International TradeInternational Trade

Mgmt. 418Mgmt. 418

Chapter 1 Chapter 1

The World of International EconomicsThe World of International Economics

The importance of international trade to the economic The importance of international trade to the economic health and overall standard of living of countries is very health and overall standard of living of countries is very clear today.clear today.

International trade had been very important all the time, in International trade had been very important all the time, in the past, too.the past, too.

We examine how international transactions influence We examine how international transactions influence social welfare, income distribution, employment, social welfare, income distribution, employment, growth, price stability, and public policy.growth, price stability, and public policy.

The Nature of The Nature of Merchandise TradeMerchandise Trade

Since 1970’s, world trade surpassed world Since 1970’s, world trade surpassed world merchandise production.merchandise production.

Growth in world production and trade:Growth in world production and trade:

The Gegraphical The Gegraphical Composition of TradeComposition of Trade

In terms of major economic areas, In terms of major economic areas, industrialized countries dominated world industrialized countries dominated world trade until 2000. trade until 2000.

In the last decade, in international In the last decade, in international merchandise trade the share of West is merchandise trade the share of West is reduced and the share of Developing reduced and the share of Developing countries increased.countries increased.

Leading exporters and importers in Leading exporters and importers in world merchandise trade (1999):world merchandise trade (1999):

Exporters Exporters value %value % Importers Importers value %value %

(bn $) (bn $) of worldof world tradetrade (bn $) (bn $) of world of world tradetrade

EUEU 798.6 18.9 US 1059.9 23.6798.6 18.9 US 1059.9 23.6US 695.0 16.4 EU 851.2 18.9US 695.0 16.4 EU 851.2 18.9Japan 419.4 9.9 Japan 310.7 6.9Japan 419.4 9.9 Japan 310.7 6.9Canada 238.4 5.6 Canada 220.2 4.9Canada 238.4 5.6 Canada 220.2 4.9China 194.9 4.6 Hong Kong 181.7 4.0China 194.9 4.6 Hong Kong 181.7 4.0Hong Kong 174.8 4.1 China 165.7 3.7Hong Kong 174.8 4.1 China 165.7 3.7Korea 144.2 3.4 Mexico 148.2 3.3Korea 144.2 3.4 Mexico 148.2 3.3

Exports and imports by Exports and imports by region:region:

ExportsExports ImportsImports

2000-2005 2004 20052000-2005 2004 2005 2000-2005 2004 20052000-2005 2004 2005

4.54.5 9.5 9.5 6.0 6.0 WorldWorld 5.05.0 10.5 6.0 10.5 6.0

1.5 8.0 6.0 N. America 4.0 1.5 8.0 6.0 N. America 4.0 10.5 6.0 10.5 6.0

7.0 13.0 8.5 S. & C. America 4.5 19.0 14.07.0 13.0 8.5 S. & C. America 4.5 19.0 14.0

3.5 7.0 3.5 Europe 3.0 7.0 3.53.5 7.0 3.5 Europe 3.0 7.0 3.5

3.0 7.0 3.5 EU (25) 2.5 6.5 3.03.0 7.0 3.5 EU (25) 2.5 6.5 3.0

8.5 13.0 4.5 CIS 15.5 16.0 18.08.5 13.0 4.5 CIS 15.5 16.0 18.0

8.5 14.5 10.0 Asia 8.0 14.5 7.58.5 14.5 10.0 Asia 8.0 14.5 7.5

2.5 10.5 0.5 Japan 3.5 7.0 2.52.5 10.5 0.5 Japan 3.5 7.0 2.5

6.5 14.5 7.5 Six EA traders 4.5 14.0 5.06.5 14.5 7.5 Six EA traders 4.5 14.0 5.0

Geographical destination Geographical destination of Exports (2005):of Exports (2005):

Imports value (bn $)Imports value (bn $)North AmericaNorth America 2,2902,290South and CentralSouth and CentralAmericaAmerica 297 297EuropeEurope 4.5734.573CISCIS 216 216AfricaAfrica 253 253Middle EastMiddle East 330 330AsiaAsia 2,8812,881

Leading-country Leading-country merchandise exporters and merchandise exporters and importers (2007):importers (2007):

ExportersExporters value value share % changeshare % changeImporters value share %change value share %changeUS 456.4 13.9 15US 456.4 13.9 15 US 335.9 10.9 9US 335.9 10.9 9UK 273.0 8.3 18 UK 273.0 8.3 18 Germany 250.5 8.1 15Germany 250.5 8.1 15Germany 205.8 6.3 15 Germany 205.8 6.3 15 UK 194.1 6.3 13UK 194.1 6.3 13France 136.7 4.2 16France 136.7 4.2 16 Japan 148.7 4.8 11Japan 148.7 4.8 11Spain 128.3 3.9 21Spain 128.3 3.9 21 China 129.3 4.2 29China 129.3 4.2 29Japan 127.1 3.9 10Japan 127.1 3.9 10 France 124.1 4.0 16France 124.1 4.0 16China 121.7 3.7 33China 121.7 3.7 33 Italy 118.3 3.8 21Italy 118.3 3.8 21Italy 110.5 3.4 13Italy 110.5 3.4 13 Spain 98.4 3.2 26Spain 98.4 3.2 26India 89.7 2.7 20 India 89.7 2.7 20 Ireland 94.5 3.1 20Ireland 94.5 3.1 20Ireland 89.0 2.7 30Ireland 89.0 2.7 30 Netherland86.8 2.8 10Netherland86.8 2.8 10Netherlands87.5 2.7 9Netherlands87.5 2.7 9 Korea 82.5 2.7 21Korea 82.5 2.7 21Hong Kong 82.7 2.5 14Hong Kong 82.7 2.5 14 Canada 80.3 2.6 12Canada 80.3 2.6 12(China)(China)Belgium 75.5 2.3 -Belgium 75.5 2.3 - India 77.2 2.5 22India 77.2 2.5 22

