The Benefits of Free Trade
History has shown that trade can be a powerful engine for economic growth. Despite this, the number of protectionist policies enacted around the world has increased.
This is due to a rising tendency to view trade as a competition, rather than a cooperative endeavor. For evidence, consider the ongoing China-U.S. trade war, which has impacted everything from electronics to soybeans.
The economic costs of this dispute are well-documented. In 2019, Moody’s Analytics found that the trade war had cost America 300,000 jobs. In 2020, the Federal Reserve concluded that U.S. firms had lost $1.7 trillion in market capitalization due to the introduction of new tariffs.
In this infographic from the Hinrich Foundation—the first of a three-part series on global trade—we explain the theory behind free trade and explore a powerful dataset that disproves the rationale for protectionist policies.
Why Do We Trade?
The main reason countries trade is to specialize their production. This is when a country’s population is able to focus on what it does best. For example, consider Germany’s expertise in automobiles, or America’s leadership in tech.
These countries use their comparative advantages to generate a greater surplus than if they produced all of their needs on their own. Through exchange, they can trade their surplus output (exports) for the output of others (imports).
Imports are what facilitate the benefits of trade. These are goods that people consume without having to produce, and they can help reduce costs, catalyze greater competition, and even spark innovation.
A New Era of Deglobalization
Between 2001 and 2008, trade grew immensely. In dollar terms, it rose from $15.6 trillion to $40.7 trillion, representing a 160% increase. More importantly, as a share of global GDP, it rose from 47% to a peak of 64%.
|Year||Trade (Export + Import)||World GDP (USD)||Trade (% of GDP)|
Since then, the number of protectionist trade policies has increased by 663%. This includes tariffs, which are taxes on foreign goods, and import quotas, which are limits on the amount of goods imported.
These measures appear to be having a material effect on trade. As a share of GDP, it has never returned to its 2008 high, and in 2020, it dipped an alarming five percentage points.
The Fallacy of Us Vs. Them
A growing number of governments view trade as a competition between “us” and “them”. This could be because the costs of trade are visible, while the benefits are largely unseen.
Consider a company that struggles to compete with foreign low-cost producers. It winds down its operations, resulting in job losses and an abandoned factory. These are the visible costs of trade, and when they’re covered in the media, trade is painted in a bad light.
So what exactly are the benefits? For starters, consumers benefit from the availability of cheaper goods. Not only can they buy the same things for less, they also have more money leftover for other goods and services. This extra spending will then contribute to growth in other areas of the economy.
“The benefits of trade are the resources that become available for investment in promising new firms and industries. Putting resources to better use is how we increase living standards and wealth.”
– Daniel Ikenson, Economist
To see if these benefits outweigh the costs, we analyzed U.S. economic performance from 1975 to 2019. In the vast majority of these years, GDP moved in the same direction as imports. This means that in years when imports grew, so too did GDP.
However, this doesn’t mean that an increase in imports will directly grow GDP. Rather, GDP grows when the extra spending that was freed up is allocated efficiently. The same positive relationship is seen between imports and employment—disputing the belief that imports cause a net loss in jobs. This is because imports increase when an economy expands, and an expanding economy creates more jobs.
The Case for Trade Liberalization
When it comes to free trade, domestic politics and geopolitical struggles appear to be taking the front seat. Consider the shortages of medical equipment seen in the early stages of the COVID-19 pandemic—this was partly due to harmful tariffs which disrupted the free flow of goods.
This is problematic because the most powerful benefits of trade are realized through imports. These cheaper goods give consumers greater spending power, which benefits other areas of the economy.
In the next part of the Global Trade Series sponsored by the Hinrich Foundation, we’ll explore digital trade and how it will impact the world economy.
Support the Future of Data Storytelling
Sorry to interrupt your reading, but we have a favor to ask. At Visual Capitalist we believe in a world where data can be understood by everyone. That’s why we want to build the VC App - the first app of its kind combining verifiable and transparent data with beautiful, memorable visuals. All available for free.
