How the Composition of International Trade Has Changed since the 1960s - Coursework Example

How the Composition of International Trade has changed since the 1960s Introduction International trade has been growing rapidly over the recent years. The level of growth has however been different for different countries and different regions. During the 1950s and 1960s Bretton Woods era of liberalisation of trade and relatively closed capital markets, total flows of capital averaged about five percent of the gross domestic product (GDP) in the advanced capitalist democracies, and by the end of the 1970s, total capital movements had increased to 20 percent of the GDP. Further, by the 1990s, transborder movements of capital exceeded on average 50 percent of GDP. It is also notable that imports and exports of goods and services have increased relative to GDP, but the growth in trade openness has been much slower than expansion of mobility of capital. Average openness of trade in the advanced market economies increased roughly from 48 percent of GDP in the mid 1960s to about 65 percent in the mid 1990s. Importantly, trends for other measures of flows between South and North of the globe exhibit even less growth (Swank, 2002, p. 17). Cognisant of the fact that trends in international trade have not been uniform across the world, this paper seeks to discuss how the situation has been since the 1960s. Changes in the composition of trend since the 1960s are therefore highlighted. To understand these changes, the paper illustrates the trends in particular countries and regions. The paper is structured to provide a critical analysis of the trends in international trade since the 1960s, with a focus on how trade between countries and regions has been rising since the 1960s. However, some regions have not experienced a steady increase in trade; in fact in some regions trade has been on the decline in some years. The analysis is further supported by a discussion on the role structures such as the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organisation (WTO), have played and how they have affected international trade. Historical analysis World trade has increased significantly over the past half century. According to WTO (noted (a)), since 1950, global trade had increased more than twenty seven times in terms of volume. In addition, by way of comparison the level of world GDP grew about eight times during the same period. Consequently, WTO estimates that the share of international trade in world GDP rose from 5.5 percent in 1950 to 20.5 percent in 2006. Reasons for the tremendous increase in global trade There are a number or reasons for the spectacular increase in international trade. First is technological change, which has lowered the cost of communication and transportation. WTO notes that in the second half of the 20th century, the introduction of the jet engine and containerisation significantly lowered the cost air and maritime transportation, hence widening the range and volume of goods that are traded. Also related to this is the issue of the information technology revolution, which has made it easier to make transactions and to coordinate the production of parts and components of the final goods in different countries. Another factor is the increase in more open trade and investment policies. According to the WTO (not dated (a)), countries have opened up their trade regimes unilaterally, bilaterally as well as multilaterally. Hence, measures that initially taxed, restricted or prohibited trade have either been reduced significantly or totally eliminated. Such changes in economic policies have not only enhanced trade, but they have also increased the number of countries participating in global trade expansion. The increase in number of countries participating in international trade can be judged to be concomitant with the increase in composition of goods and services being traded. As a result of the increase, developing countries are estimated to account for 36 percent of the world exports, which is about double their share in the early 1960s (WTO, not dated (a)). But even though the WTO indicates that countries have become more open to international trade, this assertion should be judged with caution as there are views that openness has been much slower than the rate of expansion of capital mobility (Swank, 2002, p. 17). As mentioned earlier, technological innovations and changes in trade and investment policies have been pivotal in the expansion of trade as they have democratised trade and made it easier to “unbundle” production (WTO, not dated (a)). Over the years, it has become possible to make components of various goods in different countries and assemble them in another. Many of the manufacturing plants are located in developing countries and this makes them to be easily integrated in the global supply chain. This means that today, more countries are involved in production and trade than was the case in the 1960s. Changes in the composition and network of world trade Although the level of international trade has grown tremendously, the pattern has not been uniform across the world. Some regions have grown and others have declined significantly, thus altering the pattern of world trade too (Webber & Rigby, 1996, p. 47). There are significant gaps between developed and developing countries, and even within the latter – and the gaps are widening steadily. For instance, in 1965 the average gross national product