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Introduction to World Trade


Economia Internacional I - International Trade Theory

ITAM

Rahul Giri (ITAM) Introduction to World Trade 1 / 23


Outline

1 Objective

2 Globalization and World TradeGlobalizationTrade in the Global Economy

3 World Trade in GoodsPreliminariesHow Old is Trade?Dissecting International Trade

4 Migration and Foreign Direct InvestmentMigrationForeign Direct Investment (FDI)

5 Conclusion



Objective

Learning Objectives

Understand basic terms and concepts as applied to international trade.

Understand the basic ideas of why countries trade.

Understand the different types of trade including goods, services,migration, and foreign direct investment.



Globalization and World Trade

Globalization

What is Globalization?

Flow of goods and services across borders.

Movement of people and firms.

Spread of culture and ideas between countries.

Tight integration of financial markets.




Trade in the Global Economy

What is Trade?

International trade is the exchange of goods, services, labor andcapital across international borders.

Imports are the purchase of goods or services from another country.

Exports are the sale of goods or services to other countries.◮ Merchandise goods : includes manufacturing, mining, and

agricultural products.◮ Services : includes business services like eBay, travel, insurance,

and transportation.

Migration is the flow of people across borders as they move from onecountry to another.

Foreign Direct Investment is the flow of capital across borders when afirm owns a company in another country.




Trade in the Global Economy

Why do Countries Trade?

At a very basic level, they can get products from abroad cheaper or ofhigher-quality than those obtained domestically.

The fact that Germany was the largest exporter of goods in 2005 showsits technology for producing high-quality manufactured goods.

China produces goods more cheaply than most industrialized countries.



World Trade in Goods

Preliminaries

Concepts and Definitions

Trade Balance of a country is the difference between the total value ofexports and the total value of imports. Usually includes both goods andservices.

◮ We will not be concerned with trade balances; we will assumeimports equal exports.

A Trade Surplus exists when a country exports more than it imports.

A Trade Deficit exists when a country imports more than it exports.




How Old is Trade?

Trade is Very Old - Silk Route

International trade has been a part and parcel of world economics andpolitics throughout history; a case in point is the famous Silk Route .

The trade route was initiated around 114 BC by the Han Dynasty inChina, although earlier trade across the continents had already existed.

The route enabled people to transport trade goods from different parts ofthe country in China, the spice islands, and India, with Asia Minor andthe Mediterranean, extending over 8,000 km (5,000 miles) on land andsea.




How Old is Trade?

Map of the Silk Route




Dissecting International Trade

Map of World Trade in 2000 - $6.6 trillion!





Shares of World Trade by Regions, 2000





Shares of World Trade by Regions, 2000 (Contd.)

Trade within Europe is the largest - many countries, low trade barriers.

European and U.S. Trade - these countries are more similar thandifferent. Why do we see so much trade?

Trade in the Americas (North, Central, and South America and theCaribbean) - most of this is within the North American Free Trade Area(NAFTA) which consists of Canada, the U.S. and Mexico.

Trade with Asia - exports from China alone doubled from 2000 to 2005.

Other Regions -◮ Oil and natural gas are exported from the Middle East and Russia.◮ Africa accounts for only 2.5% of world trade - very small given its

size and population.





Trade to GDP Ratios

Another way to measure trade is by looking at its ratio to GDP. GDP isthe value of all final goods and services produced in a year. This ratiotells us the importance of trade relative to the size of an economy.

In 2005 trade relative to GDP for the U.S. was 13%. Although the U.S.was the world’s largest trader, it had the smallest ratio to GDP.

Most other countries have a higher ratio.

Countries that are important shipping and processing centers havemuch higher ratios - Hong Kong, Malaysia, and Singapore.

◮ The value added can be much less than the total value of exports.This is why trade can be greater than GDP.





Trade to GDP Ratios in 2005





Composition of Trade - What do We Trade?

Table: Composition of World Exports in 2003

Agriculture 8%

Mining 11%

Services 20%

Manufactures 61%





Change in Composition of Trade Over Time

Table: Manufactured Goods as Percent of Merchandise Trade

United Kingdom United StatesYear Exports Imports Exports Imports1910 75.4 24.5 47.5 40.72002 82.6 80.4 82.1 77.8



Migration and Foreign Direct Investment

Migration

Map of Migration, 2000




Migration

European and U.S. Immigration

The EU, up to 2004, had an open migration policy between membercountries. In 2004, ten more countries joined; these countries hadincomes significantly less than the existing members. Wealthiercountries are having many more issues with free migration.

◮ Example: Britain stated that it will not fully open its labor market toRomanians and Bulgarians who joined in January of 2007.

Since the 1990’s the U.S. has seen the greatest wave of immigration inits history. Of 300 million people in the U.S., about 37 million were bornin another country.

◮ The current wave has been greatly dominated by immigrants from Mexico:in 2005 it was estimated that 12 million Mexicans were living in the U.S..This was more than 10 percent of Mexico’s population.

◮ The concern of wages being driven down is amplified by the exceptionallyhigh number of illegal immigrants - illegal immigrants outnumber legal onesand about 56% of those come from Mexico.




Migration

Migration and Trade

Given a choice, migrants would like to move to a higher-wage country.◮ Unlike trade, there are much more significant regulations on

migration.◮ Policy makers fear that immigrants from low-wage countries will

drive down wages for a country’s own lower-skilled workers.

However, international trade can act as a substitute for movements ofcapital and labor across borders.

◮ Trade can raise the living standard of workers in the same way thatmoving to a higher-wage country can.

◮ As trade has increased worldwide, more workers are able to work inexport industries. This allows them to benefit from trade withoutmoving to another country.




Foreign Direct Investment (FDI)

Some Basics of FDI

FDI occurs when a firm in one country owns a company in anothercountry.

◮ Horizontal FDI occurs when a firm from one industrial country owns acompany in another industrial country.

⋆ to avoid any tariffs or quotas from exporting to a foreign market,⋆ to get improved access to that economy because the local firms will

have better facilities and information for marketing products,⋆ alliance between the production divisions of firms allows technical

expertise to be shared.◮ Vertical FDI occurs when a firm from an industrial country owns a plant in

a developing country.⋆ to take advantage of lower wages in the developing country,⋆ to avoid tariffs and acquire local partners to sell there.

Unlike migration, most FDI occurs between OECD countries - more than90% of total world FDI.





Map of FDI, 2000





FDI by Regions

The greatest amount of FDI is between industrialized countries; thus, thegreatest amount is horizontal FDI.

European and U.S. FDI - flows within Europe and between Europe andthe U.S. add up to 55% of the world total.

FDI in the Americas - inflows to Brazil and Mexico accounted for aboutone-half of the total FDI inflows to Latin America. These are examples ofvertical FDI prompted by the opportunity for lower production wages.

FDI with Asia - China is the largest recipient country for FDI in Asia, thethird largest recipient of FDI in the world. This is again vertical FDI. FDIbetween the U.S. and Japan and between Europe and Japan ishorizontal.



Conclusion

Summary

Trade in goods is old, has become very large, and is growing.

A large portion of international trade is between industrial countries.

Over time the composition of trade has shifted towards manufacturedgoods from agricultural goods.

The majority of world migration occurs into developing countries.

International trade in goods and services acts as a substitute formigration.

The majority of world flows of FDI occurs between industrial countries.


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