UK trade: going steady since the 1960s

Tommaso Aquilante, Enrico Longoni, Patrick Schneider

Countries’ goods exports are normally defined in terms of what has been shipped when and where. Recent literature (e.g. Besedeš and Prusa, 2011 and Besedeš et al, 2016) shows that looking at how long trade relationships have been in place is important as well. Using highly granular data, we show that over 60% of the value of UK nominal goods exports is in very mature trading relationships, by which we mean exports of a particular product between a pair of countries in a given year. This is true even with substantial churn (new relationships starting and old ones ceasing) going on all the while, and for exports in real terms as well.

Highly detailed trade data are increasingly available and one of the best sources is the UN’s Comtrade database, which provides detail of nominal trade in goods between countries at the product level. The dataset shows the value of imports and exports flows along four dimensions: country, partner, product and year. In the case of the UK, we have data for a total of 3,454,756 product-level relationships, comprised of up to 1,200 products exported by the UK to 150 countries over the period 1962-2014.

This is enough detail to make a researcher giddy. The granularity of the product definitions means, for example, we can, if so inclined, compare UK exports to France of different types of iron or steel wire (Chart 1).

Chart 1: UK exports to France of different type of wire

But whether you’re interested in wires or not, the dataset and the detail therein are incredibly valuable. As Chart 2 shows, the UN Comtrade data are a pretty good match with the ONS aggregate. But because the UN Comtrade line is a sum over a bunch of products and trading partners, they allow us to look beneath the surface of aggregate statistics.

Chart 2: UK goods export value

The depth and the breadth of trade relationships

We like to think of exports using this disaggregated data in terms of relationships – exports of a particular product between a pair of countries in a given year. So the UK export of ‘Glass envelopes for electric lamps’ to Germany is one unique relationship, as is the export of ‘Distilled alcoholic beverages’ to Japan.

Aggregate UK exports are the sum of the value of all existing relationships over a given period. Thought of in this way, aggregate trade is the product of the depth and the breadth of relationships between trade partners, i.e. the product of two margins:

  1. the intensive margin is the average value for a relationship, and
  2. the extensive margin is the number of active (positive value) relationships

Any growth in the aggregate is necessarily driven by changes in these margins. The extensive margin is fairly stable over time. Chart 3 shows that the number of active UK export relationships has been between sixty and eighty-thousand since the 1960s, without much obvious growth. This implies that the substantial growth in aggregate trade has mainly driven by increases in the value of the average trade relationship (the intensive margin).

Chart 3: The extensive margin of UK exports over time

These trends mask a number of things – the total count of active relationships misses churn (the birth of new ones and the death of old ones) and, even within a relationship, we can’t observe the entry and exit of the actual firms doing the trade. Although we can’t observe firms in these data, we can investigate churn at the relationship level by grouping these relationships into birth cohorts – the year since which the relationship has had a positive value.

Long-lasting relationships are the bedrock of UK’s aggregate trade

Chart 4 breaks the extensive margin into contributions from each of these birth cohorts. Each line separates one cohort of surviving relationships in a given year from the next.  The size of the cohort diminishes over time as relationships die off, just as the number of people born in a given year decreases every year. Unlike us, however, trade relationships can re-incarnate; and when they do, they count as members of a new cohort.

From the chart, we can see that just over 25% of more than 60,000 relationships that were active in the early sixties are still in place in the recent data (the black area in the chart). In 2014, this cohort still accounted for 20% of extant relationships (over 16,000 of the total 80,000).

Chart 4: Contributions to the extensive margin by birth cohort

Using the same cohorts, we can track their influence on the aggregate level of goods exports over time (Chart 5). The result here is very striking: over 60% of 2014 exports were in product-country relationships that had been in place since the early sixties. This is despite the fact that these only account for 20% of total active relationships.

Chart 5: Contributions to total exports by birth cohort

We have seen that many trading relationships survive, unbroken, since the sixties and these survivors account for the bulk of total exports. These results are striking, but should we be surprised by them?

We can think of trade, and business in general, as a selection process. Some of the forces that can increase the likelihood of survival – e.g. comparative advantage or proximity of trading partner (Albornoz et al 2016; Besedeš et al, 2016) – will increase the value of the trade flow as well. Furthermore, the value of trade flows tend to increase over time, as existing companies deepen existing partnerships and expand their customer networks, and new companies enter to compete with them (Albornoz et al, 2012).

So just as ancient vampires tend to be the more powerful (e.g. here), older trading relationships tend to be the more valuable. But whether we should be surprised by just how much of UK goods trade is accounted for by these long-standing relationships is a question for further investigation.

Conclusion

Disaggregated trade data offer researchers a wealth of opportunities for analysing trade and its dynamics. The empirical trade literature is, accordingly, increasingly making use of this and other rich datasets. Our analysis demonstrates how even simple investigations of these data can lead to striking insights. We showed that aggregate trade appears to be dominated by a few highly valuable and long-lasting relationships.

Tommaso Aquilante, Enrico Longoni and Patrick Schneider work in the Bank’s Monetary Analysis Division.

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