per capita for the top 20 percent of the population of the world was steadily 30 times that of the poorest 20 percent, and 25 years later in 1990, the gap had doubled to 60 times (United Nations Conference on Trade and Development (UNCTAD), 1997). A notable aspect of international trade over the years has been a high growth of production and exports in the newly industrialising countries (NICs) (Webber & Rigby, 1996, p. 47). Around the world, there has been a considerable change in the composition of world trade. For instance, the share of manufactures in the total exports increased notably, while that of primary goods declined correspondingly (Cherunilam, 2008, p. 42). Cherunilam (2008) also notes that the change has been more pronounced in developing countries as the share of primary commodities, excluding fuels, dropped from 63 percent in 1960 to about 13 percent in 2001 in their exports. Further, the share of primary commodities, excluding fuels, in the world exports, was 12 percent in 2006. The nature of commodities exported by NICs has also been changing. For instance in 1963 NICs accounted for more than 5 percent of total imports into the Organisation for Economic Cooperation and Development (OECD) of clothing (17 percent); leather, footwear, and travel goods (seven percent); wood and cork manufactures (12 percent); and textiles (six percent). However, by the year 1979 the list had widened and changed to be: clothing (38 percent); leather, footwear, and travel goods (29 percent); wood and cork manufactures (27 percent); electrical machinery (16 percent); textiles (12 percent); miscellaneous (11 percent); rubber manufactures (9 percent); metal manufactures (9 percent); and iron and steel (six percent) (Webber & Rigby, 1996, p. 47). Situation between 1960s and 1990s During the 1960s and the 1970s, industrial nations increasingly embraced trade liberalisation. The GATT, which was in place since 1947 offered them a framework for a more coordinated multilateral liberalisation of trade. Further, successive GATT rounds of negotiations lowered tariffs and quantitative restrictions among them. from the first round of multilateral talks to the end of the Tokyo Round in 1979, the average tariff on manufacturing in the major industrial nations was lowered from 40 percent to between six and eight percent. On the contrary, many developing countries, in their efforts to modernise, pursued inward strategies by adopting “infant industry” support of newly created industries, and “import substitution” for the development of their local industries. As a consequence of this inward-looking strategy, quota, tariffs, and exchange payments restrictions in many developing countries were increased (Iqbal et al, 1998, p. 19). In the meantime, theoretical and empirical evidence piled on the costs of protection to develop intellectual support for trade liberalisation. The costs of import substitution and the benefits of outward oriented development strategies that emphasized development of competitive export sectors were highlighted by the success of the fast-growing countries of the Pacific Rim, which became perceptibly visible by the early 1980s. Rapid increase in output as well as trade and efficient industrialisation then became associated with these outward oriented strategies. The benefits of these approaches were determined to outweigh the cost of protection. During the 1980s, the significance of this evidence was noted in many other developing countries (Iqbal et al, 1998, p. 19). In general, world trade expanded rapidly between 1960s and 1990s in response to an increasing acceptance of openness by different countries (Iqbal et al, 1998, p. 19) and declining transport and information costs as was noted earlier. The composition of trade has also evolved rapidly as developing countries have begun to pursue opportunities for technological improvement. In addition, the volume of intra-industry trade has expanded tremendously, enabling various stages of manufacturing be located in different countries and regions as was mentioned earlier in this paper. This splitting of the value addition chain has opened up many new opportunities for all countries as more flexible criteria for the location of industry are made possible by advances in technology (Iqbal et al, 1998, p. 19; Albath, 2004, p. 22). Analysis of trade between countries/regions Different countries have faired differently in international trade. For instance, between 1960 and 2005, international trade grew by a factor of 16 in the OECD region (Piekkola & Snellman, 2005, p. 12). Trade within the European Union also grew significantly (see figure 1). Figure 1: Cross-country average of total trade in European Union countries Source: Piekkola & Snellman (2005, p. 12). Manufacturing production in middle income developing countries grew at 6.6 percent per annum between 1965 and 1985. Further, exports from middle income developing countries grew by 1.8 percent per annum (compared with 6.8 percent among the industrial market economies (IMEs) and 7.4 percent in all market economies). In short, exports from the middle income countries could be estimated to have been doubling every five years or so. Rates of growth in NICs have also increased significantly. For instance, in South Korea and Taiwan exports have been increasing in real terms at 20 percent every year since 1960. Similarly, Spain and Hong Kong have experienced growth in exports at nearly 10 percent each year (Webber & Rigby, 