World Trade - An Overview

Question 1

Who trades with whom?

Answer 1

More than 30% of world output sold across national borders
World trade in G/S exceeded $25trillion in 2019
US main trading partners - Mexico, Canada, China

Question 2

Size matters - the gravity model?

Answer 2

3 of the top 15 US trading partners are European - Germany, UK, France - Why?
They have the largest GDP in Europe
Size of an economy directly related to volume of imports/exports
Larger economies produce more so have to sell more in export market, generating more and thus able to buy more imports

Question 3

Gravity model equations?

Answer 3

Tij = (A x Yi x Yj)/Dij
A is a constant term
Tij is value of trade between i and j
Yi and Yj are GDP for each
Dij is distance between the countries
More generally -
Tij = (A x Yi^a x Yj^b)/Dij^c
where a, b and c are allowed to differ from 1

Question 4

Using gravity model - looking for anomalies?

Answer 4

(looking at % of US trade with EU)
Fits but not perfectly
Netherlands, Belgium and Ireland much more than predicted
Ireland has strong cultural affinity due to common language and history of migration - also hosts many US based multinational corporations
Netherlands and Belgium have transport cost advantages due to location

Question 5

Impediments to trade?

Answer 5

• Distance – between markets influences transportation costs and thus the cost of imports and exports
• Cultural affinity – such as a common language often lead to strong economic ties
• Geography – ocean harbours and lack of mountain barriers make transportation and trade easier
• Multinational corporations – import and export between their divisions
• Borders – involves formalities that take time, often different currencies need to be exchanged, perhaps monetary like tariffs
• Estimates of effect of distance from gravity model predict 1% increase in distance between countries is associated with decrease in volume of trade between 0.7% and 1%
• Trade agreements intended to reduce formalities needed to cross borders and thus increase trade
• US – NAFTA with Mexico and Canada in 1994, replaced by USMCA in 2020
• Canada economy roughly same size of Spain but trades with US as much as all of Europe
• Canadian border still reduces trade – data shows much more trade between pairs of Canadian provinces than between provinces and the US, even holding distance constant

Question 6

The changing pattern of world trade - has the world gotten smaller?

Answer 6

• Negative effect of distance on trade according to gravity model is significant but grown smaller due to modern transportation and communication
• Political factors such as wars can change trade patterns much more than innovations
• Vertical disintegration of production has contributed to rise in value of world trade through extensive cross shipping of components

Question 7

What do we trade?

Answer 7

• About 70% of volume of trade today in manufactured products such as automobiles, computers and clothing
• Fuels and mining products remain important at about 15%
• Agricultural products relatively small at 10%
• In past large fraction came from agricultural and mineral products
• In 1910, Britain mainly imported agricultural and mineral products, although manufactured products still represented most of the volume of exports.
• In 1910, the United States mainly imported and exported agricultural products and mineral products
• Low and middle income countries also changed composition of their trade
• In 2001, about 65 percent of exports from low- and middle-income countries were manufactured products ,and only 10 percent of exports were agricultural products.–
• In 1960, about 58 percent of exports from low- and middle-income countries were agricultural products and only 12 percent of exports were manufactured products.*
• More than 90 percent of the exports of China, the largest developing country, and a rapidly growing force in world trade, consist of manufactured goods.

Question 8

Service offshoring?

Answer 8

(outsourcing) – occurs when a firm that provides services moves its operations to a foreign location
* Can occur for services that can be transmitted electronically
* Customer service centres
* Currently not significant part of trade
* Some jobs are (tradable)
* About 60% of jobs need to be done close to customer, making them non tradable