Why do nations trade?
A simple guide into the history
and theory of international trade
What will I talk about?
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Links between the history and the theories
of international trade
Most important trade theories and their
implications
You won’t see:
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Complex math
Complex charts
Model of Intl. Trade Relations
Country B
Country A
Goods & Services
Production Factors
Capital, Labour, Technology
Trade Policy
Tariffs, Non-Tariff Barriers
Currency Exchange Rates
International Organisations
The major theories
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Absolute advantage
Comparative advantage
Factor abundance theory
Modern explanations
Let’s start, then!
3rd-4th
Ancient Times
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First trade: barter exchange between
tribes (ca. 5000 B.C.)
Trade centres: China, India, Egypt,
Phoenicia, Babylon, Persia, Greece, Rome
Inventions: money, wheel, weighing and
measuring system, commercial law, sails,
commodity exchanges
First trade routes established
3rd-4th
Ancient Times
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No intensive international trade
Lack of safe and low-cost transportation
Dispersed trade centres (from global
perspective)
Long-distance routes mostly for luxurious
goods
Stability of the commodity structure,
practically until the colonial conquest
3rd-4th
Silk Road
3rd-4th
Amber Road
13th-14th
Middle Ages
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Lower importance of cities
Marco Polo at court of
as trade centres
Kubilai Khan c.1280
Feudal system- lords, vassals and fiefs (land
given to a vassal by their lord)
Decreasing intensity of international trade
Trade centres: Byzantium, Arabia, Italian cities
(Venice, Genoa, Firenze, Pisa), Hansa
Banking system, bills of exchange, credits for
production
Trade – big share of products necessary for
sailing (sailcloth, wood, tar, salt)
13th-14th
Hansean Trade
15th-16th
Age of Discovery
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Bartholomew Diaz – Cape of Good Hope (1487)
Vasco da Gama – new sea route to India (1498)
Christopher Columbus – the „discovery” of
America (1492)
Ferdinand Magellan – expedition around the
world (1519-21)
Colonial conquest
Take a look at http://www.ucalgary.ca/applied_history/tutor/eurvoya/
15th-16th
Mercantilism
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Colonial conquest – the basis
Not a theory, rather a set of policy
guidelines
Positive trade balance
Governments as „gold-collectors”
High protectionism against import
17th-18th
Industrial revolution
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Significant growth of output
Major change in trade volume and
commodity structure
First trade patterns:
(Europe)
manufactured goods
(Colonies)
tropical products
18th
Theory of absolute advantage
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Adam Smith, The Wealth of Nations” 1776
First classical theory
Simple analysis of the causes of trade
patterns
Major assumptions: two countries, two
goods, no additional trade costs, labour as
the only production factor
18th
Theory of absolute advantage
Example:
Unit costs
(hours of
labour)
HOME
FOREIGN
2
4
4
1
How can Home get oil?
18th
Theory of absolute advantage
Example (cont.):
Unit costs
(hours of
labour)
HOME
FOREIGN
Production
Import
Production
Import
2
4
4
1
4
2
1
4
Countries produce and export goods, which production
costs are lower than abroad!
19th
Theory of comparative advantage
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David Ricardo, 1817
The most influencing classical theory
Same assumptions: two countries, two
goods, no additional trade costs, labour as
the only production factor
Question:
What if a country produces both goods at a lower cost?
19th
Theory of comparative advantage
Example:
Unit costs
(hours of
labour)
HOME
FOREIGN
1
4
2
3
How does it work now?
19th
Theory of comparative advantage
Example (cont.):
Unit costs
(hours of
labour)
HOME
FOREIGN
Production
Import
Production
Import
1
2
4
3
2
1
3
4
Why does it work now, either?
Compare the opportunity costs!
