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