of the Euro that has enabled Germany’s manufacturers to price their goods advantageously in overseas market undermining, for example, American manufacturers. The size of Germany’s trade surplus with the US, and the fact that it has widened since the introduction of the euro (in 1999) is a function both of this and of the fact that Germany’s products compete on quality as well (Figure 2).

Figure 2:          Germany’s trade with the United States, 1996-2016 (USD m)

Source:            Equant Analytics, 2017

But while Germany does export successfully to the biggest countries in the world, among them China and the US, it also operates its supply chains across Europe. In other words, the budget surplus may create distortions, particularly in weaker European countries, but it also helps fuel growth in those very same countries. The automotive sector is the best example: Figure 3 shows the projected annualised growth of German cars and components for its top five import and export partners. It shows how car and component imports from the likes of the Czech Republic and Hungary are predicted to grow to 2020 more quickly than from the US, France or Spain while exports of cars and components from Germany are growing at a slower or similar pace.

 

Germany’s top five import partners

Germany’s top five export partners

Czech Republic

5.1%

United States

2.9%

Spain

3.2%

United Kingdom

4.3%

France

-1.1%

China

1.9%

United States

3.0%

France

-0.5%

Hungary

5.4%

Spain

1.1%


Figure 3:          Projected annual growth of Germany’s top five import and export partners in the automotive sector, 2016-2020

Source:            Equant Analytics, 2017

Germany’s surpluses tell the story of its success in adjusting to two major shocks: its reunification and the global financial crisis. The process has been tough on many Germans, particularly those in the eastern regions and this was reflected in the recent election result. However, Germany is not about to become less domestically stable. It may enter a period of self-reflection, and this is not necessarily a good thing while geopolitical uncertainties are rife. But the AfD and die Linke (the extremist left party) account for just over 21% of the vote between them. Populism in Germany, as with other countries in Europe, has been driven by a sense of economic and social exclusion, largely in the eastern regions of Germany and catalysed by Angela Merkel’s controversial response to the migrant crisis in 2015. To some extent it would be possible to argue that the rise of extremism, because it is so predominantly in the east, is a function of the last nearly 30 years since reunification. Where in other countries populism is a function of exclusion from globalisation, in Germany it is driven by a sense of exclusion from Germany’s second “economic miracle”.

Angela Merkel will realise that this domestic uncertainty is dangerous. Using the surplus to focus on some of the problems of under-investment, including suitable structures to integrate the large numbers of immigrants, will undoubtedly help. It is unlikely that the trade surplus will diminish any time soon – Germany is too competitive for that. But with the trade surplus comes influence, particularly in foreign policy terms. In the run up to the election, Germany’s voters seemed very aware of the responsibility that they had in providing the stability at the heart of Europe in what seem to be turbulent times. The Chancellor’s challenge now is to convert that responsibility into policy.

 

“The Weaponization of Trade: the Great Unbalancing of Politics and Economics” 
Rebecca Harding and Jack Harding.

October 25th 2017 * 170pp paperback *£9.99
ISBN 978-1-907994-72-2

PRE-PUBLICATION ORDERS, WITH FREE UK P+P GO TO: http://londonpublishingpartnership.co.uk/wot-advance-purchase/

 

 

 

 

 

 

 

 

October – Trade Outlook

The aftermath of Germany’s election: how does trade help?

Germany’s election at the end of September was predicted to be dull. Angela Merkel was to be re-elected, possibly on a larger share of the vote, and the country would be able to focus on defining its role at the heart of a re-generated Europe. In the end, the Alternative für Deutschland won 12.6% of the share of the vote – the largest share of parliamentary representation of any extreme right wing party since the World War II. Germany’s parliament is now divided between six parties and the centre right CDU-CSU and the centre left SPD parties have been given a warning by voters that “business as usual” is not enough. Their votes shrank to 36% and just over 20% respectively.

Inevitably there will be a period of domestic uncertainty. The SPD has already stated that it would not be part of a new Grand Coalition. This leaves Angela Merkel the complex task of forming a “Jamaica” coalition of the CDU-CSU, the liberal FDP and the Greens (so called because the colours are those of the Jamaican flag). This will not be an easy process. There are rumours, following the departure of Wolfgang Schäuble from the Finance Ministry that this post is being left open as a negotiating tool for Angela Merkel as she starts discussions with the other two parties.

