International trade

International trade is the exchange of capital, goods, and services across international borders or territories, which could involve the activities of the government and individual.[1] In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Uttarapatha, Silk Road, Amber Road, salt road), its economic, social, and political importance has been on the rise in recent centuries. It is the presupposition of international trade that a sufficient level of geopolitical peace and stability are prevailing in order to allow for the peaceful exchange of trade and commerce to take place between nations.

Trading globally gives consumers and countries the opportunity to be exposed to new markets and products. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments.[2]

Ancient Silk Road trade routes across Eurasia

Industrialization, advanced technology, including transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.

Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production. Instead of importing a factor of production, a country can import goods that make intensive use of that factor of production and thus embody it. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor, the United States imports goods that were produced with Chinese labor. One report in 2010 suggested that international trade was increased when a country hosted a network of immigrants, but the trade effect was weakened when the immigrants became assimilated into their new country.[3]

International trade is also a branch of economics, which, together with international finance, forms the larger branch called international economics. Trading is a value-added function: it is the economic process by which a product finds its market, in which specific risks are to be borne by the trader.

History

The history of international trade chronicles notable events that have affected the trade between various countries.

In the era before the rise of the nation state, the term 'international' trade cannot be literally applied, but simply means trade over long distances; the sort of movement in goods which would represent international trade in the modern world.

In the 21st century, the European Union, United States and China are the three largest trading markets in the world.[4]

Models

The following are noted models of international trade.[5]

Adam Smith's model

Adam Smith displays trade taking place on the basis of countries exercising absolute advantage over one another.[6][7]

Ricardian model

The law of comparative advantage was first proposed by David Ricardo.

The Ricardian model focuses on comparative advantage, which arises due to differences in technology or natural resources. The Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

The Ricardian model is based on the following assumptions:

Heckscher–Ohlin model

In the early 1900s, a theory of international trade was developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory has subsequently been known as the Heckscher–Ohlin model (H–O model). The results of the H–O model are that countries will produce and export goods that require resources (factors) which are relatively abundant and import goods that require resources which are in relatively short supply.

In the Heckscher–Ohlin model the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H–O model, such as the Leontief paradox, were noted in empirical tests by Wassily Leontief who found that the United States tended to export labor-intensive goods despite having an abundance of capital.

The H–O model makes the following core assumptions:

Applicability

In 1953, Wassily Leontief published a study in which he tested the validity of the Heckscher-Ohlin theory.[8] The study showed that the United States was more abundant in capital compared to other countries, therefore the United States would export capital-intensive goods and import labor-intensive goods. Leontief found out that the United States' exports were less capital intensive than its imports.

After the appearance of Leontief's paradox, many researchers tried to save the Heckscher-Ohlin theory, either by new methods of measurement, or by new interpretations. Leamer[9] emphasized that Leontief did not interpret H-O theory properly and claimed that with a right interpretation, the paradox did not occur. Brecher and Choudri[10] found that, if Leamer was right, the American workers' consumption per head should be lower than the workers' world average consumption.[11][12] Many textbook writers, including Krugman and Obstfeld and Bowen, Hollander and Viane, are negative about the validity of H-O model.[13][14] After examining the long history of empirical research, Bowen, Hollander and Viane concluded: "Recent tests of the factor abundance theory [H-O theory and its developed form into many-commodity and many-factor case] that directly examine the H-O-V equations also indicate the rejection of the theory."[14]:321

In the specific factors model, labor mobility among industries is possible while capital is assumed to be immobile in the short run. Thus, this model can be interpreted as a short-run version of the Heckscher-Ohlin model. The "specific factors" name refers to the assumption that in the short run, specific factors of production such as physical capital are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms.

Example: Finland produces ocean cruisers and leather products such as reindeer fur, mink and fox coats.Lapland, the northern part of Finland, is sparsely inhabited by mostly Indians who hunt these wild animals. This cold climate or forest is a factor specific in the leather goods industry.

