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Given the spate of news about international trade lately, Americans might be surprised to learn that the U.S. isn’t very dependent on it. Indeed, looking at trade as a percentage of gross domestic product – a metric economists sometimes call the “openness index” – the U.S. is one of the least trade-oriented nations in the world.

In 2022, the U.S. trade-to-GDP ratio was 27%, according to the World Bank. That means the total value of U.S. imports and exports of goods and services combined equaled 27% of the country’s GDP. That’s far below the global average of 63%.

In fact, of the 193 countries examined by the World Bank, only two were less involved in international trade than the U.S. Those were Nigeria, at 26%, and Sudan at 3%. Most world economic powers scored considerably higher, with Germany at 100%, France at 73%, the U.K. at 70%, India at 49%, and China at 38%. Who knew?

Making sense of trade-to-GDP ratios

What do all these numbers mean? It’s tricky because many factors can influence a trade-to-GDP ratio. For example, a country can have a low ratio in large part because it has high tariffs or other protectionist policies; Nigeria, Ethiopia and Pakistan come to mind in this regard. Others, such as Turkmenistan, have low ratios because they’re geographically remote.

A low trade-to-GDP ratio may also arise from the fact that a country is large, wealthy and developed, with a diversified economy that can provide most of the goods and services it needs domestically. We think this explains a lot about the U.S.’s extremely low ratio.

On the other hand, extremely high ratios of well over 300% are found in a few tiny countries due to necessity, location or both. Countries such as Luxembourg and the microstate of San Marino are both located in high-trade Europe and are too small to survive without extensive trade.

Meanwhile, well-positioned locations such as Singapore and Hong Kong have historically thrived as true trade entrepôts. And Djibouti, in East Africa, is increasingly performing a similar function.

It’s also important to look at the trajectory of trade-to-GDP ratios over time. As for the U.S., the ratio rose from 9% in 1960 to just under 11% in 1970 to 25% by 2000.

Since then, the ratio has ranged from 22% in 2002 to 31% in 2012 – remaining low compared to almost every other country. The U.S. has registered a relatively low trade-to-GDP ratio throughout its history.

How the US got here: A roller-coaster history of American trade policy

The liberal, open institutional architecture that shapes today’s global economy was largely erected by the U.S. during World War II and shortly afterward. From then until the steep rise of trade-to-GDP ratios from 1970 to 2000, it was easy for U.S. political leaders to support engagement in relatively free trade.

After World War II, a regime of open trade and fixed exchange rates – associated with the Bretton Woods Agreement establishing both the International Monetary Fund and the World Bank in 1944, and the General Agreement on Tariffs and Trade in 1947 – succeeded in promoting trade and growth. Those policies also stabilized currencies and balance-of-payments ledgers. Devastated war economies and newly industrializing nations entered and in time helped fashion a new world economic order underwritten and overseen by the U.S.

During the 1950s and 1960s, the U.S. inevitably lost some of its edge in agricultural and manufacturing markets as overseas economies rebounded. But its low trade-to-GDP ratio and ideological commitment to anti-communist allies mitigated domestic political unrest around trade issues. Capital controls and a series of legislative and diplomatic fixes limited international trade’s role in U.S. economic dislocations.

Things changed dramatically in the 1970s, as indicated by the sizable increases in trade-to-GDP ratios for the U.S. and the world as a whole during that period. One key factor was the collapse of state-centered financial regulation. That opened the world to increasingly fluid goods and capital transfers as encouraged under world trade agreements. This was also the period when cheaper goods from Japan and Taiwan began taking hold in the U.S..

Bigger challenges to the stability of postwar working-class livelihoods arose from productivity-enhancing innovations in production, transportation and communications. Two further far-reaching factors were the opening of China’s economy beginning in 1979, and the demise of the Soviet bloc between 1989 and 1991.

Two key free-trade developments took place in the 1990s. The North American Free Trade Agreement of 1993 opened U.S. borders on the north and south to unprecedented transfers of capital, trade and migration. Then, in 2001, China gained “permanent normal trade relations status” with the U.S., thus smoothing its entry into the World Trade Organization. In both cases, the economic dynamism unleashed by the moves was accompanied by major job losses in American manufacturing.

As the U.S. trade-to-GDP ratio climbed steadily from 20% in 1990 to nearly 30% by 2010, trade became an increasingly high-profile issue in U.S. politics. Critics were especially worried by the prospect of trade hurting American jobs and living standards.

After NAFTA’s passage and China’s entry into the WTO, many Americans and interest groups representing them soured on “globalization.” That globalization was embodied in the long-open trade regime put into place after World War II.

So it’s no wonder that Donald Trump was elected president in 2016 while calling for stiff new tariffs on China and a border wall against Mexico. And President Joe Biden hasn’t backed off significantly from Trump’s protectionist trade policies.

U.S. policymakers are unlikely to move further toward trade dependence anytime soon, much less toward any new free-trade agreements. Rather, we’re likely to hear skepticism from both Biden and Trump when the subject of open trade comes up.

