- Trade is the exchange of goods and services between countries. Goods bought into a country are called imports, and those sold to another country are called exports.
- Developed countries have a greater share of global trade than developing countries. Usually developed countries export valuable manufactured goods such as electronics and cars and import cheaper primary products such as tea and coffee. Trading blocks, such as the European Union, dominate world exports.
- The greatest volume of trade occurs between the developed, rich countries, especially between industrial leaders such as Germany, Japan, the United Kingdom and the United States.
- From the 1950s to 1980s, trade was dominated by flows between high-income countries – the latter accounted for most of global GDP, and developing countries maintained high trade barriers
- Trade between the US, Canada, Western Europe, and Japan usually referred to as North-North trade
- Moving to a world where South-South commerce (trade between developing countries), and North-South commerce (trade between developed and developing countries), overtaking North-North trade
- While high-income economies accounted for 80% of world trade in 1985, will account for less than 50% by the middle of the current decade.
- The diagram below emphasises the dominance developed countries still have in terms of exports. However, there is evidence that the developed countries’ share is decreasing.
- The past few decades have seen important shifts that have reshaped the global trade landscape. As a share of global output, trade is now at almost three times the level in the early 1950s, in large part driven by the integration of rapidly growing emerging market economies (EMEs).
- The expansion in trade is mostly accounted for by growth in non-commodity exports, especially of high-technology products such as computers and electronics.
- It is also characterized by three important trends:
- the rise of EMEs as systemically important trading partners;
- the growing role of global supply chains;
- and an ongoing shift of technology content toward dynamic EMEs.
- These developments in global trade have been associated with increased trade interconnectedness and carry important implications for trade patterns, in particular in response to relative price changes.
- A chief contributor is the growing role of global supply chains in overall trade, facilitated by lower tariffs and technology-led declines in transportation and communication costs.
Emerging Economies and Trade
- Following the financial crisis, a sharp divide in economic performance of high-income vs. emerging economies. US, EU, and Japan slow to recover, while emerging economies such as China have fueled global recovery
- Rise of lower and middle-income countries two decades in making:
- China’s transition accelerated in the 1990s
- India’s growth surge started after its 1991 reforms
- Huge global export shock: 1992-2008 average annual growth rate in exports – China (18%) and India (14%)
- 15 other countries (Brazil, Korea, Mexico, Russia, Argentina, Turkey, Indonesia, Poland, South Africa, Thailand, Egypt, Colombia, Malaysia, the Philippines, and Chile) had an annual growth rate in exports of 8% for 1992-2008
- During the same period, low and middle-income countries saw share of global exports increased from 21 to 43%
- South-South trade driven by:
- urbanization and industrialization in China and India creating demand for raw materials
- lengthening of global production networks has resulted in increasing trade in parts and components
- Growth in North-South trade has rekindled interest in orthodox theories of international trade.
Changing Patterns of World Trade (1990s – 2008)
- For low and middle-income countries, exports as share of regional GDP has grown sharply, e.g., 26 to 55% (low-income), 25 to 55% (middle-income), and 25 to 55% (China and India) – similarly for imports.
- Lower trade growth for high-income countries, e.g., 17 to 26% in case of exports
- Change in trade pattern involves much larger South-South trade flows over period 1994-2008:
- share of exports from low to low and middle-income countries rose from 24 to 42%
- share of exports from middle-income to low and middle-income countries rose from 33 to 46%
- The key explanation put forward for growth in South-South trade is an expansion of multistage global production networks
- Offshoring of production allows firms to fragment manufacturing across borders by locating specific production stages in countries with the lowest cost
- Consequently, gross trade flows (total exports) may overstate net trade flows (exports minus intermediates), i.e., expansion of South-South trade is statistical artifact
- While double-counting is part of the story, there is evidence of increased specialization by emerging economies for global markets
- In 1980s and 1990s, due to dominance of high-income countries in global trade, orthodox models of trade (Ricardian/Heckscher-Ohlin) went out of fashion.
- Specifically could not explain observed intra-industry trade among high-income countries, i.e., two-way trade in similar products between similar countries, e.g. the French export cars and import German cars
- Changed in past decade where growth in countries such as China and India suggest differences in technology/resources are strong motivations for trade
- International specialization follows perceived patterns of comparative advantage
- Low-income countries: positive net exports in three resource or labor-intensive sectors: agriculture, raw materials, and apparel and shoes
- China and India: positive net exports in three laborintensive sectors: apparel, shoes and electronics, and other manufactures
- Middle-income countries: negative net exports in three capital-intensive sectors: chemicals, machinery, and transportation equipment
- High-income countries: positive net exports in three capital-intensive sectors: chemicals, machinery, and transportation equipment.
Growing South-South trade along lines of comparative advantage, i.e., resource-poor emerging economies importing from resource-rich emerging economies. For low-income countries, 70% of agricultural export growth and 73% of raw materials growth are due to shipments to low-/middle-income countries. Low-income countries send most of their output of clothing and shoes to high-income countries.
Middle-income countries export diverse sets of goods: agriculture (Argentina and Brazil); metals (Russia, Korea, South Africa, and Chile); electronics (Korea, Malaysia, Thailand, and the Philippines); transportation equipment (Korea, Mexico, Poland, and Turkey).
50% of middle-income export growth to low-/middleincome countries, except automobiles. China and India accounted for more than 25% of exports of raw materials and electronics from middle-income countries – reflecting the need for iron ore, copper, other minerals, and deepening of production networks.
China and India are distinct among low-/middle-income countries for being reliant on high-income markets to absorb their exports.
High-income countries absorbed over 70% of China’s export growth in apparel, footwear, and other manufactures, and over 55% in electronics (China) and metals (India).
Dynamics in Specialization
- Middle-income countries moved from specializing in apparel and footwear in 1994 to electronics by 2008.
- Consistent with middle-income countries accumulating human and physical capital pushing them out of labor-intensive into more capital-intensive goods.
- Low-income countries such as Bangladesh and Vietnam are filling the space vacated by middle-income countries in apparel.
- Large changes in specialization have also occurred in countries such as China.
- China not just switching from assembling shoes to assembling computers, but manufacturing more technologically advanced goods and accounting for more value-added, e.g., Huawei (mobile phones) and Lenovo (laptops)
- Some doubt China’s export strength in electronics is due to comparative advantage, but rather to industrial policy (Rodrik, 2006) – but Hanson (2012) argues stock of human capital would indicate specialization is not unwarranted
- China has increased the supply of educated labor, attracted investment by multinational firms, and improved transport and communications – it likely has an increasing comparative advantage in electronics.