International Trade Vocabulary

Introduction to International Trade

Key Questions

• What distinguishes international trade from globalization?
• Why is international trade important?
• How significant is trade for the U.S. economy?
• Has the nature of international trade evolved over time?
• What factors determine trade patterns?
• How does the flow of companies and people compare to the flow of goods and services across borders?

Globalization vs. International Trade

• Globalization: Encompasses the flow of goods, services, people, firms, culture, ideas, and financial markets across borders.
• International Trade: A subset of globalization, specifically referring to the exchange of goods and services across borders.

Economic Forces in International Trade

• The course will explore the economic forces that determine:
  • The appearance of international trade.
  • The specific products that are traded.
  • The participants in trade.
  • The quantities and prices at which goods are traded.
  • The benefits and costs associated with trade.
• Government policies that influence trade patterns will also be examined.

Migration

• Migration involves the movement of people across borders to reside in another country.
  • Immigrants: Individuals entering a country to live there.
  • Emigrants: Individuals leaving a country to live elsewhere.
  • Refugees: Migrants whose safety is at risk in their home country.

Foreign Direct Investment (FDI)

• FDI occurs when a firm from one country owns part or all of a firm located in another country.

Basics of World Trade

• Countries engage in the constant buying and selling of goods and services.
  • Export: A product sold from one country to another.
  • Import: A product bought by one country from another.

Trade Balance

• A country's trade balance is the difference between its total export value and total import value.
• Trade Surplus: Exports exceed imports (e.g., China).
• Trade Deficit: Imports exceed exports (e.g., United States).
• Bilateral Trade Balance: The difference between exports and imports between two countries.

Macroeconomics of the Trade Balance

• GDP (Gross Domestic Product) is the value of all final goods produced in a year: Y = C + I + G + EX – IM, where:

  • Y = GDP
  • C = Consumption
  • I = Investment
  • G = Government Spending
  • EX = Exports
  • IM = Imports

• The trade balance is represented as EX – IM.

  • Surplus: EX – IM > 0
  • Deficit: EX – IM < 0

• Rearranging terms:

  • (Y – T – C) – I = G – T + EX – IM
  • Sp = (Y – T – C )
  • (Sp – I) + (T – G ) = EX – IM
  • Where:
    • Sp = Private Savings
    • T = Taxes

• If both (Sp – I) < 0 and (T – G) < 0, then EX – IM < 0, indicating a trade deficit. This deficit is linked to low savings by households or the government.

• The trade balance is determined by the macroeconomic saving behavior of households and the government.

U.S.-China Trade Example

• The U.S. has had a trade deficit with China exceeding $200 billion annually from 2005 to the present.
• iPhone 5 Example (2013):
  • iPhone 5 (16GB) shipped from China to the U.S. was valued at $227, selling for $650 in the U.S.
  • Only $8 of the $227 reflected Chinese labor value-added.
  • The remaining $219 was likely imported into China from other countries.
    • $65 for flash memory, display, and touch screen (typically from Toshiba in Japan).
    • $24 for processor chip and sensors (typically from Samsung in Korea).
    • $57 for the camera and transmitting/receiving devices (typically from Infineon in Germany).
  • The entire $227 is counted as an export from China to the U.S.

Trade in Services

• Trade in services involves buying and selling intangible products across borders that can't be physically touched.
• Examples:
  • Banking and insurance: U.S. company buys reinsurance from Switzerland.
  • Tourism and travel: Canadian tourist books a hotel in Mexico.
  • Education: A Chinese student pays tuition to a U.S. university.
  • Transportation: German shipping company transports goods for a U.S. business.
  • Telecommunications and IT services: A U.S. company hires an Indian firm for software development.
  • Legal, consulting, and professional services: A UK law firm advises a company in South Africa.

World Trade Organization (WTO) Modes of Service Trade

• Cross-border supply: Online consulting.
• Consumption abroad: Traveling for education or healthcare.
• Commercial presence: A U.S. bank opening a branch in Brazil.
• Movement of natural persons: A French engineer working temporarily in Canada.

Trade and Economic Growth

• There is a relationship: the average annual change in merchandise exports as a share of GDP, and the average annual change in real GDP per capita

Trade as Percentage of U.S. GDP

• Exports: 11%
• Imports: 15%

Trade Over Time

• U.S. Import Industries, 1925–2018
  • In 1925, foods, feeds, beverages, and industrial supplies constituted approximately 90% of imports, dropping to 30% in 2018.
• U.S. Export Industries, 1925–2018
  • The combination of capital goods, consumer goods, and automobiles increased from 20% of exports in 1925 to 60% in 2018.

World Trade in Goods, 2018

• Total world trade flows in 2018: $21,107 billion
• Key Regions:
  • Asia: $6.1 trillion exports (approximately 29% of world trade).
  • Europe: internal trade of $4.5 trillion or 21% of world trade.
  • Middle East and Russia: $1.9 trillion exports (9% of world trade).
  • Americas: Trade within the Americas was $1.7 trillion.

Shares of world trade by selected Regions

• Europe(internal trade) - 21%
• Asia (exports) - 29%
• Europe and the Americas (exports) - 49%
• Middle East and Russia (exports) - 9%
• Americas (internal trade) - 8%
• Africa (exports) - 2%
• Australia and New Zealand (exports) - 2%

Trade Compared with GDP

• Trade is often expressed as a ratio of a country’s trade to its Gross Domestic Product (GDP).
• For the U.S., this ratio was 16% in 2018.
• Most other countries have higher ratios of trade to GDP.

Trade/GDP Ratio in 2018

• Countries with the highest ratios tend to be small in economic size.

