EC3355: International Trade
Trade patterns
Stijn van Weezel
Department of Economics
Royal Holloway, University of London
Today
Administrative stuff
Basic concepts
Some fact about world trade
General information
Course contents
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Trade patterns (2 lectures)
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Theoretical models of trade (3 lectures)
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Comparative advantage: the Ricardian model
Factor mobility: the Specific factors model
Resources and trade: the Heckscher-Ohlin model
All things policy (4 lectures)
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Trade facts
Gravity model
Policy instruments
Political economy of trade
International trade and the Global South
Effect of trade on income, inequality, and the environment
Review session or Everything you always wanted to know
about international trade but were afraid to ask
General information
Course material
Lecture slides
Problem sets
Academic papers
Miscellaneous items posted on Moodle
(videos, news articles, etc.)
International Economics: Theory and Policy,
Paul Krugman and Maurice Obstfeld, Marc Melitz,
9th Edition, 2012
(Optional)
General information
Course delivery
One 2-hour lecture per week (10 lectures in total)
One 1-hour seminar per week (9 seminars in total)
General information
Course evaluation
2-hour unseen exam
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In Summer term
75% of total grade
Based on: problem sets, lecture content
Everything from lecture, seminar, additional material is fair
game
Essay
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Due week 10
25% of total grade
1,200 words
Can pick any of the suggested topics
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Or choose own topic in agreement with me
General Information
Learning outcomes and how to achieve them
Learning outcomes
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Have a good understanding of the theoretical models that
explain international trade
Being able to explain cross-country differences in trade
patterns and policies
Apply knowledge to real world examples and provide academic
analysis on current events
How to achieve the learning outcomes
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Attend the lectures regularly and pay attention
(lecture slides are no perfect substitute)
Solve the problem sets
Study the recommended literature
Ask questions when things are not clear
General information
Contact
Office hours:
Monday 13:00-14:00
Tuesday 11:00-12:00
Arts Building S3
E-mail:
pwte054[at]rhul.ac.uk
Please use course code (EC3355) in e-mail subject
Basic concepts
Quintessential trade picture
Basic concepts
Of interest to this course
Movement of goods and services from one country to another
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Merchandise goods: Everything but services, includes
agricultural, mining, and manufactured products
Services: Includes things like travel, insurance, and
transportation
Movement of factors of production across countries
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Migration: Flow of people, and thus labour, across borders
from one to another country
Foreign Direct Investment: The flow of capital across borders
when a firm own a company in another country
Gains from trade
Why do countries trade?
Countries trade goods and services with each other as it
generates mutual benefits
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autarky=
Norwegians import oranges which they would have a hard time
producing
Foreign items could be cheaper or better in quality
Use finite resources to produce what they are most productive
at and trade products for goods/services they want to
consume
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Countries can specialise and still consume variety of
goods/services through trade
Gains from trade
Why do countries trade?
Countries can export goods produced with relatively abundant
resources and import goods made with relatively scarce
resources
Specialised countries can be more efficient due to large-scale
production (economies of scale)
Countries can also gain from international lending as well as
migration
Gains from trade
Losses incurred due to international trade
Although trade is predicted to benefit the whole country, it
may harm particular groups
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Trade can harm owners of resources that are used relatively
intensively in industries that compete with imports
Trade can affect income distribution within a country
Negative effect on local environment
Returns on capital
Measuring international trade
Trade balance
Trade balance: difference between the total value of export
and total value of imports
NX = X M
Trade surplus exists when a country exports more than it
imports: X > M
Trade deficit exists when a country imports more than it
exports: X < M
Measuring international trade
Trade balances USA and China
Source: OECD
there is a general increase in the surplus in China while in US there are quite a large trade deficit
Measuring international trade
Bilateral trade balance USA and China
Source: US Census Bureau
Measuring international trade
Shortcoming of trade balance in case of bilateral trade
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Consider a lego minifigure:
Valued at 2,- when imported to the UK from Denmark
Item is produced in Denmark but:
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The plastic comes from Taiwan
Paint produced in the Czech Republic
Packaging with material from Sweden
Valued added in Denmark is 2-X , where X is the total value
of the imported parts
This doesnt show in the bilateral trade balance
Measuring international trade
Shortcoming of trade balance in case of bilateral trade
Why does this matter?
