Trade-to-GDP Ratios: A critical leverage for economic resilience in emerging markets

By Richmond Kwame FRIMPONG

The trade-to-GDP ratio measures the relative importance of international trade in the economy of a country. As a percentage metric, it is calculated by dividing the aggregate value of imports and exports over a period by the gross domestic product for the same period. Although called a ratio, it is usually expressed as a percentage

The trade-to-GDP ratio is a powerful metric that has proven valuable for understanding economic growth, especially in developing and emerging economies. It serves as a barometer of economic openness and integration into the global market.

A high trade-to-GDP ratio often indicates a significant level of economic openness, which tends to facilitate the flow of goods, services, capital, and technology between countries. This level of openness can stimulate domestic economies by providing access to a broader range of inputs, enhancing competition, and expanding export opportunities. East Asia’s rapid economic ascent is a prime example of how an outward-oriented economic strategy—evident in high trade-to-GDP ratios—can drive growth and development.

China’s trade-to-GDP ratio rose from a modest 9% in 1978 to 37% by 2023, a period during which per capita income increased by more than 63 times. This expansion in trade directly correlated with economic gains, as China moved from a low-income to an upper-middle-income economy and reduced its poverty headcount ratio from 72% in 1990 to 0.1% in 2023.

Similarly, Vietnam, which embarked on economic reforms known as doi moi in 1986, saw its trade-to-GDP ratio skyrocket from 23% to an astounding 184% by 2022. During this period, per capita GDP increased nearly tenfold, and the poverty rate fell from 45% in 1992 to just 1% by 2022. These cases underscore the potential of trade to serve as a catalyst for economic growth and poverty reduction, particularly when coupled with effective reforms that facilitate competitiveness, market diversification, and infrastructure improvement.

For lower-income Commonwealth countries, the trade-to-GDP ratio can serve as a signal of potential growth areas that can be activated by embracing greater economic openness. However, to replicate East Asia’s success, policymakers must look beyond high trade-to-GDP ratios and focus on fostering an environment conducive to productive trade. This includes developing competitive industries, establishing robust trade networks, and implementing supportive policies that reduce trade barriers while enhancing productivity.

The Benefits of High Trade-to-GDP Ratios in Driving Economic Resilience

High trade-to-GDP ratios are often associated with increased economic resilience. When countries participate more fully in international trade, they gain access to diverse markets that can help mitigate the impact of local economic downturns. For example, during the global financial crisis of 2008–2009, economies with high trade-to-GDP ratios and diversified export profiles, such as Singapore and South Korea, were able to weather the storm better than more insular economies due to their ability to shift focus among markets and sectors. The trade-to-GDP ratio thus becomes not only a marker of economic activity but also a critical factor in a country’s ability to adapt to external shocks.

In developing countries, where economic volatility often poses significant challenges to growth, a higher trade-to-GDP ratio can offer similar benefits by spreading economic risks across multiple sectors and geographies. For instance, Botswana, an African nation heavily reliant on diamond exports, has recognized the importance of diversifying its trade to enhance economic resilience.

Although Botswana’s trade-to-GDP ratio hovers around 75%, the country is working to build resilience by investing in other sectors such as tourism, financial services, and manufacturing. By diversifying trade partnerships and fostering a higher trade-to-GDP ratio, Botswana seeks to reduce its vulnerability to external commodity price fluctuations, thereby achieving more stable economic growth.

For Africa at large, where economies are often dependent on single commodity exports like oil, copper, or agricultural products, achieving a high yet diversified trade-to-GDP ratio could strengthen resilience against volatile commodity prices. African countries can further benefit from intra-African trade under the African Continental Free Trade Area (AfCFTA), which could expand the continent’s economic base and reduce dependency on traditional, often volatile, export markets in Europe, Asia, and North America.

Trade-to-GDP Ratios as Indicators of Comparative Advantage

The trade-to-GDP ratio can also reveal insights about a country’s comparative advantage—an economic concept rooted in the theories of Adam Smith and David Ricardo. Comparative advantage refers to a country’s ability to produce goods or services at a lower opportunity cost than others, thus making it more competitive in those areas. A high trade-to-GDP ratio typically signals that a country is capitalizing on its comparative advantage by exporting goods and services where it is most competitive.

East Asia’s economies have utilized their trade-to-GDP ratios as indicators of comparative advantage, focusing on sectors such as electronics, textiles, and machinery. South Korea, for example, has successfully leveraged its comparative advantage in electronics and automotive manufacturing to boost exports, resulting in a trade-to-GDP ratio of around 80%.

African countries, which possess comparative advantages in natural resources, agriculture, and certain manufacturing sectors, can similarly benefit by focusing on their competitive sectors. For instance, Ghana’s cocoa industry and Nigeria’s oil sector are examples where comparative advantages could be leveraged through higher trade-to-GDP ratios. However, as global demand shifts, African economies must also look to diversify within their comparative advantage sectors and seek higher value-added exports to optimize growth.