Ironically, the open-trade world the U.S. did so much to create seems to depend on Americans limiting their participation in it.

About the Author:

Peter A. Coclanis, Professor of History; Director of the Global Research Institute, University of North Carolina at Chapel Hill and Leon Fink, Professor Emeritus of History, University of Illinois Chicago

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Development finance is the invisible glue that connects public and private financing for projects that have social, economic and environmental outcomes. These include improved infrastructure, better waste management and sanitation, financial inclusion, clean energy and sustainable agriculture.

The goal of development finance is to create positive social, economic or environmental outcomes through investments made by financial institutions such as banks, insurance companies and pension funds in addition to contributions made by development finance institutions, multilateral partners and NGOs. These investments generally generate spillovers into the development agendas of African countries. The contribution of NGOs such as philanthropic and civil society organisations may not be financial. Their contributions come through advocacy, activism, community engagement, research or social services. Development finance experts Latif Alhassan and Bomikazi Zeka explain how it works.

Why is it important?

Development finance addresses the failures or limitations of traditional financial institutions such as banks. It does this by allocating resources to social needs such as education, health, infrastructure and energy.

The essence of development finance is to mobilise both financial and non-financial resources through partnership among development funders and stakeholders. The aim is to achieve development outcomes that would not have happened without their intervention or contribution.

The Infrastructure Consortium for Africa is an example of this kind of partnership. It is made up of multilateral partners and development finance institutions. In 2019/2020 it mobilised and invested US$83 billion for the development of energy, water, transport and sanitation infrastructure.

Development finance can also draw in additional funding from private entities to finance projects with socially and environmentally desirable outcomes. Traditional financial institutions such as banks don’t have the incentives to do this. But a network of development funders and stakeholders can help raise funding. It can also draw on different kinds of expertise.

What’s the difference between development finance and corporate finance?

Corporate finance emphasises the principles of risk and return. The funding of any economic activity largely depends on how risky the activity is and its ability to generate revenue. Institutions like banks, asset managers and insurance companies make investment decisions on the basis of risk versus return. This makes it harder to fund projects and activities with sustainable development outcomes because the risks are often high. And revenue streams aren’t always assured. An example would be providing finance for small businesses.

Development finance considers other factors alongside risk and return. Social impact may be one. Because it applies a wider lens, other key players are more involved. They include:

• governments at national, provisional and local level
• multilateral partners (such as donor agencies and climate funds)
• development finance institutions like the World Bank Group, African Development Bank, Afrexim Bank, Industrial Development Corporation, Development Bank of Southern Africa and Development Bank of Nigeria
• NGOs (philanthropic organisations and civil society organisations).

Financial institutions, such as banks, insurance companies, investment companies and pension funds, do also get involved sometimes. But this is usually through the use of responsible investment strategies. These incorporate environmental, social and governance factors into investment decisions.

Development funders provide more than just debt and equity capital. They provide concessionary loans, venture philanthropy, project finance, grants, sustainable financial instruments (such as green bonds and other forms of responsible investing) and advocacy or activism engagements.

Development finance institutions are intentional about promoting sustainable development. Instruments such as venture and patient capital recognise that small businesses face funding and cash flow challenges. They allow for more flexibility in lending arrangements.

How do countries access it? Is it harder for African countries?

In Africa, development projects have traditionally been funded by national governments through annual budgetary allocations. In some cases national development banks have been set up.

The problem with relying on national budgets is that it places a lot of pressure on the taxpayer as a source of revenue.

Huge financial commitments are required for countries on the continent to achieve the development goals they’ve set for themselves. For example, the African Union plans to transform Africa into a global powerhouse by the year 2063. For its part, the United Nations has an agenda for all countries to carry out a sustainable development plan by 2030.

The annual estimated funding requirements to achieve these plans is US$200 million. The financing gap for the African context until 2030 is US$1.6 trillion.

Collaboration with development funders and stakeholders is needed to achieve this.

What three things stand out as windfalls from development finance?

Firstly, stimulating economic activities by financing the initiatives of vulnerable or marginalised groups.

For example, women-owned businesses find it difficult to access funding. Development finance institutions are well placed to step in. Examples include the Development Bank of Ghana, Development Bank of Namibia, Development Bank of Mauritius and Eswatini Development Finance Corporation. They can help local businesses to keep afloat during tough times. For example, the Small Enterprise Finance Agency was set up in South Africa to help businesses affected by the rioting in 2021.

Secondly, assisting with infrastructure development. Projects can be funded that align with the needs of communities, private stakeholders and the public sector.

Thirdly, financing global challenges such as the just energy transition and the effects of climate change. For instance, development finance institutions have spearheaded the funding of climate mitigation and adaptation measures, through the provision of US$120 billion in 2012. This went up to US$200 billion by 2018.

About the Author:

Abdul Latif Alhassan, Professor of Development Finance & Insurance, University of Cape Town and Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.