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Why do nations trade?
A simple guide into the history
and theory of international trade
What will I talk about? Links between the history and the
theories of international trade Most important trade theories and
their implications
You won’t see: Complex math Complex charts
Model of Intl. Trade Relations
Country A Country B
Goods & Services
Production Factors
Trade Policy
Capital, Labour, Technology
Tariffs, Non-Tariff Barriers
Currency Exchange Rates
International Organisations
The major theories
Absolute advantage Comparative advantage Factor abundance theory Modern explanations
Let’s start, then!
Ancient Times
First trade: barter exchange between tribes (ca. 5000 B.C.)
Trade centres: China, India, Egypt, Phoenicia, Babylon, Persia, Greece, Rome
Inventions: money, wheel, weighing and measuring system, commercial law, sails, commodity exchanges
First trade routes established
3rd-4th
Ancient Times
No intensive international trade Lack of safe and low-cost transportation Dispersed trade centres (from global
perspective) Long-distance routes mostly for
luxurious goods Stability of the commodity structure,
practically until the colonial conquest
3rd-4th
Silk Road
3rd-4th
Middle Ages
13th-14th
Lower importance of cities as trade centres
Feudal system- lords, vassals and fiefs (land given to a vassal by their lord)
Decreasing intensity of international trade Trade centres: Byzantium, Arabia, Italian
cities (Venice, Genoa, Firenze, Pisa), Hansa
Banking system, bills of exchange, credits for production
Trade – big share of products necessary for sailing (sailcloth, wood, tar, salt)
Marco Polo at court of Kubilai Khan c.1280
Age of Discovery
Bartholomew Diaz – Cape of Good Hope (1487) Vasco da Gama – new sea route to India (1498) Christopher Columbus – the „discovery” of
America (1492) Ferdinand Magellan – expedition around the
world (1519-21) Colonial conquest
15th-16th
Take a look at http://www.ucalgary.ca/applied_history/tutor/eurvoya/
Mercantilism
Colonial conquest – the basis Not a theory, rather a set of policy
guidelines Positive trade balance Governments as „gold-collectors” High protectionism against import
15th-16th
Industrial revolution
Significant growth of output Major change in trade volume and
commodity structure First trade patterns:
17th-18th
(Europe)manufactured
goods
(Colonies)tropical products
Theory of absolute advantage
Adam Smith, The Wealth of Nations” 1776
First classical theory Simple analysis of the causes of trade
patterns Major assumptions: two countries, two
goods, no additional trade costs, labour as the only production factor
18th
Theory of absolute advantage
18th
Example:
Unit costs (hours of labour)
HOME FOREIGN
2 4
4 1
How can Home get oil?
Theory of absolute advantage
Example (cont.):
Unit costs (hours of labour)
HOME FOREIGN
Production Import Production Import
2 4 4 1
4 2 1 4
Countries produce and export goods, which production costs are lower than abroad!
18th
Theory of comparative advantage
David Ricardo, 1817 The most influencing classical theory Same assumptions: two countries,
two goods, no additional trade costs, labour as the only production factor
Question:
What if a country produces both goods at a lower cost?
19th
Theory of comparative advantage
Example:
Unit costs (hours of
labour)HOME FOREIGN
1 4
2 3
How does it work now?
19th
Theory of comparative advantage
Why does it work now, either?Compare the opportunity
costs!
Unit costs (hours of labour)
HOME FOREIGN
Production Import Production Import
1 2 4 3
2 1 3 4
Example (cont.):
19th
Theory of comparative advantage
Example (cont.):
Unit costs (hours of labour)
HOME FOREIGN
1 (0,5) 4 (1,33)
2 (2) 3 (0,75)
Lower opportunity costs decides about „comparative advantage”
19th
Transportation revolution
Sea and land steam-powered transportation
Goods traded in large volumes Diminishing transportation and
communication costs – soaring trade New trade patterns (West –
developing countries)
19th
Factor abundance theory
E. Hecksher, B. Ohlin, 1930s Two countries – two goods Two production factors: labour and
capital Same technology of production No transportation costs
20th
Factor abundance theory
Example:
Factor resources
HOME FOREIGN
Technology
800 400 4 1
100 600 2 6
Compare „factor abundance” and „factor-consumption”
20th
Factor abundance theory
Example (cont.):Home is labour – abundant
Foreign is capital – abundant
Oranges are labour – consumingCars are capital - consuming
Home will export oranges – Foreign will export cars.
20th
Leontief paradox Leontief made an empirical research to verify the
H-O theory using data on the U.S. trade He surprisingly found that the U.S. – a capital-
abundant country – exported more labour-consuming goods
Possible explanation: assumptions underlying the H-O theory no longer reflected fast-changing situation in the post-war world economy
This inspired economists to look for new explanations to international trade
20th – 50’s
New trends in a post-war world
Fall of colonial empires led to a growing number of independent states
1935
late 20th
2010
Source: WTO
New trends in a post-war world Variety of actors in international
trade
late 20th
GovernmentsShape the country’s economic policy and attitudes towards foreign trade.
