Chapter 1 An Introduction To Inter Nation

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Copyright 2011 Worth Publishers nternational Economics Feenstra/Taylor, 2/e.

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Trade in the Global Economy
1
1 nternational Trade
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Introduction
On April 14, 2010, the Eyjafjallajokull volcano
in celand roared to life after being dormant for
more than two centuries.
An event like this has dramatic consequences
for internationaI trade, the movement of
goods and services across borders.
Roughly 100,000 flights to and from Northern
Europe were cancelled, and billions of dollars
in air freight and millions of travelers were
delayed, cancelled, or re-routed.
In ApriI 2010 the ash
from IceIand's
EyjafjaIIajokuII
voIcano disrupted
air traveI in Northern
Europe and beyond.
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Introduction
n this book, we will study international trade in goods
and services.
We will learn the economic forces that determine what
that trade looks like:
what products are traded
who trades them
at what quantities and prices they are traded
what the benefits and costs of trade are.
We will also learn about policies that governments use
to shape trade patterns among countries.
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1 InternationaI Trade
The Basics of WorId Trade
Countries buy and sell goods and services from one
another constantly.
An export is a product sold from one country to
another.
An import is a product bought by one country from
another.
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A country's trade baIance is the difference between its
total value of exports and its total value of imports
(usually including both goods and services).
Countries that export more than they import, such as
China in recent years, run a trade surpIus, whereas
countries that import more than they export, such as the
United States, run a trade deficit.
The biIateraI trade baIance is the difference of exports
and imports between two countries.
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An iPod Has GIobaI VaIue. Ask the (Many) Countries That
Make It.
Who makes the Apple iPod?
Apple outsources the entire manufacture of the device to a
number of Asian enterprises
The iPod, like many other products, is made in several
countries by dozens of companies, with each stage of
production contributing a different amount to the final value
The real value of the iPod doesn't lie in its parts or even in
putting those parts together. The bulk of the iPod's value is in
the conception and design of the iPod
HEADLINES
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The iPod is valued at about $10 when it leaves the
dock in China en route to the United States.
t doesn't really make sense to count the entire $10
iPod as a Chinese export to the United States, as is
done in official trade statistics, when only $4 is the
vaIue-added in China.
The difference between the value of the iPod
when it leaves China and the cost of parts and
materials purchased in China and imported from
other countries.
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APPLICATION
Is Trade Today Different from the Past?
FIGURE 1-1 (a)
The Changing Face of U.S. Import Industries, 1925-2009 The
types of goods imported by the United States has changed
drasticaIIy over the past 84 years.
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Is Trade Today Different from the Past?
FIGURE 1-1 (b)
The Changing Face of U.S. Export Industries, 1925-2009 The
types of exported by the United States has aIso changed
drasticaIIy over the past 84 years.
APPLICATION
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Map of WorId Trade
FIGURE 1-2
WorId Trade in Goods, 2006 ($ biIIions) Trade in
merchandise goods between seIected countries and
regions of the worId.
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Map of WorId Trade
TABLE 1-1
Shares of WorId Trade, Accounted for by SeIected Regions, 2006
.
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Map of WorId Trade
European and U.S. Trade The largest amount of
trade shown in Figure 1-2 is the flow of goods within
Europe.
Trade between European countries is high because
import tariffs (taxes on international trade) are low.
n addition to large trade flows among the European
countries, there are also large trade flows between the
United States and Europe.
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Map of WorId Trade
Trade in the Americas There is also a large amount of
trade recorded within the Americas, that is, between
North America, Central America, South America, and the
Caribbean.
Trade within the Americas is about one-third of trade
within Europe, and the vast majority of that trade is within
the North American Free Trade Area, consisting of
Canada, the United States, and Mexico.
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Map of WorId Trade
Trade with Asia All the exports from Asia totaled about
$.1 trillion in 200, or more than one-quarter (2) of
world trade, as shown in Table 1-1.
Remember that this total includes only trade in goods
