Who trades with whom and

why?
Chapter 1
2) Evolution and structure of
international trade and globalisation
3) Who trades with whom?
 1. Evolution and structure of world
trade
• What is globalisation?
It means more intensive relations between
countries, in the area of trade in goods
and services, of mobility of men (labour)
and capital  more « openness »
• Is globalisation a new phenomenon?
Lets turn to history, both old and recent
 The graph below shows that there has been a first movement of
« globalisation » between 1870 and 1914 (before the first world war),
followed by a recess from 1914 to 1945, and then by a new wave of
openness since 1945 up to date
Evolution of World Trade (1870 - 1998)

100000

10000
Index base 100 in 1870

World GDP
World Exports

1000

100
1870 1913 1950 1973 1998
The table below explores a more recent period and
draws attention on differences between countries
International Trade
GDP (bn of current US dollars) (exports + imports in % of GDP)

1970 1990 2001 1970 1990 2001

UNITED STATES 1026 5751 10065 11 21 18
JAPAN 206 3052 4141 20 20 20
GERMANY - 1689 1846 39 54 68
FRANCE 147 1216 1310 30 43 54
UNITED KINGDOM 124 990 1424 44 51 56
ITALY 108 1102 1089 32 39 55
CANADA 85 574 694 43 52 82
BELGIUM 26 198 230 101 140 166
CHINA 92 355 1159 4 32 49
INDONESIA 10 114 141 28 49 77
SINGAPORE 2 37 85 - 439 316
BRAZIL 42 465 509 14 15 27
MEXICO 36 263 624 17 38 57
TUNISIA 1 12 20 47 94 99
TURKEY 18 151 145 10 31 66
 Comments of the previous table

• 1) Trade on goods and services represent

a gowing share of all countries activity
• 2) This is valid both for developed and
developing countries (more for these last
countries)
• 3) « Large » countries trade less than
« small » ones. However, even the USA
cannot reach self-sufficiency (and it is not
in their interest)
Comparison between Trade in goods and services
and Foreign Direct Investments
International Trade FDI flows
(exports + imports in % of GDP) (net incoming, in % of GDP)
0 1970 1990 2001 1970 1990 2001
UNITED STATES 11 21 18 0,12 0,84 1,43
JAPAN 20 20 20 0,05 0,06 0,15
GERMANY 39 54 68 0,18 1,84
FRANCE 30 43 54 0,42 1,28 4,21
UNITED KINGDOM 44 51 56 1,20 3,08 4,35
ITALY 32 39 55 0,58 0,58 1,37
CANADA 43 52 82 2,14 1,32 4,15
BELGIUM 101 140 166 4,07
CHINA 4 32 49 0 0,98 4,04
INDONESIA 28 49 77 0,86 0,95 -2,32
SINGAPORE 439 316 15,22
BRAZIL 14 15 27 0,93 0,21 4,41
MEXICO 17 38 57 0,91 1,00 4,06
TUNISIA 47 94 99 1,11 0,73 2,43
TURKEY 10 31 66 0,32 0,45 2,25
 Comments on the previous table
• 1) FDI represent a much smaller share of
the GDP than trade. However, FDI are
counted only in one direction + they
should be compared to investment (15-
25% of GDP)
• 2) FDI (that is capital flows) seem to grow
still quicker than trade (goods flows) in the
recent period
 Comparison of growth rates of GDP
(output), trade and FDI at the world level (in
percent per year)
The growth rate of FDI in all periods is larger than the one
for trade or output

1986-90 1991-95 1996-2000

GDP (at factors cost) 10,8 5,6 1,3

NET EXPORTS (Goods &
Services) 15,6 5,4 3,4

FDI (incoming) 23,1 21,1 40,2

FDI (outgoing) 25,7 16,5 35,7

 What do we trade?
• Trade concerns more and more
manufactured products, less and less raw
materials, either agricultural, or mining
• This is valid also for developing countries:
in 1960, these countries exported 60% of
agricultural products and 12% of
manufactured goods; in 2000, the shares
are 10% and 63%
• Please refer to the UNCTAD database
 Evolution of the trade structure (by type of
commodities) in the last 50 years
Evolution of contemporary World Trade and GDP
(1950 - 2000)

10000
Index base 100 in 1950

Export of Agricultural products

Export of mining products
1000
Export of manufactured products
World GDP

100
1950 1960 1970 1980 1990 2001
Trade becomes also more and more regional: the
WTO is a multilateral agreement, but it doesnot
preclude the existence of regional agreements on
all continents of the world

