Explaining Ireland's Trade Balance

The balance of trade is the difference between the value of all the goods and services a country exports and the goods and services it imports over a certain period. In this publication, we take two measurements for Ireland’s trade in goods and services based on data available in the CSO. One measurement uses a goods balance based largely on the physical movement of goods across borders; the other calculates Ireland’s goods balance based on a change of ownership. The services trade balance is the same for both measurements¹. The two measurements, denoted Ireland's traditional and total trade balances in this publication, tend to follow the same trend except for 2014 and 2015 when they diverged. A sharp divergence in 2015 opened up a large gap between the two trade balances and a large gap was maintained in 2016 and 2017. As a result, Ireland’s trade balance with individual countries can vary significantly across the two measurements.

Get the Data: StatBank N1705T05

The data in Figure 2 and Table 1 provides us with a general overview of the extent to which the Irish economy trades with the rest of the world. Within these trade flows, distinctions are made between various physical products or goods, and non-physical services. The primary data sources for goods and services traded internationally are introduced below.

What Goods do we Trade on a Cross-Border Basis?

Figures 3 and 4 present the composition of goods Ireland exports and imports based largely² on the physical movement of goods across its borders. These movements of goods are published monthly by the CSO.

In 2017, Chemicals and Related Products accounted for 55% of Ireland’s €123bn of goods exports (see Figure 3). Pharmaceutical products dominate the Chemicals and Related Products goods category.

What Services do we Trade?

Figures 5 and 6 show the composition of Ireland’s total services exports and imports from 2007 to 2017. Unlike the goods data presented in the previous section, data on internationally traded services is published quarterly by the CSO. The main source for the data is statutory surveys completed by enterprises resident in Ireland.

In 2017, Computer Services was Ireland’s largest export category at €69.3bn or 43% of total service exports (see Figure 5).

What is Ireland’s Trade Balance?

A version of Ireland’s trade balance with the rest of the world can be calculated using the goods export and import data in Figures 3 and 4, and the services trade data in Figures 5 and 6 above. For simplicity, we will denote this measurement as Ireland’s traditional trade balance.

However, Ireland’s final or total trade balance (see Figure 2) includes a number of adjustments to this traditional balance. These adjustments are necessary to provide consistency between data on cross-border movements of goods and corresponding purchases and sales reported by businesses resident in Ireland. The adjustments produce a goods trade balance that reflects those Irish exports and imports that result in a change of ownership or, in other words, a commercial exchange. In practice, this means taking the traditional trade balance and removing cross-border goods exports and imports where no change of ownership occurs, and including flows where goods change ownership without physically crossing the Irish border. Further details on these adjustments are available at Explaining Goods Exports and Imports 2012-2016.

These adjustments have become necessary with the increasing trend of globalisation, whereby products or goods move across borders for further processing or transformation while remaining in the ownership of one enterprise. Taking account of the ownership of Global Value Chains³ is an important feature in understanding Ireland’s total trade balance.

It is this total trade balance that is used in calculating Ireland’s GDP. It also potentially has a relationship with Government Revenues as the data relates to sales and purchases reported by businesses resident in Ireland. Notwithstanding this, data on cross-border goods exports and imports are also important. For example, these physical flows are relevant to national employment and domestic consumption.

Figure 7 below compares Ireland’s traditional and total trade balances. In 2013, the relationship between the two measurements for Ireland’s trade balance began to change. That is, Ireland’s total trade balance began to exceed its traditional balance.

Figure 7 also illustrates the important increase in the total trade balance in 2015 and the large divergence between these measurement bases that year.

Get the Data: StatBank TSA01,  BPA03, N1705T05

Figures 8 and 9 show the contribution of services and traditional goods trade to Ireland’s total exports and imports respectively. The figures demonstrate services exports are nearly as valuable as goods exports, and services imports have grown to twice the value of goods imports in 2017.

Figures 8 and 9 also demonstrate the extent to which adjustments are made to traditional export and import data to arrive at total values. In recent years, the adjustments made to exports are not only positive for the trade balance but also very large (see Figure 8). This is further explained in the following section.

What is the effect of a change in ownership on our measurement?

Table 3 illustrates total goods exports grew by 75% from €114.5bn in 2014 to €200bn in 2015. Much of this growth is a result of changes in ownership which did not involve the goods crossing the Irish border. In other words, goods owned by companies resident in Ireland that are processed or manufactured abroad and subsequently sold onward without returning to Ireland.  

This growth in goods exports is a contributory factor to the large divergence between the two measured trade balances that occurred in 2015.  The 50% increase in service imports in 2015 (see Figure 6) was also a major factor in the divergence, causing the traditional trade balance to fall from €25bn in 2014 to €5bn in 2015 (see Table 2).  The gap between the two trade balances remained large in 2016 and 2017 (see Figure 7).

Who do we Trade with?  

Ireland’s primary trading partners in 2017 are shown in Tables 4 and 5 below.

In 2017, the US and UK were Ireland’s most significant trading partners, both in terms of exports and imports. Combined these two countries accounted for 31% of Ireland’s total exports and 38% of Ireland’s total imports.

Ireland’s total exports to the US are effectively the same as the value of its total US imports while its total exports to the UK exceed its UK imports by €10.3bn. This trade surplus with the UK represents 11% of Ireland’s total trade surplus with the world.

Following on from Figures 8 and 9, Tables 4 and 5⁴ quantify the size of the adjustments made to traditional trade data for a number of countries. Of note is the €17bn adjustment to Ireland’s goods exports to China. Figures 10 and 11 plot the composition of Ireland’s exports and imports with its significant trading partners.

In Figures 12 and 13, we show the relationship between exports and imports for each key trading partner. The difference between the figures is the ownership adjustment to account for Global Value Chains.

Ireland's Trade Balance by Geographic Location 

Get the Data: StatBank BPA05, Statistical Yearbook of Ireland 2018, Trade Statistics December 2017 (PDF 2,066KB)

Some of the impact of globalisation is reflected in the variation of trade balance measurements for individual countries (see Table 6). For example, in 2017 China was the country with which Ireland had the largest trade surplus at €19.4bn. This is more than ten times the size of Ireland’s traditional trade balance with China for which the goods balance is based predominantly on cross-border flows only.

Ireland’s largest trade deficit is with the Netherlands at nearly €19bn and is driven by €22bn of services imports (see Table 5). This deficit shrinks to €13.7bn if we contain the goods balance to largely customs based data. This difference in the two trade balances is driven by the €3.8bn negative adjustment to goods exports to the Netherlands (see Table 4). The negative adjustment suggests that a lot of physical flows of goods from Ireland to the Netherlands do not result in a change of ownership.

To conclude, in this note two measurements for Ireland’s trade balance have been calculated based on data published by the CSO. The difference between the two trade balances is explained by how Ireland’s exports and imports of goods are derived. One measurement uses a goods balance based largely on the physical movement of goods across borders; the other calculates Ireland’s goods balance based on a change of ownership. Since 2015 the difference between the values of the two trade balances has grown considerably. As a result, Ireland’s trade balance with individuals countries can vary significantly across the two measurements.

 

---

---

 

Many thanks to Paul McElvaney for his earlier work on this Release.