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–IMY = 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–IMEX – IM.

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

  • Rearranging terms:

    • (Y–T–C)–I=G–T+EX–IM(Y – T – C) – I = G – T + EX – IM
    • Sp=(Y–T–C)Sp = (Y – T – C )
    • (Sp–I)+(T–G)=EX–IM(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.