DOMESTIC BUSINESSESRun commercial transactions with foreign companies (export, import,
foreign direct investments)
HOUSEHOLDS, INDIVIDUALSE.g. tourists, private investors,
workers
INTERNATIONAL ORGANISATIONSGovernment or Non-Government
TRANSNATIONAL CORPORATIONSRun global business operations through
foreign subsidiaries
REGIONAL INTEGRATION GROUPINGS
Groups of neighbouring countries that eliminate trade barriers
Domestic level International level
New trends in a post-war world
Intra–industry trade – similar products are imported and exported
late 20th
IIT =| Exporti - Importi |
Exporti + Importi
New trends in a post-war world
New actors – international organisations
late 20th
Source: WTO
Grzegorz KarpiukKoordynator projektu „Program rozwoju WSIiZ – Uczelnia Jutra”
Source: Wikipedia
2004
No. Company CountryMarket value
(USD bln)
1 ExxonMobil USA 405,2
2 General Electric USA 372,1
3 Microsoft USA 273,7
4 Citigroup USA 247,7
5 BP UK 231,9
6 Royal Dutch/Shell NED/UK 221,5
7 Wal-Mart Stores USA 218,6
8 Pfizer USA 198,0
9 Johnson&Johnson USA 194,7
10 Bank of America USA 188,8
Żródło: Forbes, http://www.forbes.com/lists/2009/18/global-09_The-Global-2000_MktVal.html
New actors – multinational corporationsNew trends in a post-war world
II poł. XXw
2009
Company CountryMarket value
(USD bln)
ExxonMobil USA 335.54
PetroChina CHN 270.56
Wal-Mart Stores USA 193.15
China Mobile CHN 175.85
ICBC CHN 170.83
Microsoft USA 143.58
Procter & Gamble USA 141.18
AT&T USA 140.08
Johnson & Johnson USA 138.29
Royal Dutch Shell NED 135.10
New trends in a post-war worldTrade structure
late 20th
Value2004
(bn USD)
Value2008
(bn USD)
Value2009
(bn USD)
GOODS 8907 15775 12147
Agricultural 783 1342 1169
Fuel and minerals 1281 3530 2263
Manufactures 6570 10458 8355
SERVICES 2125 3730 3312
Transport 500 875 704
Tourism 625 945 854
Other 1000 1910 1754
Source: World Trade Report 2010, WTO
Source: World Trade Report 2014, WTO
late 20th
late 20th
Source: World Trade Report 2014, WTO
late 20th
Source: World Trade Report 2014, WTO
late 20th
Source: World Trade Report 2014, WTO
continued from the previous slide…
late 20th
Source: World Trade Report 2014, WTO
late 20th
Source: World Trade Report 2014, WTO
continued from the previous slide…
Leading exporters and importers of goods (bn USD)
Source: World Trade Report 2014, WTO
late 20th
Leading exporters and importers of services (bn USD)
Source: World Trade Report 2014, WTO
late 20th
Leading importers (bn USD)
Goods Services
Source: World Trade Report 2010, WTO
late 20th
late 20th
Statistical Data on Trade
Globalisation
late 20th
Global financial market Institutional development of international trade „McDonaldisation” – global convergence of
customer preferences towards certain products Increase of FDI flow Dominating position of MNEs Geographical development of value chains
(distribution channels) Knowledge-based economy emerged Lower importance of states in the global trade New sector of economy – knowledge management
Modern theories Imitation lag theories (Posner, 1961):
Technological gap between the Leader and the Rest of World
20th, 60’s
lag in demand
lag in reaction
Leader starts production
Demand occurs in the Rest of World
TRADE
Rest of World starts
production
Modern theories Theory of overlapping demands (Linder,
1961)
Explanation of the intra – industry trade
20th, 60’s
Country Ahigh GDP
Country Bavg. GDP
Country Clow GDP
„New” theories International product life cycle (Vernon, 1966) Uses a marketing concept of product life cycle Explains: international trade; foreign direct
investments (FDI) , intra-industry trade (IIT). Three actors:
Leader Developed countries (DC) Rest of World (RW)
Empirical evidence proves the theory can explain the developments in the post-war international trade flows of teletransmission equipment
20th, 60’s
Time: T0Leader starts production of cars. No international
trade so far
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Export net
Time: T1Leader’s domestic market matures. Demand for cars
arises in DC Trade is initiated
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Export net
T1 T2 T3 T4 T5 T6
Export net
T1 T2 T3 T4 T5 T6
Time: after T1Leader is the only exporterof cars. Growing demand
in DC causes trade growth.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
T1 T2 T3 T4 T5 T6
Time: T2Leader is still the only
exporter of cars.Demand for cars emerges
in RW, which begins import.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Time: T2Technological advancementin DC and Leader’s outward
FDIs make it possible to start production in DC.
Leader can now import cheaper cars from DC (IIT)
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Produce
Time: after T2Leader’s exports to DC
decreases, RW’s imports Increases as RW starts importing cars from DC.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Produce
T1 T2 T3 T4 T5 T6
Time: T3DC become the major
exporter of cars. The Leader’smarket share decreases.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Time: T4Leader ceases the
domestic production of cars.In pursuit of lower costs
the Leader starts outwardFDIs to the RW, which becomes a car maker.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Time: T4RW starts exports of cars
to the Leader and the DCs.The price is competitive due to low labour costs.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Time: T4 – T5DCs start to invest in RW
(outward FDIs).RW becomes the major producer and exporter
of cars
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
Time: T5 – T6RW becomes the onlyproducer and exporter
of cars.
Simulation of the int’l product life cycle - cars
20th, 60’s
REST OF WORLD
LEADERDEVELOPED COUNTRIES
Produce
Export net
T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6T1 T2 T3 T4 T5 T6