However, it is possible that trade offers a solution to at least one of Germany’s persistent problems: under-investment in some of the infrastructures in the country that are weak and that may have contributed to the sense of social as well as economic exclusion that the voters in the eastern regions exhibited. In 2016 Germany posted its largest trade surplus ever at some US$300bn – nearly a third higher than China’s at US$200bn (Figure1). Germany’s budget surplus, to which the trade surplus contributes, was €18.6bn in the first half of 2017. Much of this surplus has been achieved through its adherence to stringent, and well-documented, austerity measures. But even in Germany economists and politicians alike are beginning to worry that the surplus is unsustainable: the broadband and road infrastructures in the country are under-invested, for example, and some fiscal stimulus would further boost the European economy.

 

Figure 1:          Germany’s trade with the world, 1996-2016 (US$m)

Source:            Equant Analytics, 2017

Germany is to some extent a victim of its own success. The Hartz reforms in the 1990s and aggressive austerity in the wake of reunification provided the country with a more flexible labour market alongside lower government borrowing than any of its European counterparts. But Germany has also been hugely successful in its main economic focus – trade. Its goods are competitive abroad and its supply chains extend throughout Europe and beyond.

Yet this causes political problems in terms of its foreign relations. Throughout his presidency so far Donald Trump has branded Germany and its surplus as “bad, very bad” in his tweets. He has attributed Germany’s success in exporting to the US as a product of the under-valuation of the Euro that has enabled Germany’s manufacturers to price their goods advantageously in overseas market undermining, for example, American manufacturers. The size of Germany’s trade surplus with the US, and the fact that it has widened since the introduction of the euro is a function both of this and of the fact that Germany’s products compete on quality as well (Figure 2).

 

Figure 2:          Germany’s trade with the United States, 1996-2016 (US$m)

Source:            Equant Analytics, 2017

But while Germany does export successfully to the biggest countries in the world, among them China and the US, it also operates its supply chains across Europe. In other words, the budget surplus may create distortions, particularly in weaker European countries, but it also helps fuel growth in those very same countries. The automotive sector is the best example: Figure 3 shows the projected annualised growth of German cars and components for its top five import and export partners. It shows how car and component imports from the likes of the Czech Republic and Hungary are predicted to grow to 2020 more quickly than from the US, France or Spain while exports of cars and components from Germany are growing at a slower or similar pace.

Germany’s top five import partners

5.1%    Czech Republic

3.2%    Spain

-1.1%   France

3.0%    USA

5.4%    Hungary

Germany’s top five export partners

2.9%    USA

4.3%    UK

1.9%    China

-0.5%   France

1.1%    Spain

Figure 3:          Projected annual growth of Germany’s top five import and export partners in the automotive sector, 2016-2020

Source:            Equant Analytics, 2017

Germany’s surpluses tell the story of its success in adjusting to two major shocks: its reunification and the global financial crisis. The process has been tough on many Germans, particularly those in the eastern regions and this was reflected in the recent election result. However, Germany is not about to become less domestically stable. It may enter a period of self-reflection, and this is not necessarily a good thing while geopolitical uncertainties are rife. But the AfD and die Linke (the extremist left party) account for just over 21% of the vote between them. Populism in Germany, as with other countries in Europe, has been driven by a sense of economic and social exclusion, largely in the eastern regions of Germany and catalysed by Angela Merkel’s controversial response to the migrant crisis in 2015. To some extent it would be possible to argue that the rise of extremism, because it is so predominantly in the east, is a function of the last nearly 30 years since reunification. Where in other countries populism is a function of exclusion from globalisation, in Germany it is driven by a sense of exclusion from Germany’s second “economic miracle”.

Angela Merkel will realise that this domestic uncertainty is dangerous. Using the surplus to focus on some of the problems of under-investment, including suitable structures to integrate the large numbers of immigrants, will undoubtedly help. It is unlikely that the trade surplus will diminish any time soon – Germany is too competitive for that. But with the trade surplus comes influence, particularly in foreign policy terms. In the run up to the election, Germany’s voters seemed very aware of the responsibility that they had in providing the stability at the heart of Europe in what seem to be turbulent times. The Chancellor’s challenge now is to convert that responsibility into policy.

 

“The Weaponization of Trade: the Great Unbalancing of Politics and Economics” 
Rebecca Harding and Jack Harding.

