International Trade and Globalisation
ESRC Festival of Social Science
06 November 2014
Dr Dennis Novy
Associate Professor, Department of Economics and CAGE
University of Warwick
World trade: An overview
- In 2012, the world as a whole produced goods and services worth about $72 trillion.
- Just over 50% was sold across national borders, i.e., around $37 trillion.
- Comparison: UK GDP is roughly $2.5 trillion.
Who trades with whom?
The table lists the most important destination countries for exports:
UK
#1 USA
#2 Germany
#3 France
#4 Netherlands
#5 Ireland
(Data for the year
USA
Canada
Mexico
China
Japan
UK
2011)
Australia
China
Japan
Korea
India
USA
Austria
Germany
Italy
France
Switzerland
Hungary
Japan
China
USA
Korea
Taiwan
Hong Kong
China
USA
Hong Kong
Japan
Korea
Taiwan
- Size clearly is important.
- Distance is an impediment, neighbours are big trading partners.
- Thus, small remote countries (e.g. Angola or Nepal) do not show up in the table.
World shipping routes (Source: Nicholas Rapp, taken from vox.com)
Figure 1.2 from Feenstra/Taylor
The world’s busiest container ports (Source: Seth Kadish, taken from vox.com)
Figure 3 from Hanson (2012)
World export map (Source: Simran Khosla, taken from vox.com). This map charts each
country’s biggest export category, colour-coded by type of industry.
Trade costs
Trade costs can be
geographical (distance, landlocked, being isolated by mountains or deserts etc.)
historical/cultural ([lack of] colonial history, dissimilar language etc.)
political (tari¤s, no free trade agreements/customs unions, exchange rate volatility, capital controls, general political uncertainty etc.)
All of these trade frictions can be substantial.
Have trade costs become smaller?
- Answer: Generally yes, but they are still substantial.
- No “death of distance.” The distance barrier is well and alive for trade in goods and
services. The world has seen an increase in regional integration, i.e., relatively more
trade with nearby countries.
- Consider history: The world got smaller between the mid-19th century and 1914
(steamships, telegraph). But politics made it bigger again for decades (world wars,
protectionism).
- For example, British trade didn’t recover to pre-World War I levels until about 1970.
Figure 1.4 from Feenstra/Taylor
Note that import duties over imports can be seen as a proxy for average tari¤s,
1860-2000 (the data are for the entire global economy).
- The next three graphs are taken from Jacks, Meissner and Novy (“Trade Costs,
1870-2000” American Economic Review, May 2008).
Trade cost indices for France, UK and U.S. during the ‘First Wave of Globalization’
(1870-1913 with the values for 1870 normalized to 100).
Trade cost indices for France, UK and U.S. in the interwar period (1921-1939 with
the values for 1921 normalized to 100).
Trade cost indices for France, UK and U.S. during the ‘Second Wave of
Globalization’(1950-2000 with the values for 1950 normalized to 100).
What do countries trade?
- The composition of world trade in 2003 was
Manufactures 61%
Services 20%
Mining 11%
Agricultural 8%
- Mostly manufactured goods (automobiles, computers, clothing etc.)
- Trade in services is on the rise (airline tickets, shipping services, insurance fees from
abroad, tourism, overseas call centres etc.)
- But mineral products remain important (oil, coal, copper etc.)
- Also agricultural products (wheat, soybeans, cotton etc.)
Example: The international production chain for the iPhone
- The iPhone sells in the U.S. for about $500 in retail stores. It is assembled in China
and then shipped to the U.S. But the value of the iPhone when it leaves China is
only in the range of $180. The di¤erence is essentially distribution costs within the
U.S. and especially Apple’s markup (i.e., pro…ts).
- The international production chain is spread over various countries: parts for the
iPhone are made in Germany, Korea, Japan etc. For example, the German company In…neon contributes components worth $29, the Korean company Samsung
contributes components worth $23. In total, the inputs are worth about $172.50.
- Then the parts are assembled in China. But the value-added of manufacturing in
China is only about $180-$172.50=$7.50, i.e., just a bit more than 1 percent of the
retail value in the U.S.
- But the iPhone enters the China-U.S. trade balance as $180 per piece, whereas
really it should only enter as $7.50 per piece. The iPhone alone accounts for roughly
$1.9 billion or about 1 percent of the total China-U.S. trade de…cit (over 11 million
iPhones shipped to the U.S. in 2009), but that de…cit appears grossly exaggerated.
The classic example: The Barbie doll
- Source: Feenstra, Robert C., 1998. Integration of Trade and Disintegration of
Production in the Global Economy. Journal of Economic Perspectives 12(4), pp.
31-50. The Barbie doll story is based on a 1996 newspaper story by Rone Tempest
in the Los Angeles Times.
A ‡ow chart for the Barbie doll (Figure 1.1
from Feenstra/Taylor)
Go study international trade!