#tradeXpresso Lungo: North, South, East, West - which Gini Trade Index is the best?
Lucian Cernat
Head of Global Regulatory Cooperation and International Procurement Negotiations at European Commission
Lucian Cernat, Head of Global Regulatory Cooperation and International Procurement Negotiations, DG TRADE. Disclaimer: the views expressed herein are those of the author and do not necessarily reflect the views of the European Commission.
Recently, the World Bank published an interesting piece on the increase in global income inequality worldwide, an unfortunate setback due to the negative economic effects of the covid pandemic and its disproportionate impact on our societies. The World Bank warns that this increase in global inequality (measured by the traditional Gini index) is the largest, since 1990. In a recent #tradeXpresso Lungo , I took inspiration from the original Gini index and I have proposed a new trade indicator – the Gini Trade Index (GTI) – as a way to measure the inequalities found in international trade flows.
Like the Gini inequality index, the GTI was also on the rise in recent years. Among EU Member States, the country with the highest GTI (i.e. the most unequal distribution of export value across its exporters) was Slovakia, whereas Cyprus had the lowest GTI. Interestingly, the World Bank’s analysis found that Slovakia has the lowest Gini inequality index across all countries in the world.
This was intriguing. Can Slovakia, the country with the lowest income inequality, have at the same time the highest trade inequality? The short answer seems to be: yes, it can. Knowing that the trade and inequality nexus is still subject to considerable theoretical and empirical scrutiny, this puts us in front of an apparent puzzle: the “Slovak puzzle”. Leaving the income inequality story aside, this blog will try to figure out how Slovakia ended up with the highest GTI and whether there is something bigger behind this “Slovak puzzle”.
Let's try to unpack the meaning of the Gini Trade Index, taking Slovakia and Cyprus as examples. The GTI captures the disparity in export values of various types of exporting firms (micro, small, medium, large) relative to the mean export value per exporting firm. Suppose we pick two random firms in Slovakia and ask: how much export value would need to be “reallocated” from the high-value exporting firm to the low-value exporting firm to ensure that both firms export an equal value? The average share of export value that would need to be transferred across all Slovak exporters to ensure that all firms (irrespective of their size) have equal values of exports is captured by the GTI.
Figure 1. The Gini Trade Index 2010-2021: the geographical distribution of EU Member States
?The higher the GTI, the more unequal the export value is distributed across exporters of that country. In Cyprus, the 2021 GTI was 0.25 (low inequality) whereas in Slovakia it was 0.91 (high inequality). Hence, Slovakia has a far more unequal export distribution than Cyprus. The difference between “high-value” exporters and the “small-value” exporters in Slovakia is bigger than in any other EU member state.
The GTI is not only very diverse across EU Member States but has also evolved across time. Since 2010, the GTI has increased in virtually all EU Member States, except Finland, Bulgaria, Cyprus and Luxembourg (Figure 1). EU Member States tend to have a very complex distribution across the GTI value spectrum. Several small Baltic countries and Luxembourg have relatively low trade inequality (with GTI values below 0.7) whereas Romania, Bulgaria, Portugal and the Netherlands have GTI values clustered around 0.7. At the same, twelve EU Member States (among them large Member States like Germany, France, Italy, Spain, but also smaller ones like Greece, Slovenia or Denmark) have fairly high GTI values, equal or above 0.8. Yet, Slovakia stands out as the only EU country with a GTI above 0.9.
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What can explain the “Slovak puzzle”?
The explanation for the “Slovak puzzle” is quite simple: cars. Slovakia has a special relationships with car production. And it is not only because of the country’s long industrial tradition with its well-known ?koda brand, one of the largest European industrial conglomerates of the 20th century, founded by the Czech engineer Emil ?koda in 1859. ?Nowadays, Slovakia is a central hub for car production in Europe, with major European car producers having a strong presence in the country. Take Volkswagen, for instance. Volkswagen Slovakia exports 99.7% of the automobiles production. The largest export markets by sales were China (22%) and the USA (18%). If you drive a Skoda, Seat, Volkswagen, Audi or Porsche, chances are your car was assembled in Slovakia. Even if your car is not produced in Slovakia, there are big chances that the gearbox and many other car parts are sourced from Slovakia.
Volkswagen Slovakia tops the chart of Slovak exporters. Out of its 9bn euros worth of car production in Slovakia, Volkswagen exported more than 99%, with China and the US accounting for around 40% of exports. Add all the other non-EU countries and this means that probably more than half of Slovak car exports are extra-EU exports. This means that one single company (Volkswagen Slovakia) generates probably around one third of total Slovak exports to the rest of the world, all sectors combined.
At the same time, both Slovakia and Cyprus have many exporting SMEs. In fact, both countries have a similar share of SMEs in the total number of exporting firms (91% and 94%, respectively). But Slovakia has the lowest share of SMEs in the value of exports (18%) across all EU Member States, compared with 91% in Cyprus, the EU member states with the lowest GTI (the most equal distribution of export value across its exporters).