In the urban areas Finns are also engaged in cruise ship building and Finland exports cruisers to European countries. In addition to well educated workers, the ship building industry requires a large amount of capital, which is specific to that industry in that it cannot be used in the leather goods industry. Finnish workers are mobile between the two industries.

Additionally, owners of opposing specific factors of production (i.e., labor and capital) are likely to have opposing agendas when lobbying for controls over immigration of labor. Conversely, both owners of capital and labor profit in real terms from an increase in the capital endowment. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

New Trade Theory

Main article: New Trade Theory

New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e., foreign direct investment) that exists. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale. One result of these theories is the home-market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost.

Although new trade theory can explain the growing trend of trade volumes of intermediate goods, Krugman's explanation depends too much on the strict assumption that all firms are symmetrical, meaning that they all have the same production coefficients. Shiozawa, based on much more general model, succeeded in giving a new explanation on why the traded volume increases for intermediate goods when the transport cost decreases.[15]

Gravity model

The Gravity model of trade presents a more empirical analysis of trading patterns. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis.

Ricardian theory of international trade (modern development)

The Ricardian theory of comparative advantage became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes a presentation of Ricardo's example of a two-commodity, two-country model. A common representation of this model is made using an Edgeworth Box.

This model has been expanded to many-country and many-commodity cases. Major general results were obtained by McKenzie[16][17] and Jones,[18] including his famous formula. It is a theorem about the possible trade pattern for N-country N-commodity cases.

Contemporary theories

Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson[19] This formulation is employed for example by Matsuyama[20] and others. These theories use a special property that is applicable only for the two-country case.

Neo-Ricardian trade theory

Inspired by Piero Sraffa, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman (1941–) and Stanley Metcalfe (1946–). They have criticized neoclassical international trade theory, namely the Heckscher-Ohlin model on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle).[21] This was a second round of the Cambridge capital controversy, this time in the field of international trade.[22]

The merit of neo-Ricardian trade theory is that input goods are explicitly included. This is in accordance with Sraffa's idea that any commodity is a product made by means of commodities. The limitation of their theory is that the analysis is restricted to small-country cases.

Traded intermediate goods

Ricardian trade theory ordinarily assumes that the labor is the unique input. This is a great deficiency as trade theory, for intermediate goods occupy the major part of the world international trade. Yeats[23] found that 30% of world trade in manufacturing involves intermediate inputs. Bardhan and Jafee[24] found that intermediate inputs occupy 37 to 38% of U.S. imports for the years 1992 and 1997, whereas the percentage of intra-firm trade grew from 43% in 1992 to 52% in 1997.

McKenzie[25] and Jones[26] emphasized the necessity to expand the Ricardian theory to the cases of traded inputs. In a famous comment McKenzie (1954, p. 179) pointed that "A moment's consideration will convince one that Lancashire would be unlikely to produce cotton cloth if the cotton had to be grown in England."[27] Paul Samuelson[28] coined a term Sraffa bonus to name the gains from trade of inputs.

Ricardo-Sraffa trade theory

Economist John S. Chipman observed in his survey that McKenzie stumbled upon the questions of intermediate products and postulated that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis".[29] It took many years until Shiozawa succeeded in removing this deficiency.[30] The Ricardian trade theory was now constructed in a form to include intermediate input trade for the most general case of many countries and many goods. Chipman called this the Ricardo-Sraffa trade theory.

Based on an idea of Takahiro Fujimoto,[31] who is a specialist in automobile industry and a philosopher of the international competitiveness, Fujimoto and Shiozawa developed a discussion in which how the factories of the same multi-national firms compete between them across borders.[32] International intra-firm competition reflects a really new aspect of international competition in the age of so-called global competition.

