Chapter

Growth and Direction of International Trade

Topics to be covered
International Trade Defined Importance of International Trade to the Global Economy Determinants of Trade Volume and Direction of Trade Important Developments in Trade

International Trade Defined

International Trade Defined Why Traditionally So Popular? Where Do We Stand Now?

International Trade Defined

International trade is the exchange of goods and services across national boundaries. It is the most traditional form of international business activity and has played a major role in shaping world history and has also been shaped by world history.

Why Traditionally So Popular?

It is the first type of foreign business operation undertaken by most companies because of the following reasons: I. Importing or exporting requires the least commitment of, and risk to, the companys resources. II. This is an inexpensive way of testing a products acceptance in the market before investing in local production facilities.

Where Do We Stand Now?

International trade in services grown over the past decade at an annual rate of about 18 percent compared to that of approximately 9 percent for merchandise trade. Trade in services constitutes 25 percent of overall trade in 2004 (WTO Report). Typical service exports include transportation, tourism, banking, advertising, construction, retailing, and mass communication.

Importance of International Trade to the Global Economy

1. International trade allows manufacturers and distributors to seek out products, services, and components produced in foreign countries. Companies acquire them because of the following reasons: International trade enables firms to acquire resources that are not available at home. International trade increases incomes and employment. The relevant noteworthy points are:
To gain cost advantage To learn about technical methods used abroad

2. 3.

a) b)

a)

b) c)

Research findings indicate that the growth in exports is associated with an increase in jobs. Even though imports are associated with loss of jobs, the export job-generation effect is about 7.5 percent larger than the import job-loss effect. A recent study on wages and trade finds a strong positive correlation between export intensity and wages.

Determinants of Trade
There are several determinants for both exports and imports, which are identified below:
Major Determinants of Exports Major Determinants of Imports

Major Determinants of Exports

Presence of an entrepreneurial class Access to transportation, marketing, and other services Exchange rate Government trade and exchange rate policies The level of Foreign Direct Investment (FDI) General quality of institutional framework

Major Determinants of Imports

Per capita income Price of imports Exchange rates Government trade and exchange rate policies Availability of foreign exchange

Volume and Direction of Trade

The volume of world trade in 2004 was about three times what it was in 1990 and approached eleven trillion U.S. dollars. The dollar value of total world trade in 2004 was greater than gross national product of every nation in the world except the United States. However recent data showed a slowing down in volume of world merchandise exports (shown in the figure given below).

Directions of International Trade

One-fourth of everything grown and 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 they need. Merchandise trade currently accounts for about fourfifths of world trade. Industrial market economies account for the largest part of world trade. Trade among these countries is estimated to be greater than 67 percent (almost 70 percent) of global trade.

Important Developments in Trade

From GATT to WTO: The establishment of the world trade organization (WTO replacing the GATT under The Final Act of Uruguay Round in 1994) as a permanent trade organization and the principal agency of the United Nations (UN) with responsibility for international trade. The Final Act signed by 124 governments primarily focused on global reduction in trade barriers, establishment of multilateral framework of discipline for trade in services, and protection of trade-related property rights. After the implementation of the Uruguay Round, WTO members launched a subsequent round in Doha Qatar, in 2001 to further reduce trade barriers and to promote equitable rules for developing nations and to discourage the agricultural subsidies by them.

Important Developments in Trade (Continued)

The Emergence of Developing Nations, Opening up of New Markets and the Ascent of China: There has been a steady growth in the role of developing countries in world trade. A number of Newly Industrialized Countries (NICs), particularly Hong Kong, Singapore, South Korea, and Taiwan have increased their roles in world trade. New markets, such as China and Eastern Europe are now open for trade and investment. China joined the WTO in 2001 and now is the worlds third largest exporter/importer of goods and services.

Important Developments in Trade (Continued)

Shifting Emphasis of Developing Nations: Many developing countries have shifted their emphasis from demanding tariff cuts by wealthy countries for their exports to requesting technical assistance to increase production and exports. Economic Integration: There has been a marked increase in the establishment of common market and free trade area such North American Free Trade Agreement (NAFTA) and European Union (EU). The main reason behind this tendency is further increasing economic linkages among nations through trade, investment, and the operations of multinational companies.

Important Developments in Trade (Continued)

Increasing Dominance of Small and Medium Scale Firms: Export trade is no longer limited to the big multinational firms. Small and medium sized businesses are increasing their share of exports. These firms have the advantage of developing much more flexible structures than the big multinational enterprises. Service Economy and the Growing Share of Trade in Service: The developed countries of the world have already become service economies and the developing countries are also in the process of becoming service economy. Some developing nations such as Egypt, India, and Pakistan have a surplus in their service account, largely resulting from tourism and workers remittances.

Important Developments in Trade (Continued)

Globalization, Competitive Pressures and the Relocation of Value-Added Services: Globalization is spurred by the advances in communications & technology and governments policies to reduce obstacles to the flow of trade and capital flows. A number of Western companies have started outsourcing to overseas firms. Imminent Pressures: Transportation cost is rising all the time due to the ever increasing fuel prices. Faster economic growth in emerging economies is also putting pressures on the limited supply of raw materials and other natural resources. Businesses are still making adjustments to security costs after 9/11.

Thank You!