October 25th 2017 * 170pp paperback *£9.99
ISBN 978-1-907994-72-2

PRE-PUBLICATION ORDERS, WITH FREE UK P+P GO TO: http://londonpublishingpartnership.co.uk/wot-advance-purchase/

 

 

 

September – Trade Outlook

Trade Wars: Why the US must think before it acts

There are times when it is helpful for a nation’s leaders to think carefully about the consequences of their statements. North Korea tested an H-bomb capable of being fitted to an Inter-continental ballistic missile on the 3rd September. Without any exaggeration, this is a momentous time for the world’s security. North Korea is playing with both China’s will to intervene substantively and the US’s will unilaterally to start a major war on the Korean peninsula. China is keen to avoid any action that will result in a stream of refugees coming across the border from North Korea. The US, despite statements from President Trump that any aggression by North Korea will be met with “fire and fury” will be reluctant to avoid full-scale conflict because of the risk of retaliation.

So this has become a Trade War. On the 3rd September, President Trump tweeted, “The United States is considering in addition to other options, stopping all trade with any other country doing business with North Korea.” This is a bold statement targeted, of course, at China which accounts for around 85% of North Korea’s trade value. Since Steve Bannon’s statement in August 2017 that the US is effectively fighting a trade war with China, the statement could be interpreted as simply a desire to take on China’s relationship with North Korea and its trade surplus with the US at the same time.

President Trump should be wary what he wishes for. Apart from China, North Korea’s top ten trade partners (imports and exports) include, Russia, India, the Philippines, Singapore, Chile, Germany, Hong Kong, Indonesia, Switzerland and Mexico. China itself exports around $US 2.8bn into North Korea and other countries are substantially smaller. Russia, for example, imports just $US 68m and India some $US 54m. For many other countries the amounts are in the low millions. However, if the President’s words are to be taken at face value, then all of these countries should be included. Taken together and including China, these countries accounted for nearly 48% of the US’s total trade of $US 3.9 trillion in 2016 (Figure 1).

 

 

Figure 1:          Value of US trade for North Korea’s top 22 trading partners ($US bn)

Source:            Equant Analytics, 2017

Of greater interest is the sectors that would be affected by trading with countries that “do business” with North Korea. Mexico is a major player in the US’s electronics, automotive and machinery and components sectors and, of course, in oil. But its trade with North Korea is small, as is the trade of many other countries with North Korea. It makes sense to look just at China and how its key sectors are interwoven into strategic sectors for the US (Figure 2).

This chart in itself depicts the frustration that the US has with China’s dominance of its trade. US supply chains, are irretrievably interwoven with China. For example, many of the imports from China in Electrical Equipment and Machinery are intermediate manufactured goods, nevertheless, these goods are part of other supply chains, for example in automotives or aerospace.

 

Figure 2:          US trade with China in non-oil strategic sectors ($US million 2016)

Source:            Equant Analytics, 2017

 Quite apart from any impact that the decision to stop trading with all those nations that have trade with North Korea, there is a sense in which any sanctions, or sanctions-like move, is counter-productive. North Korea, it seems, already has nuclear launch capacity and this is not a new phenomenon. The trend started in 2008 in nuclear-related dual-use goods and, during the process of Kim Jong Un’s accession, imports of propulsion equipment started to increase (Figure 3).

 

Figure 3           Value of North Korea’s trade in selected dual-use goods, 1996-1997, $USm)

Source             Equant Analytics, 2017

There are already signs that North Korea is winning the deterrence war. Their calculation is that both China and the US are “paper tigers”: they can bluster, but in the end there is little that they can materially do. There are no clear diplomatic or military answers – all have unimaginable consequences and are therefore likely to be avoided if possible. Accepting North Korea as a nuclear power will be a tough pill for the US to swallow and again is unlikely without some form of diplomatic ‘victory.’

But what is absolutely clear is that economics solutions may well be equally as unimaginable. Loose words in military terms may increase the risk of miscalculation and war as a result. Equal discipline should be applied to the use of language in economic and trade terms. Ending trade with countries who do business with North Korea is impractical and would be an act of assured economic destruction for the US itself. Maybe this is the ultimate deterrence against a trade war with China as well; weaponizing trade cannot be the way forward.