Share of Intra-Regional Trade

in various Regional Agreements
Regional Share of mutual exports in % of total trade Starting
Agreement 1970 1980 1990 2001 Date
APEC 57,8 57,9 67,5 71,8 1989
EU 59,5 60,8 65,9 61,2 1957
NAFTA 36,0 33,6 41,4 54,8 1994
ASEAN 22,4 17,4 19,0 22,4 1992
MERCOSUR 9,4 11,6 8,9 20,8 1991
Andine CM 1,8 3,8 4,2 11,2 1988
The progress of trade has been enhanced by a movement
of decreasing tariff barriers, beginning from 1950. This is
the result of multilateral agreements reached in the
framework of the GATT (ancestor of WTO)

Long term Evolution of Customs Tariffs

on manufactured Goods

Average Customs Tariff in %

1875 1913 1931 1950 1980 1990 2002
GERMANY 5 13 21 26 - - -

BELGIUM 10 9 14 11 - - -

FRANCE 14 20 30 18 - - -

UNITED KINGDOM 0 0 - 23 - - -

EUROPEAN UNION - - - - 5,7 5,9 4,1

UNITED STATES 45 44 48 14 7 4,8 3,4

 2 - Who trades with whom?
• Let start by looking at Vietnam’s trade: exports + imports of
several countries in million dollars in 2004
8000

7000

6000

5000

4000

3000

2000

1000

0
ly
US

UK

HK

ia

Ma s
ina
ain
Z
n

ia
rea

an
ia

Ge e

d
y

d
da

Ita

Ph sia
a

sia

o
pa

re
Ind

lan
c

Sin es
an

ia

an

ss
str
w
ali

La
an

Ch

iw
Sp
na

od

po
Ko

lay
Ne

pin
Ja

Ru
rm

ail
str

Au

Po
Ta
on
Fr
Ca

mb

ga
Th
Au

ilip
Ind
Ca
 Comments of the Graph
• The larger the partner country, the larger
is trade: the USA, China, Japan trade for
ca 8 bn $, whereas Germany, Thailand
and Australia trade for 2,5 bn $
• The further is the partner country, the less
is trade: China and the UK have an
equivalent (economic) size, but Vietnam
trades much more with China. Same for
Australia and Russia.
 Construction of a new graph
We calculated :
• 1) the share of trade of each partner country in
Vietnam total trade. For instance, the US, China
and Japan have each 11-12% of Vietnam total
trade
• 2) the « weight » of each partner in comparison
to Vienam’s weight; the « weight » here is the
output, the GDP. For instance, the US is 230
times as large as Vietnam, China 42 times, but
Cambodia is 1/10 of Vietnam
 Two categories of partners:
neighbours and others
Vietnam Trade with neighbour countries and countries on other continents

16%

14%

NEIGHBOUR COUNTRIES IN BLUE, OTHERS IN RED

CHINA
12%
JAPAN

USA
10%
share of country i in Vietnam total trade

SINGAPORE
8%
TAIWAN
KOREA

6%

THAILAND GERMANY
AUSTRALIA
4%

UK
2% RUSSIA FRANCE
ITALY
SPAIN
0% CANADA
0 50 100 150 200 250
GDP of country i reported to Vietanm GDP
 Comment on the graph
• By building our two indexes, we take into
account that trade depends on the
economic weight of partners
• But there is another factor to take into
account: distance; it costs less to trade
with neighbours than with distant
countries. That is why the regression line
for neighbours is steeper than for distant
parners
 The gravity equation
• In similarity to what exists in physics (the
discovery of Isaac Newton in the 17-th century),
economists have discovered that bilateral trade
(between two countries) depends positively on
the outputs of these countries and negatively of
their distance.
• The gravity equation takes the form
Tij = A * Yi * Yj / Dij where i and j are two countries,
T their trade, Y their GDP and D their distance
 Exercise for next week
• I have recorded on an excel file trade statistics
of all countries in east and south-east Asia (up to
Australia and NZ). These data are from the IMF
DoTS for 2004
• I have also recorded the GDP of all these
countries, taken from WB data (2005)
• Your work is to find the distances in km between
all these countries
• Together, we will test the formula above,
transforming it a little: Tij/YiYj = ADij
 End of lesson 1
• Are there any questions?
• Exercise: see the previous slide