and omits trade in services, which is becoming
increasingly important.
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Map of WorId Trade
Other Regions The exports of the Middle East and
Russia combined (together with countries around Russia
like Azerbaijan, Kazakhstan, etc.) total $1.0 trillion, or
another of world trade.
And then there is Africa. The European nations have the
closest trade links with Africa, reflecting both their
proximity and the former colonial status of some African
countries.
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Trade Compared with GDP
So far, we have discussed the value of trade crossing
international borders.
But there is a second way that trade is often reported, and
that is as a ratio of trade to a country's gross domestic
product (GDP), the value of all final goods produced in a
year.
For the United States, the average value of imports and
exports (for goods and services) expressed relative to
GDP was 1 in 200.
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Trade Compared with GDP
TABLE 1-2
Trade/GDP Ratio in 2008 Countries with the highest ratios of trade to GDP
tend to be smaII in economic size. Countries with the Iowest ratios of
trade to GDP tend to be very Iarge in economic size.
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Barriers to Trade
The term trade barriers refers to all
factors that influence the amount of
goods and services shipped across
international borders.
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Barriers to Trade
This diagram shows totaI
trade in merchandise
goods and services for
each country divided by
GDP.
There was a
considerabIe increase in
the ratio of trade to GDP
between 1890 and 1913.
This trend was ended by
WorId War I and the
Great Depression
Most of the industriaI
countries shown did not
reach the IeveI of trade
prevaiIing in 1913 untiI
the 1970s.
FIGURE 1-3
Trade in Goods and Services ReIative to GDP
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First GoIden Age" of Trade
The period from 10 until World War (11411) is
sometimes referred to as a "golden age of international
trade.
Those years saw dramatic improvements in transportation,
such as the steamship and the railroad, that allowed for a
great increase in the amount of international trade.
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Interwar Period Signed into law in June 10, the Smoot-
Hawley Tariff Act raised tariffs to as high as 0 on many
categories of imports.
These tariffs were applied by the United States to protect
farmers and other industries, but they backfired by causing
other countries to retaliate.
Canada retaliated by applying high tariffs of its own against
the United States; France used import quotas, a limitation
on the quantity of an imported good allowed into a country,
to restrict imports from the United States.
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FIGURE 1-4
Average WorIdwide Tariffs, 1860-2000 This diagram shows
the worId average tariff for 35 countries from 1860 to 2000.
Interwar Period
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Second GoIden Age" of Trade
n addition to the end of World War and tariff
reductions under the General Agreement on Tariffs and
Trade, improved transportation costs contributed to the
growth in trade.
The shipping container, invented in 1, allowed
goods to be moved by ship, rail, and truck more
cheaply than before.
World trade grew steadily after 10 in dollar terms and
as a ratio to GDP. For this reason, the period after 10
is called the "second golden age of trade and
globalization.
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0 years ago Malcom McLean, an entrepreneur from
North Carolina, loaded a ship with -foot containers
and sailed from Newark, N.J., to Houston.
McLean was the first to design a transportation system
around the packaging of cargo in huge metal boxes that
could be loaded and unloaded by cranes.
HEADLINES
A Sea Change in Shipping 50 Years Ago
A fully loaded container ship can
carry thousands of containers.
Replacing break-bulk with cargo containers dramatically
reduced shipping costs, reinvigorating markets and fueling
the world economy.
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A Sea Change in Shipping 50
Years Ago
"Containerization has transformed global trade in
manufactured goods as dramatically as jet
planes have changed the way we travel and the
Internet has changed the way we communicate.
The Asian economic miracle of the last two
decades could not have happened without the
efficient transportation that containerized
shipping provides."
Joseph Bonney, editor of the Journal of
Commerce, the bible of the shipping industry.
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The FinanciaI Crisis
FIGURE 1-5
Change in the VaIue
of Trade, 2007-2009
(percent)
As a resuIt of a
worIdwide
financiaI crisis
and economic
recession, the
vaIue of trade
pIummeted
between earIy
2008 and earIy
2009.

Chapter 1 An Introduction To Inter Nation

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Copyright 2011 Worth Publishers nternational Economics Feenstra/Taylor, 2/e.

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