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Trade measures assume a country produces goods that are
either consumed domestically or exported
If domestic production is insufficient or too costly it needs to
import
Based on idea that country is a closed system that it in
harmony with other countries
In these terms a skewed trade balance can be interpreted as a
certain weakness
Misleading trade statistics can lead to controversy
Measuring international trade
Trade to GDP ratio
Measures trade intensity/openness of a country
Most countries have high trade to gdp ratios
Countries that serve as shipping and processing centres have
high ratios (Belgium, the Netherlands, Malaysia)
Countries with lower ratios are those with large economic
values (USA) or those that have just started trading (most of
South America)
Measuring international trade
Trade relative to GDP in OECD countries in 2013
Source: OECD
Measuring international trade
Terms of trade
Relative price of exported goods versus imported goods
PX
100
PM
Terms of Trade increase if:
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Export prices (PX ) increase
Import prices (PM ) decrease
An increase in the Terms of Trade increases a countrys
general welfare
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For every unit of export sold it can buy more units of imported
goods
Measuring international trade
Term of trade Australia 1900-2012
Source: Australian Bureau of Statistics
Measuring international trade
However,
Source: BBC
Trade patterns
UK imports and exports over time as ratio of GDP
Source: Bank of England
Trade patterns
World trade shares per region for 2012
Source: WTO
Region
Africa
Asia
Commonwealth of Independent States
Europe
European Union internal trade
Middle East
North America
South and Central America
Exports
Imports
3.5
33.2
4.3
34.7
19.8
7.3
12.9
4.1
3.3
33.4
3.1
35.1
19.5
3.9
17.2
4.1
Trade patterns
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Trade within the European Union is large
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Asian trade rivals that of Europe
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Cheap labour in China, Bangladesh, Vietnam, Cambodia
Efficient production of high quality goods in Japan and South
Korea
Former Soviet Union and the Middle East account for around
10% of world trade
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Many countries
Zero tariffs on imports
Very large exports of oil and natural gas
Trade from South and Central America is low but growing
(e.g. Chile)
Africa accounts for only 3.5% of world exports
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Very marginal given its size and population
Mainly dependent on export of natural resources
Trade patterns
Barriers to trade
Large differences in the amount of trade across countries and
regions
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Import tariffs, taxes that countries charge on imported goods
Transportation costs
Other events such as conflict
Trade barriers refer to all factors that influence the amount of
goods/services shipped across international borders
Trade barriers change over time as a result of changes in
policies, technology, etc.
Barriers to trade
UK export volumes 1772-2009
Source: Bank of England
1770- American Revolution
1790- cold war between US and France
First period of globalisation
1914-1918-WWI
1920-Irish Independent
1945- WWII
Barriers to trade
Trade over time
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1st Golden Age: 1890-1913
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Interbellum: 1918-1939
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Due to significant improvements in technology such as
steamships, railroads, refrigeration
Ended with the beginning of World War One
Decrease in trade in Europe and Australia due to WWI and
aftermath
Decline in trade across the world due to the Great Depression
Tariff war in reaction on Smoot-Hawley tariffs in the USA
Increase in world-wide tariff rate of 25%, decline in trade of
around 33%
2nd Golden Age: 1950-present
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After World War II, Allied victors agreed to keep tariffs low
(established GATT)
Increase in trade back to WWI levels, many countries
exceeding pre-WWI trade peak after 1950
Increases due to reduction in tariffs and improved
transportation (invention of shipping container 1956)
Trade composition
Composition international trade 1900-1960
Source: UN International Trade Statistics 1900-1960
Trade composition
Composition of international trade 2013
Source: WTO
includes shipping, insurance, tourism
clothing are from lower wages countries
automobile from industrialised one
Trade composition
Todays composition of international trade
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Majority of trade volume is manufactured goods
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Services account for a 5th of trade volume
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Includes shipping, tourism, and insurance
Mineral products also roughly a 5th of trade volume
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Clothing from low-wage countries
Computers and automobiles from industrialised countries
Fossil fuels from the Middle East, America, and Australia
Natural resources like copper from Chile and the Democratic
Republic of the Congo
Agricultural products are a relatively small part of
international trade
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Foodstuffs from the European Union
Cotton from India
Timber from West Africa
Trade composition
Imports (top) and exports (bottom) for 2012
Germany
Trade composition
Imports (top) and exports (bottom) for 2012
Central America
Trade composition
UK imports in 2012
Bananas from Equador (68 Million US $)
Lamb meat from New Zealand (441 Million US $)
Oil from Kuwait (2 billion US $)
Cars from Germany (17.2 billion US $)
Turbojets from the USA (4.2 billion US $)
Trade composition
Drivers of differences in trade
Differences in climate and natural resources explains why
Equador exports bananas and Kuwait oil
The fact that Germany exports cars and the USA turbojets
stems from differences in:
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Labour productivity
The relative supply of capital, labour, and land and their use in
the production of different goods (and services)
Mexico is the largest exporter of fresh tomatoes, which
country is the second largest exporter?
Trade patterns
OECD Foreign Direct Investment flows for 2012
Source: OECD
Japan -spending a lot of foreign money > receiving
Trade patterns
Foreign Direct Investment
Horizontal FDI
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Firm from country i owns company in country j that has same
production activity as domestic (e.g. Toyota factory in Britain)
Allows firm to circumvent export tariffs or quotas
Better access to local market
Sharing of technical expertise
Vertical FDI
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Firm from country i owns a company in country j that
operates a different stage of the production process (e.g. Zara
producing clothes in Tunisia)
Predominantly firms from industrialised countries owning
factories in low-wage countries
Trade patterns
Migration flows 2005-2010
Source: Abel and Sander (2014), Science
Trade patterns
International migration
In contrast with trade and FDI most migration occurs in the
developing world
Most immigrants move within their own continent for
employment or other reasons such as conflict
Migration often stricter regulated than flow of goods
International trade can potentially reduce flow of migrants
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Trade can increase living standards of workers the same way
moving to a higher-wage country can
More trade means more workers able to work in export
industries