International production fragmentation trade theory

In his chapter entitled Li & Fung, Ltd.: An agent of global production (2001), Cheng used Li & Fung Ltd as a case study in the international production fragmentation trade theory through which producers in different countries are allocated a specialized slice or segment of the value chain of the global production. Allocations are determined based on "technical feasibility" and the ability to keep the lowest final price possible for each product.[33] Fragmentation widens the scope for "application of Ricardian comparative advantage".[34]

An example of fragmentation theory in international trade is Li and Fung's garment sector network with yarn purchased in South Korea, woven and dyed in Taiwan, the fabric cut in Bangladesh, pieces assembled in Thailand and the final product sold in the United States and Europe to major brands.[35] In 1995 Li & Fung Ltd purchased Inchcape Buying Services, an established British trading company and widely expanded production in Asia.[33] Li & Fung supplies dozens of major retailers, including Wal-Mart Stores, Inc., branded as Walmart.

Free-Trade Theories

In fact, many countries following mercantilist policy tried to become as self-sufficient as possible. We discuss two theories supporting free trade: absolute advantage and comparative advantage. Both theories hold that nations should neither artificially limit imports nor promote exports. The market will determine which producers survive as consumers buy those products that best serve their needs. Both free trade theories imply specialization. Just as individuals and families produce some things that they exchange for things that others produce, national specialization means producing some things for domestic consumption and export while using the export earnings to buy imports of products and services produced abroad.[36]

Largest countries by total international trade

Volume of world merchandise exports
Rank Country International Trade of Goods
(Billions of USD) 		Date of
information 		% GDP (nominal)
- World 37,706.0 2013 est. 50.5%
-  European Union 4,485.0 2013 est. 24.2%
1  China 4,201.0 2014 est. 40.5%
2  United States 3,944.0 2014 est. 22.6%
3  Germany 2,866.0 2014 est. 74.3%
4  Japan 1,522.4 2014 est. 33.0%
5  France 1,212.3 2014 est. 42.6%
6  United Kingdom 1,189.4 2014 est. 40.4%
7  South Korea 1,170.9 2014 est. 82.6%
8  Hong Kong 1,088.4 2014 est. 375.8%
9  Netherlands 1,041.6 2014 est. 120.2%
10  Italy 948.6 2014 est. 44.2%
11  Canada 947.2 2014 est. 51.1%
12  India 850.6 2014 est. 41.5%
13  Russia 844.2 2014 est. 41.3%
14  Singapore 824.6 2014 est. 262.8%
15  Mexico 813.5 2014 est. 61.2%
16   Switzerland 721.8 2014 est. 101.4%
17  United Arab Emirates 676.4 2014 est. 156.7%
18  Belgium 663.6 2014 est. 181.1%
19  Spain 655.2 2014 est. 48.2%
20  Taiwan 595.5 2014 est. 112.5%

Top traded commodities (exports)

Rank Commodity Value in US$('000) Date of
information
1 Mineral fuels, oils, distillation products, etc. $2,183,079,941 2012
2 Electrical, electronic equipment $1,833,534,414 2012
3 Machinery, nuclear reactors, boilers, etc. $1,763,371,813 2012
4 Vehicles other than railway $1,076,830,856 2012
5 Plastics and articles thereof $470,226,676 2012
6 Optical, photo, technical, medical, etc. apparatus $465,101,524 2012
7 Pharmaceutical products $443,596,577 2012
8 Iron and steel $379,113,147 2012
9 Organic chemicals $377,462,088 2012
10 Pearls, precious stones, metals, coins, etc. $348,155,369 2012

Source: International Trade Centre[37]

