1. Ch. 2: World Trade: An Overview 1

2. 47,390 WORLD 2004 GDP (current US$) (billions) 41,290.4 GNI per capita, Atlas method (current US$) 6,329 Life expectancy at birth, total (years) 67.3 Population, total (millions) 6,365.0 Population growth (annual %) 1.2 Surface area (sq. km) (thousands) 133,940.9 UNITED STATES 2004 GDP (current US$) (billions) 11,711.8 GNI per capita, Atlas method (current US$) 41,440 Life expectancy at birth, total (years) 77.4 Population, total (millions) 293.7 Population growth (annual %) 1.0 School enrollment, primary (% net) 93.9 Surface area (sq. km) (thousands) 9,629.1 www.worldbank.org/data 2 $9,136 2010 14,586.7 47,390 78

3. 3 http://www.wto.org/english/res_e/statis_e/world_region_export_08_e.pdf

4. http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20399244~menuPK:1504474~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html 4 Notice the difference in numbers and find out why.

5. Gravity Model 1. Size matters 1. Large economies produce diverse products for sale 2. Large economies have income to buy foreign goods 5

6. Gravity Model 1. Distance matters 1. Transportation costs 2. Contacts 2. Other factors 1. Borders matter 1. Formalities 2. Different currencies 2. Cultural, linguistic similarity 3. Ease of transportation, access 4. Existence of many MNCs 6

7. Gravity Model Size will increase trade between countries Size will increase trade between countries Distance will decrease trade between countries. Distance will decrease trade between countries. Other factors will be lumped into a constant. Other factors will be lumped into a constant. 7

8. Gravity Model Trade between two countries (T ij ) is measured as the volume of trade (exports + imports). Trade between two countries (T ij ) is measured as the volume of trade (exports + imports). Size of country i (Y i ) is the GDP of i. Size of country i (Y i ) is the GDP of i. If size of both countries matters, T ij = AY i a Y j b, where A is a constant that will include the influences of all other variables and a and b are exponents. If size of both countries matters, T ij = AY i a Y j b, where A is a constant that will include the influences of all other variables and a and b are exponents. 8

9. Size Matters: The Gravity Model 9

10. Gravity Model If distance acts as a deterrent to trade, we can include the distance between i and j (Dij) as a denominator. If distance acts as a deterrent to trade, we can include the distance between i and j (Dij) as a denominator. T ij = AY i a Y j b D ij -c T ij = AY i a Y j b D ij -c If a=b=c=1, then T ij = AY i Y j /D ij If a=b=c=1, then T ij = AY i Y j /D ij 10

11. Distance Matters 11

12. US-Canada Trade In 1999, Canada imported C$215 billion of merchandise from the U.S., which accounted for more than 2/3 of total Canadian merchandise imports, and 23% of total U.S. merchandise exports. In 1999, Canada imported C$215 billion of merchandise from the U.S., which accounted for more than 2/3 of total Canadian merchandise imports, and 23% of total U.S. merchandise exports. In the same year, Canada exported C$286 billion of merchandise to the U.S., which accounted for 87% of total Canadian merchandise exports, and 19% of total U.S. merchandise imports. In the same year, Canada exported C$286 billion of merchandise to the U.S., which accounted for 87% of total Canadian merchandise exports, and 19% of total U.S. merchandise imports. Typically, the U.S. trades about as much with Canada as it does with all 15 countries of the European Union combined, and its trade with Ontario alone exceeds its trade with Japan. Typically, the U.S. trades about as much with Canada as it does with all 15 countries of the European Union combined, and its trade with Ontario alone exceeds its trade with Japan. http://research.stlouisfed.org/wp/2000/2000-024.pdf 12

