Which of the following was a direct result of the trade pattern shown on the map?
Author: Dr. Jean-Paul Rodrigue
1. The Flows of GlobalizationIn a global economy, no nation is self-sufficient, which is associated with specific flows of goods, people, and information. Each nation is involved at different levels in trade to sell what it produces, acquire what it lacks, and produce more efficiently in some economic sectors than its trade partners. International trade, or long-distance trade, has taken place for centuries, with some ancient trade routes predating history. Trade is an important part of economic and cultural history, as ancient trade routes such as the Silk Road can testify. Historically, trade was limited both by the demand and the capacity to transport cost-effectively goods having a market value at the destination. Commercial and technological developments have allowed trade to occur at an ever-increasing scale over the last 600 years. By the mid-19th century, trade was taking an increasingly active role in the economic life of nations and regions, and after the mid-20th century, trade became an active tool of economic globalization. The Flows of GlobalizationThe Silk Road and Arab Sea RoutesMajor Global Trade Routes, 1400-1800International trade is an expansion of the market (or exchange) principle at a scale beyond the region or the nation. It should be taking place only if there is a benefit for the partners involved, underlining that the rationale for trade can be a convenience but also a necessity. It is for convenience, as supported by conventional economic theory, when trade promotes economic efficiency by providing a wider variety of goods, often at lower costs. This is because of specialization, economies of scale, and related comparative advantages. Trade is a necessity when it enables a nation to acquire goods that would otherwise not be available in a national economy, such as energy, raw minerals, or even agricultural goods. However, the benefits of trade can be subject to contention with several theoretical foundations of international trade have been articulated to explain its rationale:
The globalization of production is concomitant to the globalization of trade as one cannot function without the other. This process has been facilitated by significant technical changes in the transport sector. The scale, volume, and efficiency of international trade have all continued to increase since the 1970s. As such, global space/time convergence was an ongoing process that implied a more extensive market coverage that could be accessed in a lower amount of time. It has become increasingly possible to trade between parts of the world that previously had limited access to international transportation systems. Further, the division and the fragmentation of production that went along with these processes also expanded trade. Trade thus contributes to lower manufacturing costs. Without international trade, few nations could maintain an adequate standard of living, particularly those of smaller size. With only domestic resources being available, each country could only produce a limited number of products, and scarcity would be prevalent. Global trade allows for an enormous variety of resources – from Persian Gulf oil, Brazilian coffee to Chinese labor – to be made more widely accessible. Each item being traded is subject to an internationally recognized classification (called Standard International Trade Classification; SITC), allowing nations to clearly identify the goods and the extent they are subject to tariffs and duties. Clear categorization also facilitates the distribution of a wide range of manufactured goods that are produced in different parts of the world to global markets. Wealth becomes increasingly derived through the regional specialization of economic activities. This way, production costs are lowered, productivity rises, and surpluses are generated, which can be transferred or traded for commodities that would be too expensive to produce domestically (convenience) or would simply not be available (necessity). As a result, international trade decreases the overall costs of production. Consumers can buy more goods from the wages they earn, and standards of living should, in theory, increase. International trade demonstrates the extent of globalization with increased spatial interdependencies between elements of the global economy and their level of integration. These interdependencies imply numerous relationships where flows of capital, goods, raw materials, people, and services are established between regions of the world. International trade is also subject to much contention since it can, at times, be a disruptive economic and social force. It changes the conditions in which wealth is distributed within a national economy, particularly due to changes in prices, wages and employment sectors. One challenge concerns the substitution of labor and capital. While in a simple economy, labor and capital (infrastructures) can be reconverted to other uses, in complex economies, labor and capital cannot be easily reallocated. Therefore, trade can, at the same time, lead to more goods being available at a lower price, but with enduring unemployment and decaying infrastructures (unused factories and real estate). In turn, this can incite economies to adopt protectionist policies since this transition is judged to be too disruptive. 2. The Setting of the Contemporary Global Trade SystemInternational trade, both in terms of value and tonnage, has been a growing trend in the global economy. It is important to underline when looking at the structure of global trade that it is not nations that are trading, but mainly corporations with the end products consumed in majority by individuals. A nation is simply a regulatory and jurisdictional unit where data is collected since freight crossing boundaries are subject to customs oversight and tabulated as trade flows. Inter and Intra corporate trade takes place across national jurisdictions is accounted for as international trade. The emergence of the current structure of global trade can mainly be articulated within three major phases:
The global economic system is thus characterized by a growing level of integrated services, finance, retail, manufacturing, and distribution. This is mainly the outcome of improved transport and logistics, more efficient exploitation of regional comparative advantages, and a transactional environment supportive of the legal and financial complexities of global trade. International trade requires a full array of services related to distribution and transactions. The volume of exchanged goods and services between nations is taking a growing share of the generation of wealth, mainly by offering economic growth opportunities in new regions and by reducing the costs of a wide array of manufacturing goods. By 2007, international trade surpassed for the first time 50% of global GDP, a twofold increase in its share since 1950. This share has fluctuated since but remains in the 45-50% range. Changes in the Global Trade EnvironmentTrade, Connectivity and Spatial InequalitiesWorld Merchandise Trade, 1960-20213. Trade Costs and Facilitation
For regulatory authorities, trade facilitation improves their effectiveness as well as reduces the risk of customs duty evasion. It relies on the reduction of the general costs of trade, which considers transaction, tariff, transport, and time costs, also known as the “Four Ts” in international trade. These trade costs are derived from two main sources:
United Nations estimates have underlined that for developing countries, a 10% reduction in transportation costs could be accompanied by a growth of about 20% in international and domestic trade. Thus, the ability to compete in a global economy is dependent on the transport system as well as a trade facilitation framework that includes measures related to economic integration, the capabilities of international transportation systems, and the ease of negotiating and settling transactions. The “Four Ts” in International TradeThe Main Dimensions of Trade Facilitation Customs Fraud by Misclassification of GoodsRegional Averages in Trading Across Borders, 2012Levels of Economic IntegrationThe quality, cost, and efficiency of trade services influence the trading environment as well as the overall costs linked with the international trade of goods. Many factors have been conducive to trade facilitation in recent decades:
All these measures are expected to promote the level of economic and social development of the concerned nations since trade facilitation relies on the expansion of human, infrastructure, and institutional capabilities. Impacts of Economic Integration Processes on Networks and Flows China’s Special Economic ZonesValue of Chinese Exports and FDI, 1983-2021 (Billions of $US) Yuan Exchange Rate (per USD), 1981-2022 (Monthly)4. Global Trade FlowsThe nature of what can be considered international trade has changed, particularly with the emergence of global value chains and the trade of intermediary goods they involve. This trend obviously reflects the strategies of multinational corporations positioning their manufacturing assets in order to lower costs and maximize new market opportunities. About 80% of the global trade takes place within value chains managed by multinational corporations. International trade has thus grown at a faster rate than global merchandise production, with the growing complexity of distribution systems supported by supply chain management practices. The structure of global trade flows has shifted, with many developing economies having growing participation in international trade with an increasing share of manufacturing. Globalization has been accompanied by growing flows of manufactured goods and their growing share of international trade. The trend since the 1950s involved a relative decline in bulk liquids (such as oil) and more dry bulk and general cargo being traded. The share of fuels in international trade tends to fluctuate in accordance with changes in energy demand and prices. Another emerging trade flow concerns the increase in the imports of resources from developing economies, namely energy, commodities, and agricultural products, which is a divergence from their conventional role as exporters of resources. This is indicative of economic diversification as well as increasing standards of living. However, significant fluctuations in the growth rates of international trade are linked with economic cycles of growth and recession, fluctuations in the price of raw materials, as well as disruptive geopolitical and financial events. Changes in the Value World’s Merchandise Trade, Production and GDP, 1950-2021Global Trade, 2017Share of Product Groups in World Merchandise Trade, 1900-2020Merchandise Exports by Trade Agreement, 2015 Share of World Goods Exports, Leading Exporters, 1950-2021Share of Merchandise Exports by Region, 1948-2021The geography of international trade remains dominated by a few large economic blocs, mainly in North America, Europe, and East Asia, which are commonly referred to as the triad. Alone, the United States, Germany, and Japan account for about a quarter of all global trade, with this supremacy being seriously challenged by emerging economies. Further, G7 countries account for half of the global trade, a dominance that has endured for over 100 years. A growing share is being accounted for by the developing economies of Asia, with China accounting for the most significant growth both in absolute and relative terms. Those geographical and economic changes are also reflected in trans-oceanic trade, with the Trans-Pacific trade growing faster than the Trans-Atlantic trade. Neo-mercantilism is reflective of global trade flows as several countries have been actively pursuing export-oriented economic development policies using infrastructure development, subsidies, and exchange rates as tools. This strategy has been followed by developing economies and is associated with growing physical and capital flow imbalances in international trade. This is particularly reflected