As a small, independent media company we don’t have the expertise in-house or the funds to build an app like this. So we’re asking our community to help us raise funds on Kickstarter.
ESG Data: The Four Motivations Driving Usage
ESG controversies can damage a company’s value, but ESG data may be able to help manage this risk. What are other reasons for using ESG data?
ESG Data: The Four Motivations Driving Usage
Data is key to the environmental, social, and governance (ESG) revolution. Access to granular ESG data can help boost transparency for market participants. Unfortunately, 63% of U.S. and European asset managers say a lack of quantitative data inhibits their ESG implementation.
Being clear on the potential application of this data is equally important.
- Investors and banks can use ESG data for risk assessment, to spot opportunities, and to push companies for change.
- Companies can publish their own ESG data, quantify progress on their ESG goals, and use data to inform decisions.
- Policymakers can use ESG data to inform regulatory frameworks and measure policy effectiveness.
This graphic from ICE, the second in a three part series on the ESG toolkit, explores four primary motivations of ESG data users.
1. Right Thing
The objective: Having a positive social or environmental impact.
For investors, this can involve screening out companies that conflict with their values and selecting companies that align with their ESG objectives.
As another example, it can involve comparing the social impact of municipal bonds. One way investors can measure social impact is through scores that quantify the potential socioeconomic need of an area, using metrics like poverty and education levels. Here are the social impact scores for three actual municipal bonds issued in Florida.
|State||Bond Issuer||Social Impact Score
(Higher = larger potential impact)
Issuer #1’s bond is projected to have a community impact that is nearly twice as high/positive as Issuer #3’s bond.
For companies, doing the right thing can include assessing their progress on ESG goals and benchmarking themselves to peers. For example, gender and racial representation is a growing area of focus.
The objective: Managing ESG risks, such as climate and reputational risks.
For investors, this can involve back-testing or analysis around specific risk events before they materialize. Here are the risk profiles of two actual municipal bonds in California. The shown bonds are practically identical in many ways, except their wildlife score.
|Issuer #1||Issuer #2|
|Current Coupon Rate||5.0%||5.0%|
|Maturity Date||Aug 01, 2048||August 01, 2048|
|Price to Date (Call Date)||Aug 01, 2027||Aug 01, 2027|
|Wildfire Score (Higher = more risk)||3.6||2.7|
Managing ESG risk can also involve analyzing a company’s policies and governance for weaknesses. This is important as an ESG controversy can have long-lasting effects on the valuation of a company.
In one study, companies with ESG controversies dropped more than 10% in value relative to the S&P 500. They hadn’t fully recovered a year after the incident.
The objective: Targeting outperformance through ESG analysis.
Selecting companies with strong ESG data can align with long-term growth trends and may help boost performance. For heavy emitting industries, research indicates that European companies with lower emissions trade at much higher valuations. The chart below shows companies’ price-to-book ratio relative to the Stoxx 600* sector median.
|Above Median Emission Intensity (Bad)||1.9||1.1||2.0|
|Below Median Emissions Intensity (Good)||2.7||1.9||2.1|
*The Stoxx 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Energy companies with low emissions trade at a valuation nearly two times higher than energy companies with high emissions.
The objective: Understanding and complying with relevant ESG regulation.
The International Sustainability Standards Board has announced a global reporting proposal aligned with the Task Force on Climate-related Financial Disclosures (TCFD). In addition, a growing number of jurisdictions will require organizational reporting that aligns with the TCFD.
- European Union
- Hong Kong
- New Zealand
Not only that, a European Union regulation known as Sustainable Finance Disclosure Regulation (SFDR) came into effect in 2021. It seeks greater transparency in disclosures from firms marketing investment products. Even firms located outside the EU could be impacted if they serve EU customers. In total, the market cap of these non-EU companies exposed to SFDR amounts to $3.2 trillion.
