Chap 1

Who trades with whom and why? Chapter 1 2) Evolution and structure of international trade and globalisation 3) Who trades with whom?

1. Evolution and structure of world trade • What is globalisation? It means more intensive relations between countries, in the area of trade in goods and services, of mobility of men (labour) and capital  more « openness » • Is globalisation a new phenomenon? Lets turn to history, both old and recent

The graph below shows that there has been a first movement of « globalisation » between 1870 and 1914 (before the first world war), followed by a recess from 1914 to 1945, and then by a new wave of openness since 1945 up to date Evolution of World Trade (1870 - 1998)

Index base 100 in 1870

100000

10000

World GDP World Exports

1000

100 1870

1913

1950

1973

1998

The table below explores a more recent period and draws attention on differences between countries International Trade (exports + imports in % of GDP)

GDP (bn of current US dollars) 1970

1990

2001

1970

1990

2001

1026

5751

10065

11

21

18

206

3052

4141

20

20

20

-

1689

1846

39

54

68

FRANCE

147

1216

1310

30

43

54

UNITED KINGDOM

124

990

1424

44

51

56

ITALY

108

1102

1089

32

39

55

CANADA

85

574

694

43

52

82

BELGIUM

26

198

230

101

140

166

CHINA

92

355

1159

4

32

49

INDONESIA

10

114

141

28

49

77

2

37

85

-

439

316

BRAZIL

42

465

509

14

15

27

MEXICO

36

263

624

17

38

57

TUNISIA

1

12

20

47

94

99

TURKEY

18

151

145

10

31

66

UNITED STATES JAPAN GERMANY

SINGAPORE

Comments of the previous table • 1) Trade on goods and services represent a gowing share of all countries activity • 2) This is valid both for developed and developing countries (more for these last countries) • 3) « Large » countries trade less than « small » ones. However, even the USA cannot reach self-sufficiency (and it is not in their interest)

Comparison between Trade in goods and services and Foreign Direct Investments International Trade (exports + imports in % of GDP) 0

1970

1990

2001

FDI flows (net incoming, in % of GDP) 1970

1990

2001

UNITED STATES

11

21

18

0,12

0,84

1,43

JAPAN

20

20

20

0,05

0,06

0,15

GERMANY

39

54

68

0,18

1,84

FRANCE

30

43

54

0,42

1,28

4,21

UNITED KINGDOM

44

51

56

1,20

3,08

4,35

ITALY

32

39

55

0,58

0,58

1,37

CANADA

43

52

82

2,14

1,32

4,15

101

140

166

4

32

49

0

0,98

4,04

28

49

77

0,86

0,95

-2,32

439

316

BELGIUM CHINA INDONESIA SINGAPORE

4,07

15,22

BRAZIL

14

15

27

0,93

0,21

4,41

MEXICO

17

38

57

0,91

1,00

4,06

TUNISIA

47

94

99

1,11

0,73

2,43

TURKEY

10

31

66

0,32

0,45

2,25

Comments on the previous table • 1) FDI represent a much smaller share of the GDP than trade. However, FDI are counted only in one direction + they should be compared to investment (1525% of GDP) • 2) FDI (that is capital flows) seem to grow still quicker than trade (goods flows) in the recent period

Comparison of growth rates of GDP (output), trade and FDI at the world level (in percent per year) The growth rate of FDI in all periods is larger than the one for trade or output

1986-90

1991-95

1996-2000

GDP (at factors cost)

10,8

5,6

1,3

NET EXPORTS (Goods & Services)

15,6

5,4

3,4

FDI (incoming)

23,1

21,1

40,2

FDI (outgoing)

25,7

16,5

35,7

What do we trade? • Trade concerns more and more manufactured products, less and less raw materials, either agricultural, or mining • This is valid also for developing countries: in 1960, these countries exported 60% of agricultural products and 12% of manufactured goods; in 2000, the shares are 10% and 63% • Please refer to the UNCTAD database

Evolution of the trade structure (by type of commodities) in the last 50 years Evolution of contemporary World Trade and GDP (1950 - 2000)