See also

Lists

Notes

  1. ↑ "Trade - Define Trade at Dictionary.com". Dictionary.com.
  2. ↑ "What is international trade". Investopedia.
  3. ↑ Kusum Mundra (October 18, 2010). "Immigrant Networks and U.S. Bilateral Trade: The Role of Immigrant Income". papers.ssrn. Retrieved 2011-09-01. Mundra, Kusum, Immigrant Networks and U.S. Bilateral Trade: The Role of Immigrant Income. IZA Discussion Paper No. 5237. Available at SSRN: http://ssrn.com/abstract=1693334 ... this paper finds that the immigrant network effect on trade flows is weakened by the increasing level of immigrant assimilation.
  4. ↑ "EU position in world trade". European Commission. Retrieved 7 March 2016.
  5. ↑ Brief review of various theories is given in Bhaduri, R., and W. Bengal (2012) International Trade is the Lifeline of Development, The Journal of Research in Commerce, 1(1): 1-6.
  6. ↑ "ABSOLUTE AND COMPARATIVE ADVANTAGE" (PDF). INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION. pp. 1–2. Retrieved 2009-05-04.
  7. ↑ Marrewijk, Charles van (2007-01-18). "absolute advantage" (PDF). Department of Economics, Erasmus University Rotterdam:world economy. Princeton University Press. Retrieved 2009-05-03.
  8. ↑ Leontief, W. W. (1953). "Domestic Production and Foreign Trade: The American Capital Position Re-examined". Proceedings American Philosophical Society 97: 332–349.
  9. ↑ Leamer, E. E. (1980). "The Leontief Paradox Reconsidered". Journal of Political Economy 88 (3): 495–503. doi:10.1086/260882.
  10. ↑ Brecher; Choudri (1982). "The Leontief Paradox: Continued". Journal of Political Economy 90 (4): 820–823. doi:10.1086/261092.
  11. ↑ Bowen, H. P.; E. E. Leamer; L. Sveiskas (1987). "A Multi-country Multi-Factor Test of the Factor Abundance Theory". American Economic Review 77: 791–809.
  12. ↑ Trefler, D. (1995). "The Case of Missing Trade and Other HOV Mysteries". The American Economic Review 85 (5): 1029–1046.
  13. ↑ Krugman, P. R.; M. Obstfeld (1988). International Economics: Theory and Policy. Glenview: Scott, Foresman.
  14. 1 2 Bowen, H. P.; A. Hollander and J-M. Viane (1998). Applied International Trade Analysis. London: Macmillan Press. Cite uses deprecated parameter |coauthors= (help)
  15. ↑ Shiozawa, Y. (2007). "A New Construction of Ricardian Trade Theory: A Many-country, Many-commodity with Intermediate Goods and Choice of Techniques". Evolutionary and Institutional Economics Review 3 (2): 141–187. doi:10.14441/eier.3.141.
  16. ↑ McKenzie, Lionel W. (1954). "Specialization and Efficiency in the World Production". Review of Economic Studies 21 (3): 165–180. doi:10.2307/2295770.
  17. ↑ McKenzie, Lionel W. (1956). "Specialization in Production and the Production Possibility Locus". Review of Economic Studies 23 (3): 56–64. doi:10.2307/2296152.
  18. ↑ Jones, Ronald W. (1961). "Comparative Advantage and the theory of Tariffs; A Multi-Country, Multi-commodity Model". Review of Economic Studies 28 (3): 161–175. doi:10.2307/2295945.
  19. ↑ Dornbusch, R.; Fischer, S.; Samuelson, P. A. (1977). "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods". The American Economic Review 67 (5): 823–839.
  20. ↑ Matsuyama, K. (2000). "A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade". Journal of Political Economy 108 (6): 1093–1120. doi:10.1086/317684.
  21. ↑ Steedman, Ian (Ed) 1979 Fundamental Issues in Trade Theory, London: MacMillan and New York: St. Martin's Press. Steedman, Ian 1979 Trade Amongst Growing Economies, Cambridge: Cambridge University Press.
  22. ↑ Chris Edwards (1985) The fragmented world: competing perspectives on trade, money, and crisis, London and New York: Methuen & Co. §3.2　The 'Sraffian' Approach to Trade Theory, pp. 48–51.
