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Trade and Globalization
Trade and Globalization
Trade and Globalization
In this entry we analyze available data and research on international trade patterns, including
the determinants and consequences of globalization over the last couple of decades. Here is an
overview of the main points we cover below.
Over the last two centuries trade has grown remarkably, completely transforming the global
economy. Today about one fourth of total global production is exported. Understanding this
transformative process is important because trade has generated gains, but it has also had
important distributional consequences. [Jump to this section]
From a historical perspective, there have been two waves of globalization. The first wave
started in the 19th century, and came to an end with the beginning of the First World War.
The second wave started after the Second World War, and is still continuing. [Jump to this
section]
Trade transactions include both goods (tangible products that are physically shipped) and
services (intangible commodities, such as tourism and financial services). The production
chains for these goods and services are becoming increasingly complex and global.
According to recent estimates, about 30% of the value of global exports comes from foreign
inputs. [Jump to this section]
Most trade theories in the economics literature focus on sources of comparative advantage.
These theories postulate that all nations can gain from trade if each specializes in producing
what they are relatively more efficient at producing, based on their strengths. The empirical
evidence shows that comparative advantage is indeed relevant; but it is not the only force
driving incentives to specialization and trade. [Jump to this section]
Related blog posts in Our World in Data:
In what follows we focus on visualizing key data with concise explanations. But we have
several other articles on this topic, delving into more detailed commentary and a literature review of
relevant academic research. These articles can be read here:
Does trade cause growth?
What’s the impact of globalization on wages, jobs and the cost of living?
Is trade a major driver of income inequality?
International trade data: why doesn't it add up?
Is globalization an engine of economic development?
I. The importance of trade
I.1 Trade has changed the world economy
Trade has grown remarkably over the last century
The integration of national economies into a global economic system has been one of the most
important developments of the last century. This process of integration, often called Globalization,
has materialized in a remarkable growth in trade between countries.
The following chart shows the value of world exports over the period 1800-2014. These
estimates are in constant prices (i.e. have been adjusted to account for inflation) and are indexed at
1913 values.
This chart shows an extraordinary growth in international trade over the last couple of
centuries: Exports today are more than 4,000-times larger than in 1913.
You can click on the option marked 'Linear', on top of the vertical axis, to change into a
logarithmic scale. This will help you see that, over the long run, growth has roughly followed an
exponential path.
Before the first wave of globalization, trade was driven mostly by colonialism
Over the early modern period, transoceanic flows of goods between empires and colonies
accounted for an important part of international trade. The following visualizations provides a
comparison of intercontinental trade, in per capita terms, for different countries.
As we can see, intercontinental trade was very dynamic, with volumes varying considerably
across time and from empire to empire.
Leonor Freire Costa, Nuno Palma, and Jaime Reis, who compiled and published the original
data shown here, argue that trade, also in this period, had a substantial positive impact on the
economy.8
The first wave of globalization was marked by the rise and collapse of intra-European
trade
The following visualization shows a detailed overview of Western European exports by
destination. Figures correspond to export-to-GDP ratios (i.e. the sum of the value of exports from
all Western European countries, divided by total GDP in this region). Using the option labeled
'relative', at the bottom of the chart, you can see the proportional contribution of each region to total
Western European exports.
This chart shows that growth in Western European trade throughout the 19th century was
largely driven by trade within the region: In the period 1830-1900 intra-European exports went
from 1% of GDP to 10% of GDP; and this meant that the relative weight of intra-European exports
doubled over the period (in the 'relative' view you can see the changing composition of exports by
destination, and you can check that the weight of intra-European trade went from about one third to
about two thirds over the period). But this process of European integration then collapsed sharply in
the interwar period.
After the Second World War trade within Europe rebounded, and from the 1990s onwards
exceeded the highest levels of the first wave of globalization. In addition Western Europe then
started to increasingly trade with Asia, the Americas, and to a smaller extent Africa and Oceania.
The next graph, from Broadberry and O'Rourke (2010)9, shows another perspective on the
integration of the global economy and plots the evolution of three indicators measuring integration
across different markets – specifically goods, labor, and capital markets.
The indicators in this chart are indexed, so they show changes relative to the levels of
integration observed in 1900. This gives us another viewpoint to understand how quickly global
integration collapsed with the two World Wars.
(NB. Integration in the goods markets is measured here through the 'trade openness index',
which is defined by the sum of exports and imports as share of GDP. In this interactive chart you
can explore trends in trade openness over this period for a selection of European countries.)
Migration, financial integration and trade openness, World, 1880-1996 (indexed to 1900 =
100) – Cambridge Economic History Vol. 210
The second wave of globalization was enabled by technology
The world-wide expansion of trade after the Second World War was largely possible because
of reductions in transaction costs stemming from technological advances, such as the development
of commercial civil aviation, the improvement of productivity in the merchant marines, and the
democratization of the telephone as the main mode of communication. The visualization below
shows how, at the global level, costs across these three variables have been going down since 1930.
