IBM554 Chapter 1: Growth And Direction In International Trade PDF

CHAPTER 1 GROWTH AND DIRECTION IN INTERNATIONAL TRADE Add Subtitle AT THE END OF THE CHAPTER, STUDENTS SHOULD BE ABLE TO UNDERSTAND:- Importance of International Trade to the Global Economy Determinants of Trade Volume and Direction of Trade Important Developments in Trade The...

CHAPTER 1 GROWTH AND DIRECTION IN INTERNATIONAL TRADE Add Subtitle AT THE END OF THE CHAPTER, STUDENTS SHOULD BE ABLE TO UNDERSTAND:- Importance of International Trade to the Global Economy Determinants of Trade Volume and Direction of Trade Important Developments in Trade The GATT and the WTO Regional Trade Agreements 2 IMPORTANCE OF INTERNATIONAL TRADE TO THE GLOBAL ECONOMY ❑ International trade define : allows manufacturers and distributors to seek out products and services produced in foreign countries. Why : ✓ Every country has different factor of endowment ✓ Long term continuity – we expand because we want to ensure long lasting existence in the market…be it domestic and also global ✓ For economic growth ✓ For political and diplomatic reasons ✓ Cost saving ✓ Policy implementation 3 DETERMINANTS OF TRADE Why do some countries trade more than others? ✓ Import tariffs ✓ Quotas ✓ Exchange rates ✓ Entrepreneurial class ✓ Efficiency enhancing government policy ✓ Secure access to transport (transport costs) ✓ Marketing services 4 VOLUME AND DIRECTION OF TRADE ❑ In 1990, the world reached a milestone when the value of international trade in goods and services measured in dollars surpassed $4 trillion. ❑ By 2019, the value of exports of goods and services was over six times the 1990 levels, approaching $25 trillion. ❑ US GDP estimated at $22 trillion in 2020. ❑ One fourth of everything grown or made in the world is now exported ❑ Small countries tend to be more dependent on international trade than larger ones because they are less able to produce all that they need. ❑ Larger countries (in terms of population) import fewer manufactured goods on a per capita basis because such countries tend to have diversified economy that enables them to produce most of their own needs (US, Japan,India, China). ❑ Merchandise trade currently accounts for about four-fifths of world trade. ❑ The top ten exporters accounted for just over one half of world merchandise exports (China, US,Germany, Japan, Netherlands,nFrance, South Korea, Italy, United Kingdom and Mexico) 5 GLOBAL TRADE IMBALANCES ❑ The US current account deficit reached 2.87 % of GDP in the last quarter of 2019 ❑ Imports exceed exports by about USD616 billion (2019). ❑ The East Asian economies (including Japan) held about USD5 trillion in official foreign reserves exchange out of a global total of USD 11 trillion in 2019. ❑ China’s foreign currency reserves alone are estimayted at USD 3.11 trillion at the end of 2019. ❑ Export led growth in surplus countries feeds (and is dependant on) debt led growth in deficit countries. ❑ Surplus countries (income exceeds spending) , they lend the difference to countries where spending exceeds income, accumulating international assets in the process. ❑ Deficit countries spend more than their income, borrowing from surplus countries to cover the difference, in the process accumulating international liabilities or debts. ❑ Trade imbalances lead to destabilizing capital flows between economies. Eg: the global financial crisis of 2007 and the subsequent euro zone crisis were basically the result of capital flows between countries. 6 DEVELOPING COUNTRIES IN WORLD TRADE ❑ There has been a steady growth in the role of developing countries in world trade. ❑ Between 2000 and 2019, the value share of developed nations in world merchandise trade declined from 62 to 47% while developing nations increased from 29% to 53%. ❑ Over this period, China’s share alone increased from 2.6% to 12 %. The share of Latin America and the Caribbean also increased from 4.5% to 4.7% (WTO,2020) ❑ China joined the WTO in 2001. Within 3 years, its exports doubled, and the country is now the world’s largest merchandise exporter ($2.5 trillion in 2019) and second largest importer of goods ($2.07 trillion in 2011). ❑ About 83% of the increase in the share of developing countries total trade (2010-2019) accrued to a small number of emerging economies : the BRICs. Mexico, South Korea, India, China accounted for about one third of world exports and about two thirds of world exports of developing country exports in 2019. 7 TRANSPORTATION AND SECURITY ❑ About 60% (by value) of total world merchandise trade is carried by sea. ❑ In volume terms, 75% of world merchandise trade is carried by sea, whereas 16% is by rail and road (9% bu pipeline, 0.3 % by air). ❑ Increase in fuel prices will give effect to raising transportation costs. ❑ In air transportation(more fuel sensitive than shipping), rising oil prices could severely damage trade in time sensitive products such as fruits and vegetables, or parts in just in time production. ❑ World air cargo traffic has grown during the past decade due to an increased trade in high volume low weight cargo, globalization and associated just in time production and distribution systems. 8