2.2. Impediments to Trade

Question 1

Impediments to trade (6 points)

Answer 1

Distance: there is a strong negative effect of distance on international trade. A 1% increase in distance causes a 0.7%-1% fall in trade. Caused by increased transport costs.

Lack of personal contact: an American salesman can easily visit Canada, but not London. Trade is normally higher when countries have close personal contacts.

Cultural affinity / ties: similarities between countries, such as a common language, can lead to strong economic ties and trade.

Geography: countries with ocean harbours (like the Netherlands) or a lack of mountain barriers that make trade cheaper and easier.

Multinational corporations: some multinational companies can import and export goods between their divisions.

Borders: decrease trade due to formalities. Also, different currencies and tariffs can increase cost and decrease trade.

Question 2

Trade agreements

Answer 2

Established between countries with the aim of reducing formalities, tariffs and other barriers to trade.

If a trade agreement is effective, it should lead to significantly more trade among its partners than one would expect given distance and GDP.

Trade agreements do not make borders irrelevant. Studies show that there is more trade between Canadan provinces than trade between the same province and a US state of similar distance.

It is estimated that US-Canadian border reduces trade as if the countries were 1,500-2,500 miles apart.

Question 3

World getting smaller

Answer 3

Modern transportation and communication have worked to make everyone more connected.

But, the gravity model shows a strong negative relationship between distance and international trade (even though effects have grown weaker over time).

Since the 1970s, world trade as a share of GDP has soared, much to do with vertical disintegration.

Question 4

Vertical disintegration

Answer 4

Before a product reaches consumers, it goes through many production stages in many countries.

For example, the iPhone is assembled in low-wage nations, such as China, using parts manufactured in high-wage nations, such as Japan.

A $100 product can give rise to $200 or $300 worth of international trade.