The reductions in transaction costs had an impact, not only on the volumes of trade, but also
on the types of exchanges that were possible and profitable.
The first wave of globalization was characterized by inter-industry trade. This means that
countries exported goods that were very different to what they imported – England exchanged
machines for Australian wool and Indian tea. As transaction costs went down, this changed. In the
second wave of globalization we are seeing a rise in intra-industry trade (i.e. the exchange of
broadly similar goods and services is becoming more and more common). France, for example, now
both imports and exports machines to and from Germany.
The following visualization, from the UN World Development Report (2009), plots the
fraction of total world trade that is accounted for by intra-industry trade, by type of goods. As we
can see, intra-industry trade has been going up for primary, intermediate and final goods.
This pattern of trade is important because the scope for specialization increases if countries
are able to exchange intermediate goods (e.g. auto parts) for related final goods (e.g. cars).
Share of intraindustry trade by type of goods – Figure 6.1 in UN World Development Report
(2009)
IV.3 Institutions
Conducting international trade requires both financial and non-financial institutions to support
transactions. Some of these institutions are fairly obvious (e.g. law enforcement); but some are less
obvious. For example, the evidence shows that producers in exporting countries often need credit in
order to engage in trade.
The following scatter plot, from Manova (2013)18, shows the correlation between levels in
private credit (specifically exporters’ private credit as a share of GDP) and exports (average log
bilateral exports across destinations and sectors). As can be seen, financially developed economies
– those with more dynamic private credit markets – typically outperform exporters with less
evolved financial institutions.
Other studies have shown that country-specific institutions, like the knowledge of foreign
languages, for instance, are also important to promote foreign relative to domestic trade (see Melitz
200819).
Cross-country correlation between private credit and exports – Figure 2 in Manova (2013)20
UN Comtrade
Data: Bilateral trade flows by commodity
Geographical coverage: Countries around the world
Time span: 1962-2013
Available at: Online here
Bilateral trade flows can be sorted by goods or services, monthly or annually, with choice of
classification (including HS codes, SITC, and BEC). Data is likely to be very time
consuming to collate as there is no bulk data download unless a user has a premium site
license.
UNCTADstat
Data: Many different measures, including trade by volumes and value
Geographical coverage: Countries around the world
Time span: For some series, data is available since 1948 - mostly annual, sometimes
quarterly.
Available at: Online here
UNCTADstat reports export and import data between 1995 and 2016 but primarily to
different regional groupings than any one country, so it's probably not best suited to
comparing country-to-country bilateral flows.
Eurostat - COMEXT
Data: Trade flows (also by commodity)
Geographical coverage: Europe (EU and EFTA)
Time span: Mostly since 1988
Available at: Online here
Also, the Eurostat website 'Statistics Explained' publishes up-to-date statistical information
on international trade in goods and services.
Footnotes
1. There are different ways of capturing this correlation. I focus here on all countries with data
over the period 1945-2014. You can find a similar chart using different data sources and
time periods in Ventura, J. (2005). A global view of economic growth. Handbook of
economic growth, 1, 1419-1497. Online here.
2. The freely available textbook The Economy: Economics for a Changing World explains this
in more detail here: https://core-econ.org/the-economy/book/text/18.html#1810-trade-and-
growth
3. The full references are:
- Frankel, J. A., & Romer, D. H. (1999). Does trade cause growth?. American economic
review, 89(3), 379-399. Online here.
- Alcalá, F., & Ciccone, A. (2004). Trade and productivity. The Quarterly journal of
economics, 119(2), 613-646. Online here.
4. Some key references here are:
- Pavcnik, N. (2002). Trade liberalization, exit, and productivity improvements: Evidence
from Chilean plants. The Review of Economic Studies, 69(1), 245-276. Online here.
- Bloom, N., Draca, M., & Van Reenen, J. (2016). Trade induced technical change? The
impact of Chinese imports on innovation, IT and productivity. The Review of Economic Studies,
83(1), 87-117. Online here.
5. Atkin, David, Benjamin Faber, and Marco Gonzalez-Navarro. "Retail globalization and
household welfare: Evidence from Mexico." Journal of Political Economy 126.1 (2018): 1-
73.
6. In the paper, Atkin and coauthors explore the reasons for this, and find that the regressive
nature of the distribution is mainly due to richer households placing higher weight on the
product variety and shopping amenities on offer at these new foreign stores.
7. The openness index, when calculated for the world as a whole, includes double-counting of
transactions: When country A sells goods to country B, this shows up in the data both as an
import (B imports from A) and as an export (A sells to B).
Indeed, if you compare the chart showing the global trade openness index and the chart
showing global merchandise exports as share of GDP, you find that the former is almost twice as
large as the latter.
Why is the global openness index not exactly twice the value reported in the chart plotting
global merchandise exports? There a three reasons.