1996, p. 47). Despite the significant growth experienced in many regions, sub-Saharan Africa’s share of world trade has declined considerably over past 30 or 40 years (Yeats, 1997, p. 1). In fact, according to European Centre for International Political Economy (ECIPE) (2007), although Africa’s level of merchandise trade has increased for all African countries, sub-Saharan Africa’s share of world trade has been declining since the 1980s. Africa’s relative performance in the world market has thus reached drastically low levels in the past thirty years. This performance is shown in the figure below. Figure 2: Africa’s share of world trade Source: ECIPE, 2007 It is therefore important when analysing world trade to critically appraise different regions and countries as they have performed differently since the 1960s. In general however, from early 1950s to 2006 the volume of trade in manufactures has outperformed that in primary products, while agriculture and fuels and mining products grew at 3.5 percent and 4 percent respectively. A notable aspect of the changing trend is the position of agriculture in world trade. While in 1950 agricultural exports accounted for 47 percent of the total mechanise exports, their share declined to a record low of 8 percent in 2006 (Cherunilam, 2008, p. 42). This could be a major reason for the decline of Africa’s influence in world trade, as most African countries (especially those in the sub-Saharan region) have economies that are agriculture-oriented. Europe was the largest exporter of agricultural products with a 46 percent global share in 2006. Excluding intra-trade, the European Union overtook the United States as a leading exporter of agricultural products in 2005. For South and Central America, the share of agricultural exports in their total trade was highest by 2006. The share of manufactured goods in the developing countries exports increased from 12 percent in 1960 to 65 percent in 2001. There has also been a sharp increase in exports of crude petroleum, mineral and non-ferrous metals as compared to manufactured and agricultural produce (Cherunilam, 2008, p. 42). Manufactured goods exports have been dominated by office and telecom equipment in recent years. Other major categories of products that are traded include automotive products and chemicals (Cherunilam, 2008, p. 42). These figures are shown in table 1. Table 1: World merchandise exports by major product group 2006 Agricultural products Fuels and mining products Manufactures Total Fuels Total Iron and steel Chemicals Office and telecom equipment Automotive products Textiles Clothing Value 945 2277 1771 8257 374 1248 1451 1016 216 311 Share in total exports 8 19.3 15.0 70.1 3.2 10.6 12.3 8.6 1.9 2.6 Annual percentage change 2000-2006 9 17 18 10 17 14 7 10 5 8 Source: Cherunilam (2008, p. 42). Notable aspects of international trade There are number of noteworthy regional variations in the composition of exports according to Cherunilam (2008, p. 43): Asia accounts for the highest share of manufactures in total exports, with more than 80 percent of the regions exports coming from this export group. Africa, the Middle East and the Commonwealth of Independent States (CIS) are highly dependent on mining products and fuels, with over two-thirds of their export revenues originating from this group. The least developed countries derive almost three quarters of their export revenues from primary commodities, and manufactures comprise only a quarter of their export earnings. South and Central America account for the highest share of agricultural exports in their total trade. Changes in export manufactures The most notable aspect here is the emergence of China as the biggest exporter of manufactures, having a share of nearly 11 percent in 2006 from less than one percent in 1980. With this, China surpassed the United States, having exceeded Japan’s level in 2004. Between 2000 and 2006, China increased its share of the market by more than twofold from 4.7 percent to 10.8 percent. In contrast, the shares of the United States and Japan declined from 13 and 11 percent in 1980 to 10 and 7 percent respectively in 2006. Combined, the United States and China account for more than one-fifth of the global exports of manufactures. On the other hand, the United States’ share of imports in manufactures increased from 11 percent in 1980 to 16 percent in 2006, that of Japan from 2.3 percent to 3.5 percent and that of China from around one percent to approximately seven percent in the same period (Cherunilam, 2008, p. 43). World trade and the least developed countries (LDCs) The share of about 50 LDCs in global trade is very small. According to Cherunilam (2008, p. 71), their share fell from 0.7 percent in 1980 to 0.4 percent in 1990. Thereafter, it began rising marginally in the late 1990s, reaching 0.6 percent in 2000. However, their exports rose sharply in 2006, as a result of much larger volumes of fuel exports and stronger exports of other primary products and manufactured goods, taking the share to a record level of 0.9 percent. The LDCs can be analysed under the following categories according to Cherunilam (2008, p. 71). Oil-exporting LDCs: Countries such as Sudan, Yemen, Equatorial Guinea and Angola have benefited from high oil prices. These four countries alone accounted for more than half of LDC exports in 2006. LDCs that export chiefly manufactured goods: Countries such as Myanmar, Bangladesh, Nepal, Cambodia, Laos, Haiti, Lesotho and