19th
Theory of comparative advantage
Example (cont.):
Unit costs
(hours of
labour)
HOME
FOREIGN
1 (0,5)
4 (1,33)
2 (2)
3 (0,75)
Lower opportunity costs decides about
„comparative advantage”
19th
Transportation revolution
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Sea and land steam-powered
transportation
Goods traded in large volumes
Diminishing transportation and
communication costs – soaring trade
New trade patterns (West – developing
countries)
20th
Factor abundance theory
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E. Hecksher, B. Ohlin, 1930s
Two countries – two goods
Two production factors: labour and capital
Same technology of production
No transportation costs
20th
Factor abundance theory
Example:
Technology
Factor
resources
HOME
FOREIGN
800
400
4
1
100
600
2
6
Compare „factor abundance” and „factor-consumption”
20th
Factor abundance theory
Example (cont.):
Home is labour – abundant
Foreign is capital – abundant
Oranges are labour – consuming
Cars are capital - consuming
Home will export oranges – Foreign will export cars.
20th – 50’s
Leontief paradox
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Leontief made an empirical research to verify the
H-O theory using data on the U.S. trade
He surprisingly found that the U.S. – a capitalabundant country – exported more labourconsuming goods
Possible explanation: assumptions underlying the
H-O theory no longer reflected fast-changing
situation in the post-war world economy
This inspired economists to look for new
explanations to international trade
late 20th
New trends in a post-war world
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Fall of colonial empires led to a growing
number of independent states
1935
2010
Source: WTO
late 20th
New trends in a post-war world
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Variety of actors in international trade
Governments
Shape the country’s economic policy
and attitudes towards foreign trade.
DOMESTIC BUSINESSES
Run commercial transactions with
foreign companies (export, import,
foreign direct investments)
HOUSEHOLDS, INDIVIDUALS
E.g. tourists, private investors,
workers
Domestic level
INTERNATIONAL ORGANISATIONS
Government or Non-Government
TRANSNATIONAL CORPORATIONS
Run global business operations through
foreign subsidiaries
REGIONAL INTEGRATION
GROUPINGS
Groups of neighbouring countries that
eliminate trade barriers
International level
late 20th
New trends in a post-war world
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Intra–industry trade – similar products are
imported and exported
IIT =
| Exporti - Importi |
Exporti + Importi
Grzegorz Karpiuk
Koordynator projektu „Program rozwoju WSIiZ – Uczelnia Jutra”
late 20th
New trends in a post-war world
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New actors – international organisations
Source: WTO
Source: Wikipedia
II poł. XXw
New trends in a post-war world
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New actors – multinational corporations
2004
No.
Company
Country
2009
Market value
(USD bln)
Company
Country
Market value
(USD bln)
1
ExxonMobil
USA
405,2
ExxonMobil
USA
335.54
2
General Electric
USA
372,1
PetroChina
CHN
270.56
3
Microsoft
USA
273,7
Wal-Mart Stores
USA
193.15
4
Citigroup
USA
247,7
China Mobile
CHN
175.85
5
BP
UK
231,9
ICBC
CHN
170.83
6
Royal Dutch/Shell
NED/UK
221,5
Microsoft
USA
143.58
7
Wal-Mart Stores
USA
218,6
Procter & Gamble
USA
141.18
8
Pfizer
USA
198,0
AT&T
USA
140.08
9
Johnson&Johnson
USA
194,7
Johnson & Johnson
USA
138.29
10
Bank of America
USA
188,8
Royal Dutch Shell
NED
135.10
Żródło: Forbes, http://www.forbes.com/lists/2009/18/global-09_The-Global-2000_MktVal.html
late 20th
New trends in a post-war world
Trade structure
Value
2004
(bn USD)
GOODS
Value
2008
(bn USD)
Value
2009
(bn USD)
8907
15775
12147
783
1342
1169
Fuel and minerals
1281
3530
2263
Manufactures
6570
10458
8355
SERVICES
2125
3730
3312
Transport
500
875
704
Tourism
625
945
854
1000
1910
1754
Agricultural
Other
Source: World Trade Report 2010, WTO
late 20th
Source: World Trade Report 2014, WTO
late 20th
Source: World Trade Report 2014, WTO
late 20th
Source: World Trade Report 2014, WTO
late 20th
