World Trade an Overview - Lecture Slides | ECON 4550, Study notes of Economics

Download World Trade an Overview - Lecture Slides | ECON 4550 and more Study notes Economics in PDF only on Docsity! Chapter 2WORLD TRADE AN OVERVIEW Who trades with whom, and why?  The largest trading partners of the US Gravity model:  influence of an economy’s size on trade  distance and other factors that influence trade Borders and trade agreements Globalization: then and now The changing composition of trade Service outsourcing 2-2 PREVIEW Rank Country Total Trade ($, bn) % of total trade 1 Canada 597.4 16.2% 2 China 503.2 13.6% 3 Mexico 460.6 12.5% 4 Japan 195.0 5.3% 5 Germany 147.5 4.0% 6 United Kingdom 107.1 2.9% 7 South Korea 100.1 2.7% 8 Brazil 74.3 2.0% 9 France 67.8 1.8% 10 Taiwan 67.2 1.8% 11 Netherlands 66.3 1.8% 12 Saudi Arabia 61.3 1.7% 13 India 57.8 1.6% 14 Venezuela 55.6 1.5% 15 Singapore 50.5 1.4% TOP 15 U.S. TRADE PARTNERS, 2011 2-5 3 of the top 10 trading partners of the U.S. in 2011 were also the 3 largest European economies: Germany, UK, and France. These countries have the largest gross domestic product (GDP) in Europe.  GDP measures the value of goods and services produced in an economy. Why does the U.S. trade more with these countries relative to others in Europe? 2-6 SIZE MATTERS: THE GRAVITY MODEL In fact, the size of an economy is directly related to the volume of imports and exports. Larger economies produce more goods and services, so they have more to sell (exports) Larger economies have more purchasing power, and are able to buy more (imports) 2-7 SIZE MATTERS: THE GRAVITY MODEL (CONT.) 4. Multinational corporations: corporations spread across different nations import and export many goods between their divisions. 5. Borders: crossing borders involves both monetary and non-monetary costs.  These implicit and explicit costs reduce trade.  The existence of borders may also indicate the existence of different languages or different currencies, either of which may impede trade. 2-10 THE GRAVITY MODEL (CONT.) In its basic form, the gravity model assumes that only size and distance are important for trade in the following way: Tij = A x Yi x Yj /Dij where Tij is the value of trade between country i and country j A is a constant Yi the GDP of country i Yj is the GDP of country j Dij is the distance between country i and country j 2-11 THE GRAVITY MODEL (CONT.) In a slightly more general form, the gravity model that is commonly estimated is Tij = A x Yia x Yjb /Dijc where a, b, and c are allowed to differ from 1. The gravity model works fairly well in predicting actual trade flows, as the figure above representing U.S.–EU trade flows suggested. 2-12 THE GRAVITY MODEL (CONT.) The U.S. signed a free trade agreement with Mexico and Canada in 1994, the North American Free Trade Agreement (NAFTA). Because of NAFTA and because Mexico and Canada are close to the U.S., the amount of trade between the U.S. and its northern and southern neighbors as a fraction of GDP is larger than between the U.S. and European countries. 2-15 DISTANCE AND BORDERS (CONT.) 2-16 ECONOMIC SIZE AND TRADE WITH THE UNITED STATES Source: U.S. Deparment of Commerce, European Commission Yet even with a free trade agreement between the U.S. and Canada, which use a common language, the border between these countries still seems to be associated with a reduction in trade. See “How Wide is the Border?” by Charles Engel and John Rogers (American Economic Review, 1996) 2-17 DISTANCE AND BORDERS (CONT.) The negative effect of distance on trade has grown smaller over time due to advances in modern technology, transportation, and communication.  Wheels, sails, compasses, railroads, telegraph, steam power, automobiles, telephones, airplanes, computers, fax machines, internet, fiber optics, personal digital assistants, GPS satellites… are technologies that have increased trade. But history has shown that political factors, such as wars, and economic crises and cycles can change trade patterns much more than innovations in transportation and communication. 2-20 HAS THE WORLD BECOME “SMALLER”? There were two waves of globalization. 1840–1914: economies relied on steam power, railroads, telegraph, telephones. Globalization was interrupted and reversed by wars and depression. 1945–present: economies rely on telephones, airplanes, computers, internet, fiber optics, PDAs, GPS satellites… 2-21 HAS THE WORLD BECOME “SMALLER”? (CONT.) Only in the last few decades has international trade become more important to the British economy than it was in 1910. Even today, international trade is less important for the U.S. than it was to the UK before 1910. 2-22 HAS THE WORLD BECOME “SMALLER”? (CONT.) 2-25 THE COMPOSITION OF WORLD TRADE, 2008 Source: World Trade Organization In the past, a large fraction of the volume of trade 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 U.S. mainly imported and exported agricultural products and mineral products.  In 2002, manufactured products made up most of the volume of imports and exports for both countries. 2-26 CHANGING COMPOSITION OF TRADE (CONT.) MANUFACTURED GOODS AS A PERCENT OF MERCHANDISE TRADE iy.\:j8=9) Manufactured Goods as Percent of Merchandise Trade United Kingdom United States Exports Imports Exports Imports 1910 75.4 24.5 47.5 40.7 2008 71.0 67.8 74.8 65.3 Source: 1910 data from Simon Kuznets, Modern Economic Growth: Rate, Structure and Speed. New Haven: Yale Univ, Press, 1966, 2008 data from World Trade Organization. 2-27 Service outsourcing occurs when a firm that provides services moves its operations to a foreign location.  Service outsourcing can occur for services that can be performed and transmitted electronically.  For example, a firm may move its customer service centers whose telephone calls can be transmitted electronically to foreign location.  However, many types of services require physical proximity to the consumer and therefore cannot be outsourced 2-30 SERVICE OUTSOURCING (CONT.) Service outsourcing is currently not a significant part of trade: About 19% of service jobs are “tradeable” and thus can be outsourced.  In comparison, about 12% of manufacturing jobs are “tradeable” and thus have the potential to be outsourced.  Most jobs, however, are non-tradeable because  they need to be done close to the customer  Skills required may not be available everywhere  Intellectual property issues 2-31 SERVICE OUTSOURCING (CONT.) 2-32 TRADABLE INDUSTRIES’ SHARE OF EMPLOYMENT Source: J. Bradford Jensen and Lori G. Kletzer, “Tradable Services: Understanding the Scope and Impact of Services Outsourcing,” Peterson Institute of Economics Working Paper 5-09, May 2005