G7 vs. the World: The Misconception of Global Trade Dominance.

Richard Baldwin, IMD , 11 October 2024, Factful Friday.

Introduction: When did G7-to-G7 trade stop dominating world exports?

This is a trick question. The answer is that they never did, as the frontpiece and chart below show. Apart from a freak-peak in 1944, trade among the largest advanced economies—the G7—never even came close to 50% of world trade. Usually it was floating around 25%—hardly dominant.

The intra-G7 trade share averaged about 25% pre-WWI with a gentle decline in evidence. The share jumped during WWI, but then slumped from the end of the war to the beginning of WWII. The share rocketed up during WWII. Not strange if you think about it; big wars produce big import demands. But keep in mind that the G7 wasn’t a thing back then—just the opposite. G7 nations were slaughtering each other’s citizens on an industrial scale. The surging trade was fueled by the demand for munitions and the fact that the economies of the US and Canada were not kinetically directly impacted by the combat.

Post-WW2, the G7-to-G7 share dropped to a level that was below the level that it was during the Great Depression. The problem, when you think about it, is obvious: the economies of five of the G7-members were flat on their backs. The post-war economic recovery was accompanied by a long climb of the G7-to-G7 trade share to just above 25% by 1986 (with a pause for the Oil Shocks and Volcker Recession).

Since the start of the Great Convergence in the late 1980s (Baldwin 2016), the share fell by half. It’s now at just 12% of world trade.

So, it was a trick question in the title. And now that you know the answer, you can skip the rest of today’s Factful Friday if you’re in a hurry. But as they say: “Come for the killer chart; stay for the filler charts.”?

This brings me the mystery of why intra-G7 trade wasn’t massive given how massive their economies were and are.

How could the G7 fail to dominate world trade given their size?

For most of the post WWII period, the G7 economies accounted for the lion’s share of the world economy—two-thirds of world GDP—and they reigned supreme over world manufacturing until the ends of the 1990s. Nevertheless, the G7 never dominated world trade as the dominated global GDP. See the left chart below.

The explanation for the gap between the G7’s world trade and GDP share lies one of trade’s great open secrets—large economies are relative closed. Mega economies are their own best customers. The chart on the right below shows that the four biggest economies have trade to GDP ratios that are notably below the world average.?

To indulge the curious, the charts below shows the world export shares of the G7 individually. Three of the seven are much larger than the others, so they are in the left chart. Japan's post-war export-led growth miracle is the most salient features in the left chart. The UK's long slide down the rankings is the highlight of the right chart. In 1960, Britain accounted for almost as much trad and Germany, and much more than Japan. By the end of the period, the country was at the bottom of the world-share league table. This may help explain UK leaders who were schoolboys in their formative years thought that the UK would be able to navigate the world without being part of the EU! Maybe It was a sort of Make-Britain-Great-Again thing?

G7 to G7 during the dark years: 1914-1945.

The world share of intra-G7 exports does some amazing things during the two world wars, so devoted readers may be interested in zooming in on that period.

When looking at data from the period, it is essential to note that the G7 was an anachronism back then. During the war, some were on one side and others on the other. On the side of the Allied Powers were France, Britain, Canada, and (eventually) the US. On the Central Powers side were Germany and Italy, until Italy switched sides in 1915. Japan didn’t engage in the European theater, but it did declare war on Germany in 1914 and seized German-held territories in China.

If your brain-space has room for more fun facts, remember that Europe was very different place back then. For example, then Austria-Hungarian and Ottoman empires were major forces. Those facts may not be at the tip of your tongue since, at the end of the war, the Austria-Hungary empire fragmented into independent nations including Austria Hungary, Czechoslovakia, and Yugoslavia. Likewise, the Ottoman Empire was broken up into Turkey, and several smaller nations. The Ottoman’s Middle Eastern provinces were divvied up into colonies (“mandates”) of Britain and France.

With that background under our belts, the left chart below shows that WWI saw a surge of trade among the G7, but of course this was trade among the G7 members of the two alliances, not more among all seven. From the end of WWI to the begin of WWII, the intra-G7 share fell steadily. The period was marked by a recession (1920-21), which started in the US, UK, and Germany and soon spread worldwide (Eichengreen 1992).

The right chart shows the big 1944 peak in the left chart is due to more intra-G7 trade, not less non-G7 trade worldwide (i.e. the spike is driven by the numerator, not the denominator).

?Summary and concluding remarks.

Just a few takeaways from today’s Factful Friday.

• Apart from a freak-peak in 1944, intra-G7 trade hovered around 25% of the world total, until the 1990 start of the Great Convergence (Baldwin 2016 which brought the down to just 12% of world trade.
• The seeming paradox between the G7’s GDP-dominance (almost 70% of world output) and its lack of trade dominance is down to the fact that big nations tend to be relatively closed.
• Both world wars were good for intra-G7 trade, although of course the members were on opposite sides of the conflicts, so the intra-trade was among two distinct subsets of the G7.
• Post-WW2, the G7-to-G7 share dropped to a level that was below the level that it was during the Great Depression.
• The post-war economic recovery was accompanied by a long climb up to a level just above 25% by 1986 (with a pause for the Oil Shocks and Volcker Recession).

And that’s it for today’s Factful Friday!

References

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Annex

Here is a good alternative view of North-North trade from a different source (I’ll explore it more in future posts). The North-North share is much higher than the G7-G7 share due to a large amount of trade among western European nations.