continued from the previous slide…
Source: World Trade Report 2014, WTO
late 20th
Source: World Trade Report 2014, WTO
late 20th
continued from the previous slide…
Source: World Trade Report 2014, WTO
late 20th
Leading exporters and importers of goods (bn USD)
Source: World Trade Report 2014, WTO
late 20th
Leading exporters and importers of services
(bn USD)
Source: World Trade Report 2014, WTO
late 20th
Leading importers (bn USD)
Goods
Source: World Trade Report 2010, WTO
Services
late 20th
Statistical Data on Trade
late 20th
Globalisation
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Global financial market
Institutional development of international trade
„McDonaldisation” – global convergence of customer
preferences towards certain products
Increase of FDI flow
Dominating position of MNEs
Geographical development of value chains (distribution
channels)
Knowledge-based economy emerged
Lower importance of states in the global trade
New sector of economy – knowledge management
20th, 60’s
Modern theories
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Imitation lag theories (Posner, 1961):
Technological gap between
the Leader and the Rest of World
lag in demand
lag in reaction
TRADE
Leader starts
production
Demand occurs
in the Rest of
World
Rest of World
starts
production
20th, 60’s
Modern theories
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Theory of overlapping demands (Linder, 1961)
Country A
high GDP
Country B
avg. GDP
Country C
low GDP
Explanation of the intra – industry trade
20th, 60’s
„New” theories
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International product life cycle (Vernon, 1966)
Uses a marketing concept of product life cycle
Explains: international trade; foreign direct
investments (FDI) , intra-industry trade (IIT).
Three actors:
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Leader
Developed countries (DC)
Rest of World (RW)
Empirical evidence proves the theory can explain
the developments in the post-war international
trade flows of teletransmission equipment
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
Time: T0
Leader starts production
of cars. No international
trade so far
DEVELOPED
COUNTRIES
LEADER
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T1
Leader’s domestic market
matures. Demand for cars
arises in DC
Trade is initiated
DEVELOPED
COUNTRIES
LEADER
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: after T1
Leader is the only exporter
of cars. Growing demand
in DC causes trade growth.
DEVELOPED
COUNTRIES
LEADER
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T2
Leader is still the only
exporter of cars.
Demand for cars emerges
in RW, which begins import.
DEVELOPED
COUNTRIES
LEADER
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T2
Technological advancement
in DC and Leader’s outward
FDIs make it possible to start
production in DC.
Leader can now import
cheaper cars from DC (IIT)
DEVELOPED
COUNTRIES
LEADER
Produce
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: after T2
Leader’s exports to DC
decreases, RW’s imports
Increases as RW starts
importing cars from DC.
DEVELOPED
COUNTRIES
LEADER
Produce
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T3
DC become the major
exporter of cars. The Leader’s
market share decreases.
DEVELOPED
COUNTRIES
LEADER
Produce
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T4
Leader ceases the
domestic production of cars.
In pursuit of lower costs
the Leader starts outward
FDIs to the RW, which
becomes a car maker.
DEVELOPED
COUNTRIES
LEADER
Produce
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T4
RW starts exports of cars
to the Leader and the DCs.
The price is competitive
due to low labour costs.
DEVELOPED
COUNTRIES
LEADER
Produce
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
Time: T4 – T5
DCs start to invest in RW
(outward FDIs).
RW becomes the major
producer and exporter
of cars
DEVELOPED
COUNTRIES
LEADER
Produce
Produce
REST OF
WORLD
20th, 60’s
Simulation of the int’l product life cycle - cars
Export
net
T1
T2
T3 T4
T5 T6
DEVELOPED
COUNTRIES
LEADER
Produce
Time: T5 – T6
RW becomes the only
producer and exporter
of cars.
REST OF
WORLD