  23. ↑ Yeats, A., 2001, "Just How Big is Global Production Sharing?" in Arndt, S. and H. Kierzkowski　(eds.), 2001, Fragmentation: New Production Patterns in the World Economy, (Oxford University Press, Oxford).
  24. ↑ Bardhan, Ashok Deo, and Jaffee, Dwight (2004), "On Intra-Firm Trade and Multinationals: Foreign Outsourcing and Offshoring in Manufacturing" in Monty Graham and Robert Solow eds., The Role of Foreign Direct Investment and Multinational Corporations in Economic Development.
  25. ↑ McKenzie, Lionel W. 1954 Specialization and Efficiency in the World Production, Review of Economic Studies, 21(3): 165–180. See pp. 177–9.
  26. ↑ Jones, Ronald W. 1961 Comparative Advantage and the theory of Trarrifs; A Multi-Country, Muti-commodity Model, Review of Economic Studies, 28(3): 161–175. See pp. 166–8.
  27. ↑ Equilibrium, Trade, and Growth: Selected Papers of Lionel W. McKenzie, By Lionel W. McKenzie, Tapan Mitra, Kazuo Nishimura, Page 232.
  28. ↑ Samuelson, P. (2001). "A Ricardo-Sraffa Paradigm Comparing Gains from Trade in Inputs and Finished Goods". Journal of Economic Literature 39 (4): 1204–1214. doi:10.1257/jel.39.4.1204.
  29. ↑ Chipman, John S. (1965). "A Survey of the Theory of International Trade: Part 1, The Classical Theory". Econometrica 33 (3): 477–519 Section 1.8. doi:10.2307/1911748.
  30. ↑ Shiozawa, Y. (2007). "A New Construction of Ricardian Trade Theory—A Many-country, Many-commodity Case with Intermediate Goods and Choice of Production Techniques—". Evolutionary and Institutional Economics Review 3 (2): 141–187. doi:10.14441/eier.3.141.
  31. ↑ Fujimoto, T. 2001 The Evolution of a Manufacturing System at Toyota, Productivity Press. Fujimoto, T. 2007 Competing to Be Really, Really Good: The Behind the Scenes Drama of Capability-Building Competition in the Automobile Industry, I-House Press.
  32. ↑ Fujimoto, T. and Y. Shiozawa 2011 and 2012, Inter and Intra Company Competition in the Age of Global Competition: A Micro and Macro Interpretation of Ricardian Trade Theory, Evolutionary and Institutional Economics Review, 8(1): 1–37 (2011) and 8(2): 193–231.
  33. 1 2 Cheng, Leonard K. (2001). Leonard K. Cheng, Henryk Kierzkowski, eds. Li & Fung, Ltd.: An agent of global production in Global Production and Trade in East Asia. Springer. pp. 317–323. ISBN 978-1-4613-5647-9.
  34. ↑ Ronald W. Jones; Henryk Kierzkowski (2000). S. Arndt; Henryk Kierzkowski, eds. 'A Framework For Fragmentation' in Fragmentation and International Trade (PDF). Rochester, NY and Geneva, Switzerland: Oxford University Press.
  35. ↑ J. S. Brown, S. Durchslag, J. Hagel III (2002). "Loosening up: How process networks unlock the power of specialization". The McKinsey Quarterly (PDF).
  36. ↑ Daniels, John; Radebaugh, Lee; Sullivan, Daniel. International Business: Environments and Operations (15th ed.). Pearson. ISBN 978-0-13-345723-0.
  37. ↑ International Trade Centre (ITC). "Trade Map - Trade statistics for international business development".

References

External links

Data

Official statistics

Data on the value of exports and imports and their quantities often broken down by detailed lists of products are available in statistical collections on international trade published by the statistical services of intergovernmental and supranational organisations and national statistical institutes:

The definitions and methdological concepts applied for the various statistical collections on international trade often differ in terms of definition (e.g. special trade vs. general trade) and coverage (reporting thresholds, inclusion of trade in services, estimates for smuggled goods and cross-border provision of illegal services). Metadata providing information on definitions and methods are often published along with the data.

Other data sources

Other external links

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