The commodity composition The commodity composition of world trade (%):of world trade (%):

ImportsImports ExportsExports19801980 20042004 19801980 20042004

ISM-exISM-ex 3131 2626 2929 1414(industrial supplies(industrial suppliesAnd materials)And materials)

Capital goodsCapital goods 3434 4040 1313 2323Consumer g.Consumer g. 8 8 1313 1414 2525AutosAutos 8 8 1111 1111 1515OtherOther 2020 1212 4343 2323Trade as Trade as

% of GDP% of GDP 10.710.7 15 9.4 9.815 9.4 9.8

Growth in world Growth in world production and trade (%):production and trade (%):

ProductionProduction 1963-731963-73 1980-851980-85 20052005AllAll 6.06.0 1.71.7 2.52.5AgricultureAgriculture 2.52.5 2.92.9 0.50.5MiningMining 5.55.5 -2.7 -2.7 1.01.0ManufacturingManufacturing 7.57.5 2.32.3 3.53.5ExportsExportsAllAll 9.09.0 2.12.1 6.06.0Agriculture 14.0Agriculture 14.0 1.01.0 5.55.5MiningMining 7.5 -2.7 7.5 -2.7 2.52.5Manufacturing Manufacturing 11.511.5 4.54.5 7.07.0

World Trade in ServicesWorld Trade in Services

The trade in services is increasing rapidly.The trade in services is increasing rapidly.The share of service production in GDP of The share of service production in GDP of

many industrialized countries is many industrialized countries is increasing, as well. For example, increasing, as well. For example, services account for 72 % of GDP in the services account for 72 % of GDP in the USA, 56 % in Canada, 70 % in USA, 56 % in Canada, 70 % in Netherlands, 66 % in the UK, 61 % in Netherlands, 66 % in the UK, 61 % in Germany, 71 % in France, and 60 % in Germany, 71 % in France, and 60 % in Japan.Japan.

International Standard International Standard Industrial Classification (ISIC) Industrial Classification (ISIC) systemsystem

Categorizes services as; wholesale and Categorizes services as; wholesale and retail trade, restaurants and hotels, retail trade, restaurants and hotels, transport, storage, communications, transport, storage, communications, financial services, insurance, real estate, financial services, insurance, real estate, business services, personal services, business services, personal services, community services, social services, and community services, social services, and government services.government services.

International trade in International trade in servicesservices

This category broadly consists of; commercial This category broadly consists of; commercial services, investment income, and government services, investment income, and government services.services.

The nature of trade in “services” is such that it is The nature of trade in “services” is such that it is extremely difficult to obtain accurate estimates extremely difficult to obtain accurate estimates of the value of these transactions.of the value of these transactions.

Many service transactions are not observable, Many service transactions are not observable, hence they are sometimes referred as hence they are sometimes referred as “invisibles”.“invisibles”.

Liberalization of trade in Liberalization of trade in servicesservices

Mainly industrialized countries advocated Mainly industrialized countries advocated the liberalization of services trade, like the liberalization of services trade, like banks, financial services, insurance, banks, financial services, insurance, telecommunications sectors to open up telecommunications sectors to open up to foreign firms. to foreign firms.

In 1996, telecommunications sector was In 1996, telecommunications sector was liberalized by WTO. liberalized by WTO.

The changing degree of The changing degree of interdependenceinterdependence

The relative size of trade is measured by The relative size of trade is measured by comparing the size of a country’s exports with comparing the size of a country’s exports with its GDP.its GDP.

Increases in export/GDP ratio indicates that a Increases in export/GDP ratio indicates that a higher percentage of output of final goods and higher percentage of output of final goods and services produced within a country’s borders is services produced within a country’s borders is being sold abroad.being sold abroad.

It indicates a higher interdependence.It indicates a higher interdependence.Exports could be raw materials, intermediary Exports could be raw materials, intermediary

goods, semi-finished goods, finished goods, goods, semi-finished goods, finished goods, services, and/or capital goodsservices, and/or capital goods

Dependence on exportsDependence on exports

As dependence on exports increase, the As dependence on exports increase, the prosperity of importing countries become prosperity of importing countries become important for the exporting country.important for the exporting country.

So dependence requires adjustments and policy So dependence requires adjustments and policy coordination among the trading countries.coordination among the trading countries.

This situation leads to economic integrations in This situation leads to economic integrations in diferent regions of the world; such as, NAFTA, diferent regions of the world; such as, NAFTA, EU, ECOWAS, ASEAN, GCC, etc.EU, ECOWAS, ASEAN, GCC, etc.