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.