Index base 100 in 1950

10000

Export of Agricultural products Export of mining products

1000

Export of manufactured products World GDP

100 1950

1960

1970

1980

1990

2001

Trade becomes also more and more regional: the WTO is a multilateral agreement, but it doesnot preclude the existence of regional agreements on all continents of the world Share of Intra-Regional Trade in various Regional Agreements Regional Agreement APEC EU NAFTA ASEAN MERCOSUR Andine CM

Share of mutual exports in % of total trade 1970 1980 1990 2001 57,8 57,9 67,5 71,8 59,5 60,8 65,9 61,2 36,0 33,6 41,4 54,8 22,4 17,4 19,0 22,4 9,4 11,6 8,9 20,8 1,8 3,8 4,2 11,2

Starting Date 1989 1957 1994 1992 1991 1988

The progress of trade has been enhanced by a movement of decreasing tariff barriers, beginning from 1950. This is the result of multilateral agreements reached in the framework of the GATT (ancestor of WTO) Long term Evolution of Customs Tariffs on manufactured Goods Average Customs Tariff in % 1875

1913

1931

1950

1980

1990

2002

GERMANY

5

13

21

26

-

-

-

BELGIUM

10

9

14

11

-

-

-

FRANCE

14

20

30

18

-

-

-

UNITED KINGDOM

0

0

-

23

-

-

-

EUROPEAN UNION

-

-

-

-

5,7

5,9

4,1

45

44

48

14

7

4,8

3,4

UNITED STATES

2 - Who trades with whom? •

Let start by looking at Vietnam’s trade: exports + imports of several countries in million dollars in 2004

8000

7000

6000

5000

4000

3000

2000

1000

sia Ko rea La o Ma s lay Ph sia ilip pin Sin es ga po re Th ail an d Ta iw an Po lan d Ru ss ia

Ind on e

Ind ia

HK

UK Ca mb od ia Ch ina

Ita ly Sp ain

US Ca na da Au str ali a Ja pa n Ne w Z Au str ia Fr an c Ge e rm an y

0

Comments of the Graph • The larger the partner country, the larger is trade: the USA, China, Japan trade for ca 8 bn $, whereas Germany, Thailand and Australia trade for 2,5 bn $ • The further is the partner country, the less is trade: China and the UK have an equivalent (economic) size, but Vietnam trades much more with China. Same for Australia and Russia.

Construction of a new graph We calculated : • 1) the share of trade of each partner country in Vietnam total trade. For instance, the US, China and Japan have each 11-12% of Vietnam total trade • 2) the « weight » of each partner in comparison to Vienam’s weight; the « weight » here is the output, the GDP. For instance, the US is 230 times as large as Vietnam, China 42 times, but Cambodia is 1/10 of Vietnam

Two categories of partners: neighbours and others Vietnam Trade with neighbour countries and countries on other continents 16%

14%

NEIGHBOUR COUNTRIES IN BLUE, OTHERS IN RED

CHINA

12%

JAPAN USA

share of country i in Vietnam total trade

10% SINGAPORE 8%

TAIWAN KOREA

6% THAILAND 4%

GERMANY AUSTRALIA UK

2%

RUSSIA SPAIN CANADA

0% 0

ITALY

FRANCE

50

100

150

GDP of country i reported to Vietanm GDP

200

250

Comment on the graph • By building our two indexes, we take into account that trade depends on the economic weight of partners • But there is another factor to take into account: distance; it costs less to trade with neighbours than with distant countries. That is why the regression line for neighbours is steeper than for distant parners

The gravity equation • In similarity to what exists in physics (the discovery of Isaac Newton in the 17-th century), economists have discovered that bilateral trade (between two countries) depends positively on the outputs of these countries and negatively of their distance. • The gravity equation takes the form Tij = A * Yi * Yj / Dij where i and j are two countries, T their trade, Y their GDP and D their distance

Exercise for next week • I have recorded on an excel file trade statistics of all countries in east and south-east Asia (up to Australia and NZ). These data are from the IMF DoTS for 2004 • I have also recorded the GDP of all these countries, taken from WB data (2005) • Your work is to find the distances in km between all these countries • Together, we will test the formula above, transforming it a little: Tij/YiYj = ADij

End of lesson 1 • Are there any questions? • Exercise: see the previous slide