Tuesday, July 14, 2015

Why International Trade is a zero-sum game many a times?

In a zero sum game, one’s gain is another’s loss. Free trade is not a zero-sum game. But any undue advantages do not seem to last forever. When it comes to commodities (or any natural resource), it is closer to zero-sum game in most cases. One country’s exports are another country’s imports. One country’s surplus is another country’s deficit. When crude was trading above $100/barrel, all emerging countries importing oil were having trade deficits and run-away inflation. But the oil producing countries were enjoying a trade surplus.

Saudi's Balance of Trade and GDP Growth Rate Source: Tradingeconomics.com

The drop in crude oil price turned the table. Look at the balance of trade data for Saudi. It is a quarter of what it used to be sometime ago. That is affecting its GDP growth rate too. To keep up the public spending as per plan, Saudi Govt. had to borrow by issuing bonds. And that is happening after a gap of eight years. (Link: http://www.cnbc.com/2015/07/12/financial-times-saudi-arabia-borrows-4bn-as-oil-price-reality-hits-home.html). But their loss is oil importer's benefit. Their import bills are reducing, so is inflation.

US is number one oil producer now, that means some of their consumption is met by local production. China, Japan and Europe are slowing down so they cannot increase oil consumption at earlier expected growth rates. Oil production is going up but not the demand. So oil prices may not come back in a hurry. What would happen if oil prices fail to come back for a longer period or weaken further from here? It would hurt the economies of oil exporting countries. They do not have any other products or skills worth mentioning to offset the damage in oil trade. Trade surpluses will shrink and they cannot continue to peg their currencies to US dollar. Weakening currency would take inflation up. Govt. cannot rise its spending infinitely. If they borrow heavily, it would take up the interest rates. And their economy will go through a downward spiral. They get into the same issues many emerging countries went through but probably more quickly and severely.

Oil producing countries gained at somebody’s cost and now they would lose at others profit. That makes me think international trade should not be skewed to benefit one party. Any such imbalances do not seem to last long. The opposing forces come together to bring the balance back. We are seeing many evidences for it all around the globe.