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International Trade
Wednesday, 10 September 2008 20:24

The amount of fuss that is stirred up by discussions on international trade is just amazing.

Just think about it.  A transaction between someone in Seattle and someone in Vancouver is international trade.  The two people are residents of different countries which use different currencies.  A similar transaction between two people, one in Seattle and the other in New York, a much greater distance, is just a domestic transaction.

What's the problem?  Well, most human beings are nationalistic or even racist, which means that we like to blame foreigners (even Canadians!) for our problems.  It is also true that much international trade is longer distance.  It also often takes place between countries of different levels of development, and even different political and social systems.  So it may seem that trade is destroying jobs, industry, culture and the environment.  It may also seem destabilizing or "unfair".


There are many benefits from trading internationally (and also domestically).  If we specialise in what we do best (comparative advantage) we end up better off.  As we specialise, we can also reap economies of scale -- unit costs become lower the more we produce.

We can also import or buy those goods and services which others are relatively better at producing.  And we can benefit even more from these imports because they usually embody knowledge and technology, from which we can learn.  Many countries can benefit from importing products that are simply not available at home, like Japan's imports of oil.

The economy as a whole can gain in many ways.  International trade promotes competition -- the rhythm of life in a market economy -- and therefore efficiency, and also innovation.  And trade in environmental goods and services can help the environment.

Trade between nations can create the basis for peaceful relations.  And free trade is one aspect of economic freedom -- "I wanna be free!".

But don't worry.  We don't have to get stuck in our comparative advantage.  It is a dynamic concept.  Japan used to be a low-tech producer of transistor radios and the like, and then climbed the technology ladder to be sitting today on the global technology frontier.

Most every country in the world has protected its industry from imports from foreign lands.  Enterprises or trade unions want special favours from government so they ask for protection.  In return, they might promise to vote for the government -- patronage is still a feature of many democracies.

The average citizen who pays the price does not complain because either the hassle of fighting this protectionism is not worth the bother, or he is not even aware of the protection.  But the cost is very real, as we saw in the 1930s when protectionism dragged us even deeper into the Great Depression.

So when the guns of World War 2 stopped blazing, the international trade system was riddled with massive protection.  Trade was then liberalised through "rounds" of negotiations under the GATT (predecessor of the WTO) -- like the Kennedy Round in the 1960s, Tokyo Round in the 1970s, and the Uruguay Round from 1986 to 1994.  The Doha Development Agenda is the latest trade round which was launched in 2001, but is still not finished!

Trade was also liberalised through regional economic arrangements like the European Union, NAFTA, Mercosur, and ASEAN.  An increasing number of countries are negotiating free trade agreements with other countries.  Trade has also been liberalised through "special economic zones" -- China started its reform by establishing special economic zones along its coast. And some wise countries even liberalised trade alone, particularly in East Asia.

While trade barriers are now very much lower than they used to be, they still exist, particularly for agriculture and services.  And barriers to trade between developing countries are still quite high. Government financed export credits subsidise trade.  And domestic regulations are perhaps the greatest trade barrier, particularly in the services area.

The nature of trade is changing dramatically.  Thanks to reductions in transportaion costs and the sophistication of information technology, trade in manufactured goods is fragmenting.  The production process is being sliced up into different "tasks" like design, component manufacture, assembly and marketing.  These different tasks are located in different countries according to their comparative advantage.  China is not so much an export giant, but rather a major international base for the assembly of manufactured goods.

Many services like back office activities are now also being outsourced to places like India or the Philippines.  And new forms of services trade are now emerging like trade in higher education and trade in health services.  While the services sector generates around two-thirds of the total world value added, its share in total trade remains around 20%, a share which has been broadly unchanged for several decades.  With the new potential for outsourcing services, this will likely change.

This new fragmented and outsourced trade is increasingly driven by foreign direct investment.  And an increasing share of the trade is now undertaken between different branches and subsidiaries of one multinational company.

Over the past few decades, trade has become very globalised.  Asian countries have joined the developed OECD countries as major trading nations.  Since China joined the WTO in 2001, it has almost quadrupled its exports, while imports have more than tripled.  And many other emerging economies are now among the world's top trading nations.

In 2007, the world's top 20 merchandise exporters included China (number 2), Japan (4), Korea (11), Russia (12), Hong Kong (13), Singapore (14), Mexico (15), Taiwan (16), Saudi Arabia (18), Malaysia (19) and United Arab Emirates (20).  South America's leading exporter, Brazil, is the world's 24th exporter, while South Africa at 24th is Africa's leading exporter.

Longer term trade trends for the emerging world are also of great interest.  From 1948 to 2007, Asia's (including Japan) share of world merchandise exports has doubled from 14.0% to 27.9%, with China growing from 0.9% to 8.9%.  Africa and South America are two regions of the world that have done less well out of globalization.  Africa's share of world export declined from 7.3% to 3.1% over this period, while South America saw a decline from 11.3% to 3.7%.

Trade flows within some regions (intra-regional trade) account for a higher share of world trade than flows between regions.  Since 2000, this share has fluctuated from between 55 to 58%.  Europe's intra-trade is growing much faster than its external trade due to a deepening of economic integration, and now represents 68% of EU trade.  Intra-trade is balanced with external trade for NAFTA (51%/49%) and for Asia (50%/50%).  For the other regions, intra-trade is minor compared with external trade -- South America (24%/76%), Africa (10%/90%) and CIS (20%/80%).  Other trade blocs show much lower levels of intra-trade -- ASEAN (25%), Mercosur (14%) and the Andean Community (8%).

The emergence of a global economy is directly linked to the globalisation of trade.  Trade has grown consistently much faster than production -- our economies are now increasingly "open".  From 2000-2007, world exports increased on average 2.7 percentage points higher than real GDP.   Overall, countries that have opened themselves to international trade have performed very much better in terms of economic growth and poverty reduction that countries that have not opened up.

At the moment, with the global financial crisis, governments are trying to fight off protectionist pressures, and to keep markets open.  But there are a whole set of deeper problems and challenges that governments should be concerned with.  What are they?

1.  International trade can have a dark side: trade in counterfeited goods; trade in drugs or arms, etc; exports of hazardous wastes from rich to poor countries; etc.  There is also increased bribery associated with trade transactions.

2.  Openness to international trade can create vulnerabilities and risks like: security of supply risks to importers, eg, the security of supply for oil or food; dependence on a narrow export base can make a country vulnerable to world market fluctuations or in the case of agricultural crops vulnerable to droughts or cyclones; trade sanctions can be used as a political tool against your country; and resource rich countries often suffer from the 'curse of natural resources'.

3.  Trade can provoke economic and social change.  We need to make economies flexible, adaptable and innovative.

The international trade paradox is the following.  The globalisation of trade has been a very positive thing for those countries that have opened up to trade.  Even so, we are always trying to fight off protectionist pressures.

But, governments and international organizations still pay too little attention to the deeper problems and challenges mentioned above.

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