What factors affect the foreign trade dependence?
- The size of the economy, that is, the size of a country’s GDP. Generally speaking, under the condition of open economy, the trade dependence of small countries is larger than that of large countries, mainly because small countries have limited resources and markets, and their economic development must rely on import and export to a large extent. In contrast, large countries are less dependent on the external economy due to their abundant resources and vast domestic markets, and their foreign trade dependence is relatively low.
- The composition of national income. Changes in the three industries have a great impact on the foreign trade dependence, and the industrial structure is related to the development stage of a country. Countries in the primary stage of economic development generally have a low foreign trade dependence due to the large proportion of agriculture, low proportion of manufactured goods and low export competitiveness. On the other hand, the tertiary sector (services), which is less traded in developed countries, has a high proportion, so their foreign trade dependence is usually not high either. In contrast, countries in the middle stage of economic development have higher foreign trade dependence because of the high proportion of secondary industries and the competitiveness of their products in the international arena. From the history of economic development of developed countries such as the United States and Japan, we can observe that their foreign trade dependence has experienced a change from low to high and then from high to low.
- The economic development strategy and the resulting degree of openness to the outside world are also important factors affecting the foreign trade dependence. Countries and regions that adopt export-oriented development strategies, such as the Four Little Dragons in Asia, often underestimate the exchange rate of the local currency and adopt policy measures such as export incentives to lower the production costs of the export sector, so that domestic resources flow more to the external sector, while these countries and regions are constrained by their own markets and resources, and need to import raw materials and other upstream products to ensure export growth. Therefore, the foreign trade dependence of these countries and regions will be higher. In contrast, the foreign trade dependence of countries with inward-oriented development strategy is generally lower.
- The influence of exchange rate level. The impact of exchange rate level on foreign trade dependence is divided into two kinds of direct and indirect effects. Direct impact is that, because the exchange rate level affects the domestic and foreign price ratio, so it has an impact on the numerator and denominator of foreign trade dependence. The indirect effect is that the exchange rate is often a tool of a country’s foreign trade policy. If an export-oriented country chooses to adopt a policy of exchange rate undervaluation, it will lead to an increase in the share of the external sector in the economy, which will result in a corresponding change in the foreign trade dependence.
- The difference between GDP and GNP also affects the foreign trade dependence. Generally speaking, since the difference between GDP and GNP of large countries is not significant, the difference between foreign trade dependence calculated by GDP and foreign trade dependence calculated by GNP is not significant. However, if the increase of foreign investment is taken into account, the two algorithms may appear to be relatively different. For example, with the development of the international division of labor system, the scale of direct investment from developed countries to developing countries increases greatly, the net inflow of factors from abroad in developed countries expands, and GNP is larger than GDP, so that the foreign trade dependence of developed countries measured by GDP is often higher than the foreign trade dependence measured by GNP. In contrast, the opposite is true for developing countries.