Globalization or fragmentation? How international trade data is biased

Container ships at the Port of Felixstowe in Felixstowe, England on January 28, 2021. (Peter Cziborra / Reuters)

The story that international trade is growing misses some key points.

Fact: The role in the global economy of international trade – specifically national cross-border trade – has tended to increase over time. The consensus interpretation of this fact: The growth of international trade demonstrates a general tendency for economic activity to become more spatially integrated over time. According to this interpretation, the growing interdependence of different geographic areas over time demonstrates the growing irrelevance of national borders. This interpretation retrogrades everything about the relationship between international trade and national borders.

The birth of a new national border transforms a formerly internal trade into international trade. If California seceded from the United States, wine trucked from California vineyards to Nevada casinos would be considered international trade. The secession of California would therefore increase the role of international trade in the economy. This would necessarily happen whether you measure international trade in simple dollar terms or as a percentage of production produced in the United States, California, or elsewhere. In fact, to the extent that California secession would reduce GDP in California or elsewhere, measured as a percentage of GDP, the importance of trade to the economy would only increase.

Yet real economic integration between different geographic areas would almost certainly decline massively. California has a larger economy than any country except a handful of countries, and new national borders tend to hamper trade by 20-50%. The fate of workers in California would end up being less tied to the fate of workers in Nevada, or workers anywhere for that matter. And that would happen precisely as the role of international trade in the California economy increases. To indulge in the conventional interpretation of trade statistics would therefore be tantamount to committing an error which would reduce everything to the economy of California’s new national borders. Yes, international trade would increase statistically, but this increase would reflect the growth of national borders, not their increasing uselessness. And that would reflect economic location rather than economic globalization.

As shown in the graph above, the role of national borders in the compilation of international trade data is not hypothetical. This is the story of the world economy over the past 100 years. And that’s a story you can’t see if you follow the conventional interpretation of the growth of international trade.

As empires crumble, new sovereign states with new national borders are born and cross-border trade increases as a result. In 1920, the Austro-Hungarian and Ottoman Empires had recently collapsed following World War I. the early 1990s sparked the most recent of the ascending waves of national land borders visible on the map. Overall, land border kilometers have slightly more than tripled, from 41,920 in 1920 to 132,940 in 2019, with the share of international trade in GDP slightly less than tripling from 21.7% in 1920 at 60.3% in 2019. The great similarity in the size of their increase – the two roughly tripled – suggests that their increase together is no coincidence.

But stability, once the variation in the number of national land borders is taken into account, may be the most remarkable attribute of the role of international trade in the global economy. In the 100 years from 1920 to 2019, the share of international trade in global GDP has never fallen below 0.21% or above 0.51%. These upper and lower limits have also been traced with a regularity that suggests they may be more than a coincidence. The border-adjusted low of 0.21% of global GDP per 1,000 miles of national land border was reached during the Great Depression of 1932 as well as at the height of the Cold War in 1967. The overall high of the series 0.51% happened in 1920, when there were far fewer national borders than today. Since 2000, the border quantity has remained roughly stable and the share of international trade in world GDP per thousand kilometers of national border has not exceeded the 0.46% recorded in four separate years, including in 2019.

Some are worried today about this lack of new growth in the share of international trade in global GDP. If history is any guide, their best bets for unlocking that growth would be for secessionist movements in places like Catalonia or Scotland to be successful. But many supporters of deepening international trade are also opposed to the new national borders. So they may have an internal contradiction to resolve: If you applaud the growth of international trade over the past 100 years, you have to thank the birth of new national borders.

Joseph W. Sullivan served on the White House Council of Economic Advisers as Special Advisor to the President, as well as an Economist, from 2017 to 2019.

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Estelle D. Eden

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