in the American container trade structure, which is highly imbalanced and has acute differences in the composition of imports and exports. A large share of these imbalances was the outcome of the fiscal policies of exporting countries purchasing American financial instruments, such as bonds. This enabled the US dollar to uphold its value and purchasing power. Imbalances can also be misleading as products are composed of parts manufactured in several locations with assembly often taking place in low-cost locations and then exported to major consumption markets. In international trade statistics, a location assumes the full value of finished goods imported elsewhere while it may have only contributed to a small share of the total added value. Electronic devices are illustrative of this issue. Trade imbalances also do not reflect well the utility an economy derives from it, such as cheaper goods for consumers. Further, the growth of e-commerce has resulted in new actors being involved in international trade, at times indirectly. For instance, ordering a product online may result in an international trade transaction controlled by a single corporation. Regionalization has been one of the dominant features of global trade as the bulk of trade has a regional connotation, promoted by proximity and the setting of economic blocs such as NAFTA and the European Union. The closer economic entities are, the more likely they are to trade due to lower transport costs, fewer potential delays in shipments, common customs procedures, and linguistic and cultural affinities. The most intense trade relations are within Western Europe and North America, with a more recent trend involving trade within Asia, particularly between Japan, China, Korea, and Taiwan, as these economies are getting more integrated. 5. Global Trade at a Threshold?At the beginning of the 21st century, the flows of globalization have been shaped by five salient trends:
Still, many challenges are impacting future developments in international trade and transportation, mostly in terms of demographics, politics, supply chain, energy, and environmental issues. While the global population and its derived demand will continue to grow and reach around 9 billion by 2050, demographic changes such as the aging of the population, particularly in developed economies, will transform consumption patterns as a growing share of the population shifts from wealth-producing (working and saving) to wealth consuming (selling saved assets). Demographic trends in North America, Europe, and East Asia (e.g. Japan, South Korea, Taiwan) may not place them as drivers of global trade, a function they have assumed in recent decades. The demographic dividend in terms of peak share of the working-age population that many countries benefited from, particularly China, will recede. This has ramifications on both the demand side (consumption structure) and the production side (workforce). The regulatory environment and the involvement of governments, either directly or indirectly, are subject to increasing contention. Reforms in agricultural trade have not been effectively carried on, implying that many governments (e.g. in the EU) provide high subsidy levels to their agricultural sectors, undermining the competitiveness of foreign agricultural goods. This is undertaken with the intent to protect their agriculture, considering the risks associated with dependency on foreign providers and possible fluctuations in prices. Intellectual property rights remain a contentious issue as well since many goods are duplicated, undermining the brands of major manufacturers and retailers. There is also a whole array of subsidies that influence the competitiveness of exports, such as low energy and land costs and tax reductions. The rise of protectionist policies, as exemplified by higher tariffs imposed by the American government on several Chinese goods in 2018, is underlining a contentious trade environment this is likely to endure. As both maritime and air freight transportation depend on petroleum, international trade remains influenced by fluctuations in energy prices. The paradox has become that periods of high energy prices usually impose a rationalization of international trade and its underlying supply chains. However, periods of low or sharply declining energy prices, which should benefit international transportation, are linked with economic recessions. Environmental issues have also become more salient with the growing tendency of the public sector to regulate components of international transportation that are judged to have negative externalities. International trade enables several countries to mask their energy consumption and pollutant emissions by importing goods that are produced elsewhere and where environmental externalities are generated. Thus, international trade has permitted a shift in the international division of production, but also a division between the generation of environmental externalities and the consumption of the goods related to these externalities. Technological changes are impacting the nature of manufacturing systems through robotization and automation. The ongoing fourth industrial revolution is changing input costs, particularly labor. Since a good share of international trade is the result of the convenience of comparative advantages, automation and robotization can undermine the standard advantages of lower labor costs and make manufacturing more productive at other locations, such as those closer to major markets. Further, since many developing economies remain complex places to undertake business as state and national firms are privileged, the loss of labor cost advantages could undermine future development prospects. This is likely to have a strong influence on the nature and volume of international trade, which could level and even regress. If this is the case, absolute advantages, such as resources, would play a greater influence on trade, as was the case before the 1970s. Related Topics
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