Evan Soltas
May 12, 2012

Opening Up

When the economics discussion examines trade, most often it is in net terms -- looking at the trade balance. Of course that's important, but what it means is that a very important point gets overlooked: in 2011, the American economy was the most open it has been on record.

When economists say "open," we're looking at the trade-to-GDP ratio, the sum of real exports and real imports divided by real GDP. This ratio can't go below zero, but for some small countries -- Singapore, for example -- it can be well over 100 percent, that is, the country imports and exports far more than it produces, as it acts as a trade hub. While the U.S. is far from that -- we are too large of an economy, with too great a domestic market for goods and services -- what is remarkable is how effectively closed of an economy we were for most of the 20th century, and the remarkable shift to openness that has occurred and the speed with which that transformation is now occurring.

The global economy is undergoing a similar transformation, write Bank of England economists Mark Dean and Maria Sebastia-Barriel -- the global trade-to-GDP ratio has also risen substantially, from 14 percent in 1970 to 29 percent in 2002. The numbers don't really tell the full story of what this implies for economic change in the real world; the economic integration of the globe is really one of the most important stories of the last and the current centuries.

What's going on, Dean and Sebastia-Barriel say, is a fall in transport costs and tariffs, and also changing consumption needs per Engel's Law which are more easily served by non-domestic firms than more basic needs, such as food and shelter, and a relatively quicker rate of productivity growth in the tradeable goods sector (Can that be explained by Porter externalities?).

I think this is also about the "rise of the rest" in terms of producers and consumers. During the earlier half of this data, the U.S. domestic market, both for production and consumption, towered above anything else -- it was almost self-sufficient because no foreign firms participated at the sort of scale needed for mass consumption in the U.S. because their domestic markets were not large enough to support the emergence of firms which could produce at such scales. Now that foreign economies have grown, they can support larger firms, and the U.S. domestic market is relatively a smaller fraction of the global economy, and with larger firms, there is more entrance and exit of goods and services. This is both because the outside markets want American goods and because they find it easier to sell into the U.S.