Matching ESG Data with Motivation
There will be growing demand for transparent data as ESG investing flourishes. To remain competitive, investors, policymakers, and companies need access to ESG data that meets their unique objectives.
In Part 3 of the ESG Toolkit series sponsored by ICE, we’ll look at key sustainability index types.
The Hierarchy of Zero Waste
In a world that generates 2 billion tonnes of waste every year, waste management has become a global concern. Here are some strategies to help guide zero waste policies.
The Hierarchy of Zero Waste
Many cities have set ambitious zero waste targets in the upcoming decades.
The idea is to have communities where waste generation is avoided, and products are shared, reused, or refurbished.
This graphic, sponsored by Northstar Clean Technologies, shows the main strategies and hierarchy to guide zero waste policies.
What is Zero Waste?
In a world that generates approximately 2 billion tons of waste every year, waste management has become a global concern. Thus, countries and cities are increasing efforts to reduce or even eliminate waste when possible.
The Zero Waste International Alliance defines zero waste as “the conservation of all resources by means of responsible production, consumption, reuse, and recovery of products, packaging, and materials without burning and with no discharges to land, water, or air that threaten the environment or human health.”
Becoming a zero waste community, however, is a complex task.
Currently, Sweden recycles 99% of locally-produced waste and is considered the best country in the world when it comes to recycling and reusing waste. However, such results only came after almost 40 years of recycling and reuse policies.
In line with this, here are seven commonly accepted steps you can use to achieve zero waste:
1. Rethink, Redesign Products
The global population consumes 110 billion tons of materials each year, but only 8.6% is reused or recycled. In a zero waste society, single-use products are avoided and products are designed with sustainable practices and materials.
Consumption must be planned carefully to reduce the unnecessary use of materials. Consumers must choose products that maximize the usable lifespan and opportunities for continuous reuse. Companies must minimize the quantity and toxicity of materials used.
The value of products is maintained by reusing, repairing, or refurbishing for alternative uses.
Products are diverted from waste streams and recirculated into use. Resilient local markets are developed, allowing the highest and best use of materials.
5. Material Recovery
Component materials like cement, metals, or asphalt are recovered from mixed waste and collected for other applications.
In the U.S. alone, around 12 million tons of asphalt shingle tear-off waste and installation scrap are generated from roof installation each year. Currently, more than 90% of this is discarded in landfills. This material can be repurposed to create new products like liquid asphalt, fiber, and aggregate.
6. Residuals Management
Waste is biologically stabilized and sent to responsibly managed landfills.
The production of materials that are not recoverable and can negatively impact the environment must be avoided.
Reducing our Climate Impact
Reducing, recycling, and recovering materials can be a key part of a climate change strategy to reduce our greenhouse gas emissions.
According to the U.S. Environmental Protection Agency, about 42% of all greenhouse gas emissions are caused by the production and use of goods, including food, products, and packaging.
Even though 100% zero waste may sound difficult to achieve in the near future, a zero waste approach is essential to reduce our impact on the environment.
Northstar Clean Technologies aims to become the leading recovery and reprocessing company for asphalt shingles in North America.
Money2 weeks ago
Mapping the Migration of the World’s Millionaires
Markets2 weeks ago
Visualizing the Coming Shift in Global Economic Power (2006-2036p)
Datastream3 weeks ago
Ranked: These Are 10 of the World’s Least Affordable Housing Markets
Demographics2 weeks ago
Mapped: A Decade of Population Growth and Decline in U.S. Counties
Misc3 weeks ago
Visualizing Well-Known Airlines by Fleet Composition
Markets4 weeks ago
Ranked: Visualizing the Largest Trading Partners of the U.S.
Misc2 weeks ago
Iconic Infographic Map Compares the World’s Mountains and Rivers
Markets5 days ago
Interest Rate Hikes vs. Inflation Rate, by Country