Ch. 2: World Trade: An Overview

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Ch. 2 World Trade An Overview
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  WORLD   2004  
    GDP (current US) (billions)     41,290.4  
    GNI per capita, Atlas method (current US)     6,329  
    Life expectancy at birth, total (years)     67.3  
    Population, total (millions)     6,365.0  
    Population growth (annual )     1.2  
    Surface area (sq. km) (thousands)     133,940.9  
2010
9,136
47,390
 UNITED STATES   2004  
    GDP (current US) (billions)     11,711.8  
    GNI per capita, Atlas method (current US)     41,440  
    Life expectancy at birth, total (years)     77.4  
    Population, total (millions)     293.7  
    Population growth (annual )     1.0  
    School enrollment, primary ( net)     93.9  
    Surface area (sq. km) (thousands)     9,629.1  
2010
14,586.7
47,390
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www.worldbank.org/data
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http//www.wto.org/english/res_e/statis_e/world_re
gion_export_08_e.pdf
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http//web.worldbank.org/WBSITE/EXTERNAL/DATASTATI
STICS/0,,contentMDK20399244menuPK1504474pagePK
64133150piPK64133175theSitePK239419,00.html
Notice the difference in numbers and find out why.
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Gravity Model

1. Size matters
2. Large economies produce diverse products for sale
3. Large economies have income to buy foreign goods

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Gravity Model

1. Distance matters
2. Transportation costs
3. Contacts
4. Other factors
5. Borders matter
6. Formalities
7. Different currencies
8. Cultural, linguistic similarity
9. Ease of transportation, access
10. Existence of many MNCs

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Gravity Model

• Size will increase trade between countries
• Distance will decrease trade between countries.
• Other factors will be lumped into a constant.

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Gravity Model

• Trade between two countries (Tij) is measured as
  the volume of trade (exports imports).
• Size of country i (Yi) is the GDP of i.
• If size of both countries matters, Tij AYiaYjb,
  where A is a constant that will include the
  influences of all other variables and a and b are
  exponents.

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Size Matters The Gravity Model
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Gravity Model

• If distance acts as a deterrent to trade, we can
  include the distance between i and j (Dij) as a
  denominator.
• Tij AYiaYjbDij-c
• If abc1, then Tij AYiYj/Dij

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Distance Matters
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US-Canada Trade

• In 1999, Canada imported C215 billion of
  merchandise from the U.S., which accounted for
  more than 2/3 of total Canadian merchandise
  imports, and 23 of total U.S. merchandise
  exports.
• In the same year, Canada exported C286 billion
  of merchandise to the U.S., which accounted for
  87 of total Canadian merchandise exports, and
  19 of total U.S. merchandise imports.
• Typically, the U.S. trades about as much with
  Canada as it does with all 15 countries of the
  European Union combined, and its trade with
  Ontario alone exceeds its trade with Japan.

http//research.stlouisfed.org/wp/2000/2000-024.pd
f
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US-Canada Trade

• Nearly 90 of the Canadian population lives
  within 100 miles (161 km) of the U.S. border.
• The border between Canada and the 48 contiguous
  states stretches for almost 4000 miles (over 6400
  km).
• Starting with the 1965 Auto Pact, there has been
  an almost uninterrupted trend towards freer
  bilateral trade, culminating in the 1988
  Canada-U.S. Free Trade Agreement, subsequently
  deepened and broadened by the North American Free
  Trade Agreement (NAFTA).

http//research.stlouisfed.org/wp/2000/2000-024.pd
f
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US-Canada Trade

• John McCallum (1995) used a gravity model to
  estimate that in 1988, trade between provinces
  within Canada was 22 times the expected amount of
  trade between the provinces and the states of the
  U.S.

http//research.stlouisfed.org/wp/2000/2000-024.pd
f
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Distance and Borders
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What about China?
 less than 3 percent of personal spending in
the U.S. goes to China, according to a
new report from the SF Fed. That's partly because
most personal spending goes to things like health
care and housing that are, by definition,
produced in the U.S.
http//www.npr.org/blogs/money/2011/08/10/13938853
2/only-a-tiny-sliver-of-americans-personal-spendin
g-goes-to-china
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Globalization

• It is not inevitable.
• 19th century was more global than 20th century,
  even though technology allowed lower
  transportation costs, faster communication tools,
  etc. in the 20th c.
• Wars and government policies can stop
  globalization.
• Since 1980 there has been rapid globalization.

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Globalization
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http//www.wto.org/english/res_e/statis_e/its2005_
e/its05_world_maps_e.pdf
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Composition of Trade
2008
2003
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Changing Composition of Trade
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Between 1945 and 1980, the World Bank reckons,
economic integration was concentrated among rich
countries. Since 1980 that has changed.
Manufactured goods rose from 25 of poor-country
exports in 1980 to more than 80 in 1998. This
integration was concentrated in two dozen
countriesincluding China, India and Mexicothat
are home to 3 billion people. Over the past two
decades, these countries have doubled their ratio
of trade to national income. In the 1990s their
GDP per head grew by an annual average of 5.
Life expectancy and schooling levels increased.
Another 2 billion people live in the rest of the
developing world, where the story is rather
different. In these less globalised countries,
including much of Africa, the ratio of trade to
national output has fallen. In the past decade,
income per head has shrunk, and the number of
people in poverty has risen. In short, the poor
countries that are in the biggest trouble are
those that have globalised the least. The
challenge for developmentand the World Bankis
to reverse this marginalisation.
http//www.economist.com/finance/displaystory.cfm?
story_idE1_RJRTTN
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Changing Composition of Trade

• Developing countries, or low and middle-income
  countries, have also changed the composition of
  their trade.
• In 2001, about 65 of exports from developing
  countries were manufactured products, and only
  10 of exports were agricultural products.
• In 1960, about 58 of exports from developing
  countries were agricultural products and only
  12 of exports were manufactured products.

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Changing Composition of Trade
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Multinational Corporations and Outsourcing

• Before 1945, multinational corporations played a
  small role world trade.
• But today about one third of all US exports and
  42 of all US imports are sales from one
  division of a multinational corporation to
  another.

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Trade Theory

• In spite of all the changes observed in
  international trade, the theories utilized since
  the first half of the 19th century still have
  strong predictive power.