So, when looking at such Trade Policy 2.0 indicators, the large gap in GTI values start to make a lot of sense. Is the “Slovak puzzle” a trade recipe that other countries should follow? Should countries aim to have the highest GTI possible, like Slovakia? Or should everyone strive to have the lowest GTI, like Cyprus?
There is no simple answer to this question. But one thing is clear: putting all eggs in one single basket may be a risky trade strategy. Relying on a “single goose with golden eggs” is, especially nowadays, not necessarily a good idea. In its 2023 Country Report , the European Commission argued that raising long-term productivity growth and industrial competitiveness in Slovakia requires a more diversified economy. Slovakia has the EU's highest share of direct automotive employment in total manufacturing (over 16% of total manufacturing workforce). These days, the automotive sector is facing significant disruptive challenges globally, including in terms of increased robotisation and automation, a shift towards Industry 4.0 and Mode 5 services that require a new set of skills for the 21st century automotive production. Being so dependent on one single industrial sector makes an economy more vulnerable to supply chain shocks and shortages. The number of Slovak firms facing disruptions in the form of materials shortages increased from 23% in 2021 to 32% in 2022, with the most significant impact in the automotive industry.
In terms of GTI, Cyprus is probably not in an ideal position either. Cyprus is a services-oriented economy, with one of the lowest population of exporting firms and a concentrated export structure. Cyprus exports a lot of cargo ships and recreational boats to a handful of destinations (e.g. Marshall Islands, British Virgin Islands), oils and refined petroleum (Lebanon), cosmetics (Libya) and food products (UK, Turkey). For instance, cheese is the top exports from Cyprus to the UK, and fruits are the top export to Turkey. These export destinations account for more than half of Cyprus’ merchandise exports.
Is there an ideal GTI value? Hard to say. But common sense and this anecdotal evidence would indicate that neither a too high, nor a too low GTI is ideal. Perhaps the ideal GTI values should be somewhere in the middle. Across all EU Member States the GTI simple average is 0.75. Knowing that some small Member States (like Cyprus) are GTI outliers, it would make sense to also calculate a GDP-weighted GTI average. The EU weighted average GTI was 0.8 in 2021. So, here’s my rule of thumb: if a European country falls in the 0.75-0.8 GTI range in Figure 1, that is not too bad. At any rate, the exact GTI value is of little importance if we do not understand its broader potential implications.
Beyond the “Slovak puzzle”: the systemic implications of an optimal Gini Trade Index
The export firm characteristics, in particular size and export concentration metrics, have been already part of trade policy preoccupations. EU agreements already include provisions in favour of small and medium exporting enterprises (SMEs). For instance, chapter 20 of the EU-Japan EPA contains dedicated provisions in support of exporting SMEs. Apart from these dedicated chapters, many other FTA provisions are relevant for SMEs and could promote their export performance. Yet, FTAs are long and complex international treaties. The main text of the EU-Japan EPA has more than 1000 pages. Many FTA provisions are written in “legalese”, rather than plain English. Thus, addressing the current trade inequality requires a concerted effort to help the SMEs increase their export values. Increasing both the number of exporting firms and their export values has a strategic importance and goes beyond trade performance, as this can increase the overall productivity, innovation and competitiveness of European countries. Such a successful trade facilitation can be done using two strategies. The first one is “doing more of the same”, i.e. selling more of the same product to the current exporting destinations. The second one is “doing things differently”, i.e. exporting new product varieties or expanding the export destinations.
Both strategies require some common ingredients, one of the most important ones being “knowledge”. Trade procedures are often complex. But there are ways to make them simpler. Making the trade formalities and procedures easier to understand by small exporting firms saves them unnecessary costs and would allow them to tap into new markets. The newest trend in the “easification ” of trade procedures is the creation of a digital “one-stop-shop” where all trade procedures are explained in plain language, based on algorithms and interactive interfaces. The EU has put in place a number of such tools under the “Access2Markets ” online portal. Tariffs are no longer the most problematic trade policy elements for SMEs, at least in terms of knowledge gaps. The ROSA tool under the Access2Market helps SMEs navigate the complexities of rules of origin associated with FTA preferential tariffs. Thus, the biggest hurdles for exporting SMEs remain non-tariff barriers, notably technical barriers to trade (e.g. testing requirements, product certification, etc.). The good news is that the Access2Market portal will offer a new tool to EU exporting SMEs: the #Access2Conformity.
If used on a large scale by SMEs across all EU Member States, such “trade easification” tools should boost SME exports and help revert the current upward trend in the Gini Trade Index. Increasing the participation of SMEs in EU trade will not just offer a solution to the “Slovak puzzle”, but could also increase the EU overall competitiveness in global markets.