Barriers to Trade

• Trade barriers are factors influencing the quantity of goods and services shipped internationally.
• First Golden Age of Trade
  • The period from 1890 until World War I (1914–1918) is referred to as the "golden age" of international trade.
  • Improvements in transportation, like the steamship and the railroad, increased international trade.

Political Economy of Tariffs

• The political economy combines economic and political reasoning to explain tariffs.
• The Tariff Act of 1890 raised tariffs to protect U.S. industries.

Tariff Act of 1930 (Smoot–Hawley Tariff Act)

• Raised tariffs to 60% on some imports.
• Intended to protect American farmers and manufacturers during the Great Depression.
• Caused retaliation from other countries, leading to a trade war.
  • Canada retaliated with high tariffs.
  • France used import quotas.
• World trade fell by over 60% between 1929 and 1934.
• Many economists believe it worsened the Great Depression.

Second Golden Age of Trade

• After World War II, tariff reductions under the General Agreement on Tariffs and Trade (GATT) occurred.
• The shipping container (invented in 1956) lowered transportation costs.
• World trade grew steadily after 1950, marking the "second golden age" of trade and globalization.

U.S.–China Trade War

• In July 2018, President Trump imposed import tariffs on China.
• By September 2019, tariffs applied to nearly all U.S. imports from China.
• China responded with tariffs on imports from the U.S.

Why President Trump imposed tariffs on China:

• To gain concessions from China regarding trade barriers.
• The U.S. wants China to:
  • Reduce import tariffs on automobiles and consumer goods.
  • Increase purchases of U.S. agricultural products.
  • Be more open to foreign firms.
  • Enforce intellectual property protection.
• American companies have begun shifting production away from China due to the trade war.

Migration

• In 2017, more than half (53%) of the foreign-born people worldwide were living in the OECD countries, while only less than one-quarter (23%) of the OECD-born people were living in another country.
• Most migration occurs from countries outside the OECD, with more than one-half of migrants moving to countries within the OECD.
• While more trade arrows point in both directions (countries both import from and export to their trading partners), the immigration arrows often point in one direction only, from lower-income to higher-income countries.
• International trade can act as a substitute for movements of labor or capital across borders by raising the living standard of workers.

Migration in the EU

• Before 2004, the EU consisted of 15 western European countries with open labor mobility.
• After 10 more countries joined the EU in 2004, income and wage differences created incentive for labor migration from low-wage to high-wage countries.
• 26 EU countries created the Schengen Area of open borders.
• Refugee migration from Africa and Asia since 2015 has caused controversy in Europe.
• This played a role in the 2016 vote in the United Kingdom to leave the EU.

Migration in the United States

• In 2017, there were 26 million people from Latin America living in the U.S. and Canada.
• Approximately 11 million Mexicans live in the U.S., with slightly less than half being undocumented immigrants.
• Immigration policy is a frequent topic of debate in the United States.

Foreign Direct Investment (FDI)

• In 2018, the total value of foreign direct investment (FDI) stocks worldwide was $32.3 trillion.
• The stocks that are both owned by and located in European countries is $8.1 trillion (25% of the total world stock of FDI).
• The flow of FDI stock into China and other Asian countries is $7.4 trillion.
• Most of this FDI is from industrial countries, but Chinese firms have begun to acquire land in Africa and Latin America for agriculture and resource extraction.

Types of FDI

• Horizontal FDI
  • Occurs between industrial countries.
  • A firm from one industrial country owns a company in another industrial country.
• Vertical FDI
  • A firm from an industrial country owns a plant in a developing country.
  • Low wages are the main reason firms shift production abroad to developing countries.

Conclusions

• Globalization involves the flow of goods, services, people, firms, culture, ideas, and financial markets across borders.
• International trade and financial market integration were strong before World War I.
• Migration is more restricted than international trade.
• FDI is largely unrestricted between high-income countries but may face restrictions in developing countries.

Key Points

• The trade balance is the difference between exports and imports and is determined by macroeconomic conditions.
• The type of goods traded has changed; now, most trade is in highly processed consumer and capital goods.
• A large portion of international trade takes place between industrial countries.
• It is possible to explain trade between similar countries, which trade different varieties of goods with each other.
• Larger countries tend to have smaller shares of trade relative to GDP.
• Trade wars occur when countries retaliate with tariffs.
• Most world migration comes from developing countries to wealthier, industrial countries.
• International trade can act as a substitute for migration and allow workers to improve their standard of living.
• There is more FDI than international trade between high-income countries and less FDI than trade between high-income and middle- or low-income countries.

Key Terms

• International trade
• Export
• Imports
• Import tariffs
• Export quota
• Migration
• Immigrants
• Emigrants
• Refugees
• Foreign direct investment (FDI)
• Trade balance
• Trade surplus
• Trade deficit
• Bilateral trade balance
• Value-added
• Offshoring
• Free-trade area
• Sanctions
• Trade embargo
• Gross domestic product (GDP)
• Trade barriers
• Political economy
• Import quotas
• Trade war
• Horizontal FDI
• Vertical FDI

Clicker Questions & Answers:

• Question 1: The majority of trade today is in:
  • Answer: highly processed consumer and capital goods.
• Question 2: The largest amount of world trade (in U.S. dollars) is within:
  • Answer: Europe.
• Question 3: A(n) is a tax on an imported good, and a(n) is a numerical limit on an imported good.
  • Answer: tariff; import quota
• Question 4: Migrants typically choose __ countries to immigrate to.
  • Answer: high-income
• Question 5: The majority of FDI occurs:
  • Answer: between industrial countries.