First, the global openness index uses different sources. Second, the global openness index
includes trade in goods and services, while merchandise exports include goods but not services.
And third, the amount that country A reports exporting to country B does not usually match the
amount that B reports importing from A.
We explore this in more detail in our blog post Trade data: why doesn't it add up?
8. Leonor Freire Costa, Nuno Palma, and Jaime Reis (2015) – The great escape? The
contribution of the empire to Portugal's economic growth, 1500–1800 Leonor Freire Costa
Nuno Palma Jaime Reis European Review of Economic History, Volume 19, Issue 1, 1
February 2015, Pages 1–22, https://doi.org/10.1093/ereh/heu019
9. Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe:
Volume 2, 1870 to the Present. Cambridge University Press.
10. Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe:
Volume 2, 1870 to the Present. Cambridge University Press. The graph depicts the
'evolution of three indicators measuring integration in commodity, labor, and capital markets
over the long run. Commodity market integration is measured by computing the ratio of
exports to GDP. Labor market integration is measured by dividing the migratory turnover by
population. Financial integration is measured using Feldstein–Horioka estimators of current
account disconnectedness.' This data is taken from: Bayoumi 1990; Flandreau and Rivière
1999; Bordo and Flandreau 2003; Obstfeld and Taylor 2003.
11. This chart was inspired by a chart from Helpman, E., Melitz, M., & Rubinstein, Y. (2007).
Estimating trade flows: Trading partners and trading volumes (No. w12927). National
Bureau of Economic Research.
12. Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician
Stanislaw Ulam: "Name me one proposition in all of the social sciences which is both true
and non-trivial." It was several years later than he thought of the correct response:
comparative advantage. "That it is logically true need not be argued before a
mathematician; that is is not trivial is attested by the thousands of important and intelligent
men who have never been able to grasp the doctrine for themselves or to believe it after it
was explained to them."
(NB. This is an excerpt from https://www.wto.org/english/res_e/reser_e/cadv_e.htm)
13. Bernhofen, D., & Brown, J. (2004). A Direct Test of the Theory of Comparative Advantage:
The Case of Japan. Journal of Political Economy, 112(1), 48-67. doi:1. Retrieved from
http://www.jstor.org/stable/10.1086/379944 doi:1
14. Bernhofen, D., & Brown, J. (2004). A Direct Test of the Theory of Comparative Advantage:
The Case of Japan. Journal of Political Economy, 112(1), 48-67. doi:1. Retrieved from
http://www.jstor.org/stable/10.1086/379944 doi:1
15. Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5),
1741-1779.
16. Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5),
1741-1779.
17. Crozet, M., & Koenig, P. (2010). Structural Gravity Equations with Intensive and Extensive
Margins. The Canadian Journal of Economics / Revue Canadienne D'Economique, 43(1),
41-62. Retrieved from http://www.jstor.org/stable/40389555
18. Manova, Kalina. "Credit constraints, heterogeneous firms, and international trade." The
Review of Economic Studies 80.2 (2013): 711-744.
19. Melitz, J. (2008). Language and foreign trade. European Economic Review, 52(4), 667-699.
20. Manova, Kalina. "Credit constraints, heterogeneous firms, and international trade." The
Review of Economic Studies 80.2 (2013): 711-744.
21. Evenett, S. J., & Keller, W. (2002). On theories explaining the success of the gravity
equation. Journal of political economy, 110(2), 281-316. Available online here.
22. The chart includes series labeled by the sources as 'merchandise trade' and 'goods trade'. As
we explain below, part of the asymmetries in trade data come from the fact that, although
'merchandise' and 'goods' are equivalent in the dictionary, these two terms often measure
related but different things.
23. For example, if there is no change in ownership (e.g. a firm exports goods to it's factory in
another country for processing, and then re-imports the processed goods) the manual says
that statistical agencies should only record the net difference in value. You can find more
details about this in this OECD Statistics Briefing.
24. This issue is actually also a source of disagreement between National Accounts data and
customs data. You can read more about it in this report: Harrison, Anne (2013) FOB/CIF
Issue in Merchandise Trade/Transport of Goods in BPM6 and the 2008 SNA, Twenty-Fifth
Meeting of the IMF Committee on Balance of Payments Statistics, Washington, D.C.
25. Precisely because of the difficulty that arises when trying to establish the origin and final
destination of merchandise, some sources distinguish between national and dyadic (i.e.
'directed') trade estimates. To illustrate, we have plotted Fouquin and Hugot (CEPII
2016) national and dyadic trade estimates of the total value of exports from each country to
the rest of the world.
26. For more details about general and special trade see: http://ec.europa.eu/eurostat/statistics-
explained/index.php/Glossary:General_and_special_trade_systems
27. The printed version is published in 3 volumes: Africa, Asia, Oceania – The Americas –
Europe. The volume set is described at the publisher's website here.