Nepal recorded high export growth rates throughout the 1990s. However, their performance was dismal between 2000 and 2006. The largest group: This category comprises LDCs whose exports are limited to a number of primary commodities. The export performance of such countries is often dictated by the cyclical demand in commodity markets as well as the vagaries of weather, hence exports are erratic. Nevertheless, certain countries such as Mozambique, Zambia, Bhutan, and Mauritania have registered impressive increases in trade. Others such as the Democratic Republic of Congo, Burundi, Sierra Leone and Rwanda experienced poor performance in the 1990s due to civil strife and armed conflict, but their exports improved in the current decade. Global trade challenges and the role of GATT and WTO There are many challenges to world trade but two are outstanding. First is that protection remains high and concentrated in areas of particular interest to developing countries, such as labour intensive manufactures and agriculture. Second, the progress of liberalisation of trade, removal of quantitative import restrictions and tariffs reductions has been hit with other obstacles to trade such as industrial subsidies and intellectual property rights, and more lately, investment and competition polices (Cherunilam, 2008, p. 72). The GATT and WTO have been instrumental in dealing with these challenges over the years. The GATT/WTO is an institution that regulates trade negotiations through a set of pre-negotiated articles. The articles are formulated by considering the principles of reciprocity and non-discrimination. Reciprocity requires trade policy changes to keep changes in imports equal across trading partners while the principle of non-discrimination stipulates that the same tariff must be applied against all trading partners for any product that is traded (Ossa, 2009, p. 2). GATT and WTO have helped to create a more liberal trading system contributing to unprecedented growth. A key achievement of GATT was the Uruguay Round of 1986-1994 that led to the formation of WTO. The Uruguay Round arrested the deterioration in the trading environment and developed a strengthened framework for future trade relations, thereby boosting business and investment confidence. The Round offers positive outcomes in many areas, including market liberalisation, strengthening of rules and institutional structures, and incorporation into the trading system of new dynamic areas such as services and intellectual property, and conventional areas such as agriculture and clothing and textiles that were initially exempted from many GATT rules (Kirmani & Calika, 1994, p. 13). Within two years of the Uruguay Round, participants had agreed on a package of reductions in import duties on tropical products – which are mainly exported by developing countries (WTO, not dated (b)). Conclusion Overall, the volume of trade has increased significantly since the 1960s. This has been caused by many factors, key among them being technological changes that have improved production, transportation and communication, and an increase in more open trade and investment policies. However, the increase has not been uniform across the world, as some countries/regions have remained dominant over others. In particular, the sub-Saharan Africa and the least developed countries have performed largely dismally. The GATT and its successor, the WTO, have been instrumental in ensuring a balance in trade across regions. Although the balance is yet to be achieved, measures such as the Uruguay Round have been pivotal in ensuring fairness in trade and boosting business and investment confidence. References Albath, L. 2004, Trade and energy: Investment in the gas and electricity sectors, Cameron May, London. Cherunilam, 2008, International economics (5th edition), Tata McGraw-Hill Education, London. ECIPE 2007, “Africa and world trade: Sub-Saharan Africa’s falling share of world trade,” Media Briefing Note 1/2007. Iqbal, Z., Khan, M. S., International Monetary Fund & African Economic Research Consortium, 1998, Trade reform and regional integration in Africa, International Monetary Fund, Washington. Kirmani, N. & Calika, N. (eds) 1994, International Trade Policies: Principal issues, International Monetary Fund, Washington. Osaa, R. 2009, “A new Trade Theory of GATT/WTO Negotiations,” WTO Staff Working Paper ERSD-2009-08 November 11, 2009. Piekkola, H. & Snellman, K. 2005, Collective bargaining and wage formation: Performance and challenges, Springer, New York. Swank, D. 2002, Global capital, political institutions, and policy change in developed welfare states, Cambridge University Press, Cambridge. UNCTAD, 1997, “UNCTAD sounds warning on globalization, advocates policies to counter economic polarization and growing income inequality,” UNCTAD Press Release 25/08/97, available from http://www.unctad.org/Templates/Webflyer.asp?docID=3303&intItemID=2068&lang=1 (9 May 2011). Webber, M. J. & Rigby, D. L. 1996, The golden age illusion: Rethinking postwar capitalism, Guilford Press, New York. WTO, not dated (a), “The impact of trade opening on climate change,” available from http://www.wto.org/english/tratop_e/envir_e/climate_impact_e.htm (7 April 2011) WTO, not dated (b), “The Uruguay Round,” available from http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm (10 may 2011). Yeats, A. J. 1997, Did domestic policies marginalize Africa in international trade? World Bank Publications, Washington. Read More