“The Weaponization of Trade: the great unbalancing of politics and economics,” by Rebecca Harding and Jack Harding will be published on the 25th October by London Publishing Partnership. Click here to find out more and to pre-order a copy.

August – Trade Outlook

What does a US trade war with Russia mean?

Just as the world thought it was safe to go on holiday, at the beginning of August President Trump signed legislation to place severe sanctions on Russia because of their alleged interference in the US Presidential elections. At the same time, he declared the legislation to be “seriously flawed” and “unconstitutional.” Russia’s Prime Minister, Dmitry Medvedev responded on Facebook, that the action was, “the declaration of a fully-fledged trade war” against Russia and would damage US-Russian relations for years to come. More than this, he also stated, “The US establishment fully outwitted Trump… the Trump administration has shown its total weakness by handing over executive power in the ‘most humiliating way.’ ”[i] President Trump’s response? To tweet “Our relationship with Russia is at an all-time and very dangerous low. You can thank Congress, the same people that can’t even give us HCare!”[ii]

Escalation of tension

The politics of the escalation of tensions between the US and Russia clearly matter, but do the economics? From a US perspective it may appear not. Russia is not a top-ten import or export partner of the country. Its US$ 32bn of trade is less than 1% of the total value of US trade of US$ 3.9tn and has been falling since sanctions against Russia were first imposed in 2014 (Figure 1). Some of this may also be due to the collapse in oil prices between 2014 and 2015. A momentum-based projection into 2017 suggests that the increase in both imports and exports between 2015 and 2016 is unlikely to continue.

 

The trade between US and Russia between 1996 and 2017

Figure 1: US trade with Russia, 1996-2017, US$ bn (2017 projection)
Source: Equant Analytics 2017

What does the US Export to Russia?

US exports to Russia are predominantly in aircraft and aerospace (Figure 2). It accounted for US$ 3.2bn in 2016 and this was nearly double the second largest export sector, machinery and components, which includes computers and data storage. In every year since 2011, and in spite of sanctions against Russia, US exports in aircraft have grown by just over one third. This is admittedly from a relatively small base but it does demonstrate the fact that there is activity in what is both a highly politically sensitive and strategic sector for the US. On the basis of a momentum projection into 2017, it might be expected that exports would grow by a further 8%. This represents a lost value of around US$ 256m, which is small in the grand scheme of US exports. Although it represents a sector-specific loss, Russia is a relatively small export destination and does not feature in the US’s top ten biggest market in this sector.

 

the change in US exports to russia in different sectors

Figure 2: US top five largest exports to Russia, Compound Annualised Growth Rate, 2011-2016 and year-on-year projected growth 2016-17 (%)
Source: Equant Analytics, 2017

What does the US Import from Russia?

Just over 52% of the US’s imports from Russia are in oil and gas. It is the US’s fifth largest import partner in this sector but the value of US$ 10.6bn is dwarfed by Canada at over US$ 72bn. Russian oil and gas imports represent just over 4% of US total oil and gas imports and have been falling over the past five years (Figure 3). In fact, the only area to show any substantial increase is fertiliser imports which are projected to grow by 7.9% between 2016 and 2017 but from a low base and a period of five years during which they have declined annually by around 1% each year.

 

change in us imports from russia

Figure 3: US imports from Russia, Compound Annualised Growth Rate, 2011-2016 and year-on-year projected growth 2016-17 (%)
Source: Equant Analytics, 2017

Figure 3 illustrates two things: the US has imposed sanctions on Russian imports progressively over the past five years and the downward trend is likely to continue. But second, and perhaps more importantly, the substantial drop in oil and gas trade with Russia reflects the US growing independence in this sector as its own exports increase and as shale gas production becomes increasingly efficient.

What are the consequences?

So what does this tell us about the importance of a trade war between the two countries? From a US perspective, Russia is another country with whom it has a trade deficit, albeit proportionately small at US$ 6bn in 2016. It has been reducing its imports from Russia and the country is not a major trading partner. In terms of the economics of its own trade, it loses relatively little and is making a strong political point. But equally, the US is not a top ten importer into Russia and is only its sixth largest export destination. Even though this has been driven in the last few years by sanctions and dropping oil prices, it seems that the relationship is economically less important than it is politically.

It is the politics that are the key point here. When leaders of two major countries start declaring a “trade war,” they are raising the stakes. Trade becomes political rather than economic and this is dangerous.