De-risking: Looking at patterns in global trade and globalisation

• Aggregate trade data, recently onboarded by LSEG, confirm that the US is reliant on a complex network of intertwined global supply chains for its substantial imports of arms and ammunition — supply chains that include China, for now.
• As the US de-risks its trading relationship with China, the door will open for other countries to export arms and ammunition to the US, and other high-tech or strategically important products.
• China too has been de-risking its relationship with the rest of the world: in fact, it has been targeting self-sufficiency in strategically important sectors, and in dual-use and military technologies, for longer and with greater success than the US.

The so-called ‘guns or butter’ model^[1] is often used to illustrate the strategic choices that different countries make. Put simply, it is the ratio of the resources a country devotes to arms and ammunition, relative to the resources it devotes to dairy produce. By framing this wealth of complex, inter-related choices as a simple binary choice between guns or butter, we can focus on the trade-offs in play between consuming goods that increase our welfare or happiness now (‘butter’), and goods that potentially increase our security in the long term (‘guns’). A country’s choice will depend on many factors: the price and availability of guns relative to butter, of course, but also the level of threat it perceives from other nations, and how replete it is with consumer goods and services.

LSEG has recently onboarded a large quantity of international trade data, which allows for many interesting comparisons, while allowing us to observe the guns/butter ratio in the flow of trade. Both ‘guns’ (shorthand here for arms and ammunition, which is the relevant HS2 code) and ‘butter’ (shorthand for dairy produce) are highly traded goods. Chart 1 shows the ratio of guns/butter imports over time for each of the G7 nations, plus China.

Among the eight, the US has the highest ratio of guns to butter imports, with Canada second, the UK third and China the lowest. In fact, the Chinese ratio is so low that it is barely distinguishable from zero.

There could be many reasons for these differences. China might be largely self-sufficient in arms and ammunition but need to import a lot of dairy produce; this could still be true even if the total resources devoted to guns relative to butter were the same as in the US. The US in turn has a well-developed dairy farming sector. The underlying pattern of preferences does not necessarily map to patterns of trade, as countries specialise in the production and trade of different items according to their natural advantages and domestic needs.

There might be other factors in play. Digging deeper, it turns out that the ‘mirror statistics’ tell a slightly different story. For example, known US exports of ‘guns’ to China almost always exceeds China’s reported total imports of ‘guns’ — sometimes by a significant amount, as Chart 2 demonstrates. The same is true for the mirror statistics on exports of ‘guns’ to China from France and the UK, though not from Italy, where the mirror statistics track more closely.

Such discrepancies are common in trade statistics, but in this case they look particularly pronounced. Inferences about how much China spends on imports of arms and ammunition appear to depend in part on who is measuring or reporting the data.

The US has meanwhile built complex, interlinked, international supply chains for arms and ammunition.

From this, a broader pattern emerges: one where China has for many years been ‘de-risking’ its supply chains. Beijing has focused on becoming increasingly self-sufficient in military, dual-use or strategically important technology, while the US has continued to develop complex, interwoven supply chains within which China currently features. That last fact is about to change, however. The Biden Administration intends to reduce its dependence on China for imports of certain critical materials and advanced technologies, especially where they are strategically important, such as batteries and legacy semiconductors.^[2]

As Washington de-risks, China’s share of ‘guns’ exports to the US are likely to decline, perhaps to almost zero. The change provides an opportunity, from which other countries’ export markets potentially stand to benefit. As to whether this will negatively impact China’s economy, one cannot say for sure; but as LSEG’s trade data suggest, such is China’s dominance in export markets of all descriptions it is at least possible that China’s economic trajectory continues unabated. 

The issues raised in this insight, and many more, are explored at greater length in our research paper.

[1] See for reference: https://en.wikipedia.org/wiki/Guns_versus_butter_model

[2] https://www.whitehouse.gov/briefing-room/statements-releases/2024/05/14/fact-sheet-president-biden-takes-action-to-protect-american-workers-and-businesses-from-chinas-unfair-trade-practices/