The process of identifying and capitalizing on comparative advantage requires more than simply increasing exports. It involves building the necessary infrastructure, human capital, and technology to ensure that industries can compete on a global scale.

This approach is seen in Ethiopia’s budding textile and apparel industry, which leverages the country’s low labor costs and growing production capabilities. By increasing its trade-to-GDP ratio and targeting sectors with comparative advantages, Ethiopia aims to become a leading exporter of textiles and apparel within Africa and globally, which could catalyze broader industrial development across the country.

Potential Challenges of High Trade-to-GDP Ratios

Despite the advantages, a high trade-to-GDP ratio is not without challenges, particularly for developing nations. One primary risk is the increased exposure to global economic fluctuations, which can significantly impact countries heavily reliant on trade.

For instance, during the COVID-19 pandemic, many economies with high trade-to-GDP ratios experienced severe disruptions due to supply chain breakdowns, falling demand, and border closures. Countries such as Thailand and Singapore, with trade-to-GDP ratios of 123% and 324% respectively, faced substantial economic slowdowns, underscoring the vulnerabilities that can accompany high levels of trade dependency.

Furthermore, high trade-to-GDP ratios can sometimes lead to a trade deficit, where the value of imports exceeds exports, resulting in net economic outflows. Many African countries face this issue as they import more manufactured goods than they export, leading to trade imbalances.

Addressing this imbalance requires a concerted effort to increase the value-added component of exports. For instance, while African countries export raw materials like cocoa and crude oil, they often import processed goods derived from these same raw materials at a higher cost. By investing in processing industries domestically, these countries could improve their trade balance, reduce dependency on imports, and achieve a more sustainable trade-to-GDP ratio.

Another concern associated with high trade-to-GDP ratios is the potential for over-reliance on a narrow export base. For countries with high export dependency in specific sectors, a sudden drop in global demand or a price collapse can have severe economic consequences.

Countries that are rich in natural resources but rely on only a few exports, such as Nigeria (oil) or Zambia (copper), are particularly vulnerable to this risk. For these economies, a strategy that promotes diversified trade relationships and value addition across various sectors could improve resilience and stabilize growth prospects, even as they pursue higher trade-to-GDP ratios.

Trade-to-GDP Ratios and the Path Forward for African Nations

Africa’s development trajectory is increasingly tied to its ability to achieve greater economic openness and integration into global and regional markets. The trade-to-GDP ratio can serve as a guiding indicator, signaling the continent’s progress toward sustainable growth.

For African nations, achieving a balanced trade-to-GDP ratio involves more than just increasing exports or imports; it requires strategic trade policies, investment in critical infrastructure, and a shift toward higher-value-added production. A prime example of such investment is Ghana’s Dawa Industrial Zone, a major industrial enclave designed to attract both regional and international manufacturing and trade operations.

By providing advanced facilities and streamlined access to trade routes, Dawa Industrial Zone illustrates how dedicated industrial parks can boost trade capacity and foster economic diversification. As part of Ghana’s strategic economic initiatives, this zone is not only enhancing trade flow but also promoting employment and technological advancement, making it a model for other African nations aiming to increase their trade-to-GDP ratios sustainably.

Through initiatives like the African Continental Free Trade Area (AfCFTA), African countries are well-positioned to boost intra-regional trade, thereby reducing their dependency on external markets and increasing overall trade-to-GDP ratios.

By facilitating trade across borders and harmonizing trade policies, the AfCFTA has the potential to unlock a market of over 1.2 billion people and a combined GDP of $3.4 trillion. This approach could boost trade-to-GDP ratios across Africa and enhance growth prospects, with the added benefit of creating more resilient economies that are less vulnerable to external shocks.

Conclusion

The trade-to-GDP ratio is a vital metric that highlights a nation’s economic openness and integration into global markets, serving as a catalyst for growth, resilience, and poverty reduction. High trade-to-GDP ratios often reflect a country’s ability to leverage its comparative advantages, promote competitiveness, and expand market access, as seen in the economic transformations of East Asian nations like China and Vietnam.

However, while increased trade can foster economic resilience by diversifying markets, it also exposes nations to global economic shifts and potential trade imbalances. For African economies, achieving a sustainable trade-to-GDP ratio involves not only boosting exports but also investing in value-added industries, diversifying trade partnerships, and fostering infrastructure development, as exemplified by initiatives like Ghana’s Dawa Industrial Zone and the African Continental Free Trade Area (AfCFTA).

By enhancing regional trade and reducing reliance on external markets, African nations can strengthen economic stability and growth, making high trade-to-GDP ratios a strategic tool for sustainable development.

The writer is an award-winning “growth and turnaround” business leader with nearly two decades of multi-industry expertise across Europe, the Middle East and Africa. Specialized in Upstream financial Advisory, International Trade & Development, Economic Integration & Digitalization, Industrial Ecosystems & Special Economic Zones.

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