13. US-Canada Trade Nearly 90% of the Canadian population lives within 100 miles (161 km) of the U.S. border. Nearly 90% of the Canadian population lives within 100 miles (161 km) of the U.S. border. The border between Canada and the 48 contiguous states stretches for almost 4000 miles (over 6400 km). The border between Canada and the 48 contiguous states stretches for almost 4000 miles (over 6400 km). Starting with the 1965 Auto Pact, there has been an almost uninterrupted trend towards freer bilateral trade, culminating in the 1988 Canada- U.S. Free Trade Agreement, subsequently deepened and broadened by the North American Free Trade Agreement (NAFTA). Starting with the 1965 Auto Pact, there has been an almost uninterrupted trend towards freer bilateral trade, culminating in the 1988 Canada- U.S. Free Trade Agreement, subsequently deepened and broadened by the North American Free Trade Agreement (NAFTA). http://research.stlouisfed.org/wp/2000/2000-024.pdf 13

14. US-Canada Trade John McCallum (1995) used a gravity model to estimate that in 1988, trade between provinces within Canada was 22 times the expected amount of trade between the provinces and the states of the U.S. John McCallum (1995) used a gravity model to estimate that in 1988, trade between provinces within Canada was 22 times the expected amount of trade between the provinces and the states of the U.S. http://research.stlouisfed.org/wp/2000/2000-024.pdf 14

15. Distance and Borders 15

16. What about China? 16 http://www.npr.org/blogs/money/2011/08/10/139388532/only-a-tiny-sliver-of- americans-personal-spending-goes-to-china “… less than 3 percent of personal spending in the U.S. goes to China, according to a new report from the SF Fed.report That's partly because most personal spending goes to things like health care and housing that are, by definition, produced in the U.S.”

17. Globalization It is not inevitable. It is not inevitable. 19 th century was more global than 20 th century, even though technology allowed lower transportation costs, faster communication tools, etc. in the 20 th c. 19 th century was more global than 20 th century, even though technology allowed lower transportation costs, faster communication tools, etc. in the 20 th c. Wars and government policies can stop globalization. Wars and government policies can stop globalization. Since 1980 there has been rapid globalization. Since 1980 there has been rapid globalization. 17

18. Globalization 18

19. http://www.wto.org/english/res_e/statis_e/its2005_e/its05_world_maps_e.pdf 19

20. Composition of Trade 20 2003 2008

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22. 22

23. Changing Composition of Trade 23

24. Between 1945 and 1980, the World Bank reckons, economic integration was concentrated among rich countries. Since 1980 that has changed. Manufactured goods rose from 25% of poor-country exports in 1980 to more than 80% in 1998. This integration was concentrated in two dozen countries—including China, India and Mexico—that are home to 3 billion people. Over the past two decades, these countries have doubled their ratio of trade to national income. In the 1990s their GDP per head grew by an annual average of 5%. Life expectancy and schooling levels increased. Another 2 billion people live in the rest of the developing world, where the story is rather different. In these “less globalised” countries, including much of Africa, the ratio of trade to national output has fallen. In the past decade, income per head has shrunk, and the number of people in poverty has risen. In short, the poor countries that are in the biggest trouble are those that have globalised the least. The challenge for development—and the World Bank—is to reverse this marginalisation. http://www.economist.com/financ e/displaystory.cfm?story_id=E1_ RJRTTN 24

25. Changing Composition of Trade Developing countries, or low and middle-income countries, have also changed the composition of their trade. Developing countries, or low and middle-income countries, have also changed the composition of their trade. In 2001, about 65% of exports from developing countries were manufactured products, and only 10% of exports were agricultural products. In 2001, about 65% of exports from developing countries were manufactured products, and only 10% of exports were agricultural products. In 1960, about 58% of exports from developing countries were agricultural products and only 12% of exports were manufactured products. In 1960, about 58% of exports from developing countries were agricultural products and only 12% of exports were manufactured products. 25

26. Changing Composition of Trade 26

27. Multinational Corporations and Outsourcing Before 1945, multinational corporations played a small role world trade. Before 1945, multinational corporations played a small role world trade. But today about one third of all US exports and 42% of all US imports are sales from one division of a multinational corporation to another. But today about one third of all US exports and 42% of all US imports are sales from one division of a multinational corporation to another. 27

28. Trade Theory In spite of all the changes observed in international trade, the theories utilized since the first half of the 19 th century still have strong predictive power. In spite of all the changes observed in international trade, the theories utilized since the first half of the 19 th century still have strong predictive power. 28