source: https://ourworldindata.org/trade-and-globalization
Trade and Globalisation – Our World In Data
Over the last two centuries trade has grown remarkably completely transforming the global economy. - Exports today are more than 40 times larger than in 1913. Today about one fourth of total global production is exported. - Up to 1870, worldwide exports were less than 10% of global output. Today, that value is close to 25%. This shows that over the last hundred years of economic growth, there has been more than proportional growth in global trade. Understanding this transformative process is important because trade has generated gains, but it has also had important distributional consequences.
Efficiency Gains
Countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output. Is this relation casual? - Potential growth-enhancing factors that may come from greater global economic integration are: 1. Competition - Firms are forced to innovate and cut costs to avoid being replaced by more dynamic firms. 2. Economies of scale – Firms that export worldwide face larger demand which allows them to operate at a larger scale. 3. Innovation – Firms that trade can gain exposure from foreign competitors to develop newer technologies and industry standards. Frankel and Romer – A country’s geography is fixed and mainly affects national income through trade, therefore making it a strong influence on economic growth. Trade liberalization episodes also lead to firms becoming more productive. - Innovation increased more in those European firms most affected by Chinese imports. (New existing technologies were adopted within firms; and aggregate productivity also increased as employment was reallocated towards more technologically advanced firms.)
Distributional Consequences
Chinese imports and their impact on factory workers in the US - Rising exposure increased unemployment and reduced wages. Claims for unemployment and healthcare benefits also increased in more trade-exposed labor markets. - This perspective ignores that firms operate in multiple regions and industries at the same time. Evidence proves that the Chinese trade shock provided incentives for US firms to diversify and reorganize production.
Expansion of trade in India and the impact on poverty reductions - Liberalization had a stronger negative impact among the least geographically mobile at the lowest income levels. Rural regions experienced a slower decline in poverty and had lower consumption growth. This showed the gains from trade are unequally distributed. Although trade negatively affects wages and employment for specific groups of people, it also brings welfare gains with the prices of consumption goods from product variety. - Study from Mexico showed arrival of global retail chains led to reductions in the incomes of retail sector workers as well as lower costs of living for both rich and poor households. Thus, concluding a net positive welfare across all income groups (con: regressive) Conclusion: There are aggregate gains from trade, but there are also real distributional concerns. While it isn’t a major driver of income inequality, public policies, such as unemployment benefits and other safety-net programs, should help redistribute the gains from trade.
Trade from a historical perspective
There have been two waves of globalization. - The first wave – from the 19th century to the beginning of the First World War. - Openness Index – Ratio of total trade (I + X) to global GDP - Never exceeded 10% before 1800 (mostly driven by colonialism) - Technological advances (ex- steamships) triggered a period of growth in world trade which came to an end with the First World War, when the decline of liberalism and the rise of nationalism led to a slump in international trade. - The second wave - after the Second World War and is continuing. - Openness Index amounts to more than 50% today. - This rapid growth was enabled by reduction in transaction costs from technological advances such as: commercial civil aviation, telephone, sea freight. - This did not only impact trade volume but also the types of goods traded. First wave was mainly inter-industry trade (England traded machines for Indian tea). Second wave saw a rise in intra-industry trade (France trades machines to and from Germany). This is important because the scope for specialization increases.
Trade around the world today
Trade transactions include both goods (tangible products) and services (intangible commodities: tourism, financial services).
Trade in goods has been happening for millennia, while trade in services is a relatively recent phenomenon. Today, services are an important driver of trade in some countries (UK- services are about 45% of all exports.).
Globally, trade in goods accounts for most trade transactions. But the share of services in total global exports has increased (17% in 1979 to 24% in 2017)
Today, about 30% of the value of global exports comes from foreign inputs. This is a key indicator of global economic integration in which we see the different stages of the production process taking place across different countries.
Bilateral trade has grown substantially (13.05% in 1950 to 57.76 in 2014) as well as the number of preferential trade agreements (a pact that reduces tariffs for participants). In the late 1970s, North-South agreements accounted for more than half of all agreements. Today, most preferential trade agreements are between developing economies.
- Up until the Second World War, most of trade transactions were between a small group of rich countries. This regime has changed over the last couple of decades, and today trade between non-rich countries is just as important as trade between rich countries.
Explaining trade patterns
Most trade theories focus on sources of comparative advantage. A country is said to have a comparative advantage if they can produce something at a lower opportunity cost than their trade partners. These theories suggest that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, based on their strengths. - Trade patterns of Japan from closed to open economy: Prices of major exports like silk increased (Cheap to produce for Japan and was valuable abroad) while prices of imports like sugar decreased (Cheap abroad, difficult to produce locally). Trade intensity is strongly linked to geographic distance. Findings suggests that trade diminishes with distance, thus making it a significant barrier to trade. This is further proven by looking at trade intensity data within countries. Firms exporting to each of the corresponding neighbours is largest close to the border. Empirical evidence shows that comparative advantage is indeed relevant; but it is not the only force driving incentives to specialization and trade. Taking the concept of comparative advantage, why is it then the case that in the last few years we have seen such rapid growth in intra-industry trade between rich countries? Increasing returns to scale has been used to explain the rapid growth of this phenomena (Evenett and Keller). The idea is that specialization allows countries to reap greater economies of scale (i.e. to reduce production costs by focusing on producing large quantities of specific products), so trade can be a good idea even if the countries do not differ in factor endowments.
Measurement and Data Quality
- Discrepancies in international trade statistics are large for a variety of reasons like: conceptual inconsistencies across measurement standards, inconsistencies in the way countries apply agreed protocols. rest of this section I think is useless for the exam