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International Trade Mgmt. 418 Chapter 1 The World of International Economics The importance of international trade to the economic health and overall standard of living of countries is very clear today. International trade had been very important all the time, in the past, too. We examine how international transactions influence social welfare, income distribution, employment, growth, price stability, and public policy. The Nature of Merchandise Trade Since 1970’s, world trade surpassed world merchandise production. Growth in world production and trade: The Gegraphical Composition of Trade In terms of major economic areas, industrialized countries dominated world trade until 2000. In the last decade, in international merchandise trade the share of West is reduced and the share of Developing countries increased. Leading exporters and importers in world merchandise trade (1999): Exporters value % Importers value % (bn $) of world trade (bn $) of world trade EU 798.6 18.9 US 1059.9 23.6 US 695.0 16.4 EU 851.2 18.9 Japan 419.4 9.9 Japan 310.7 6.9 Canada 238.4 5.6 Canada 220.2 4.9 China 194.9 4.6 Hong Kong 181.7 4.0 Hong Kong 174.8 4.1 China 165.7 3.7 Korea 144.2 3.4 Mexico 148.2 3.3 Exports and imports by region: Exports 2000-2005 2004 2005 4.5 9.5 6.0 1.5 8.0 6.0 7.0 13.0 8.5 3.5 7.0 3.5 3.0 7.0 3.5 8.5 13.0 4.5 8.5 14.5 10.0 2.5 10.5 0.5 6.5 14.5 7.5 Imports 2000-2005 2004 2005 World 5.0 10.5 6.0 N. America 4.0 10.5 6.0 S. & C. America 4.5 19.0 14.0 Europe 3.0 7.0 3.5 EU (25) 2.5 6.5 3.0 CIS 15.5 16.0 18.0 Asia 8.0 14.5 7.5 Japan 3.5 7.0 2.5 Six EA traders 4.5 14.0 5.0 Geographical destination of Exports (2005): North America South and Central America Europe CIS Africa Middle East Asia Imports value (bn $) 2,290 297 4.573 216 253 330 2,881 Leading-country merchandise exporters and importers (2007): Exporters value share % changeImporters value share %change US 456.4 13.9 15 US 335.9 10.9 9 UK 273.0 8.3 18 Germany 250.5 8.1 15 Germany 205.8 6.3 15 UK 194.1 6.3 13 France 136.7 4.2 16 Japan 148.7 4.8 11 Spain 128.3 3.9 21 China 129.3 4.2 29 Japan 127.1 3.9 10 France 124.1 4.0 16 China 121.7 3.7 33 Italy 118.3 3.8 21 Italy 110.5 3.4 13 Spain 98.4 3.2 26 India 89.7 2.7 20 Ireland 94.5 3.1 20 Ireland 89.0 2.7 30 Netherland86.8 2.8 10 Netherlands87.5 2.7 9 Korea 82.5 2.7 21 Hong Kong 82.7 2.5 14 Canada 80.3 2.6 12 (China) Belgium 75.5 2.3 India 77.2 2.5 22 The commodity composition of world trade (%): ISM-ex Imports Exports 1980 2004 1980 2004 31 26 29 14 (industrial supplies And materials) Capital goods Consumer g. Autos Other 34 8 8 20 40 13 11 12 13 14 11 43 10.7 15 9.4 23 25 15 23 Trade as % of GDP 9.8 Growth in world production and trade (%): Production All Agriculture Mining 1963-73 6.0 2.5 5.5 Manufacturing 7.5 Exports All 9.0 Agriculture 14.0 Mining 7.5 Manufacturing 11.5 1980-85 1.7 2.9 -2.7 2.3 2005 2.5 0.5 1.0 3.5 2.1 1.0 -2.7 4.5 6.0 5.5 2.5 7.0 World Trade in Services The trade in services is increasing rapidly. The share of service production in GDP of many industrialized countries is increasing, as well. For example, services account for 72 % of GDP in the USA, 56 % in Canada, 70 % in Netherlands, 66 % in the UK, 61 % in Germany, 71 % in France, and 60 % in Japan. International Standard Industrial Classification (ISIC) system Categorizes services as; wholesale and retail trade, restaurants and hotels, transport, storage, communications, financial services, insurance, real estate, business services, personal services, community services, social services, and government services. International trade in services This category broadly consists of; commercial services, investment income, and government services. The nature of trade in “services” is such that it is extremely difficult to obtain accurate estimates of the value of these transactions. Many service transactions are not observable, hence they are sometimes referred as “invisibles”. Liberalization of trade in services Mainly industrialized countries advocated the liberalization of services trade, like banks, financial services, insurance, telecommunications sectors to open up to foreign firms. In 1996, telecommunications sector was liberalized by WTO. The changing degree of interdependence The relative size of trade is measured by comparing the size of a country’s exports with its GDP. Increases in export/GDP ratio indicates that a higher percentage of output of final goods and services produced within a country’s borders is being sold abroad. It indicates a higher interdependence. Exports could be raw materials, intermediary goods, semi-finished goods, finished goods, services, and/or capital goods Dependence on exports As dependence on exports increase, the prosperity of importing countries become important for the exporting country. So dependence requires adjustments and policy coordination among the trading countries. This situation leads to economic integrations in diferent regions of the world; such as, NAFTA, EU, ECOWAS, ASEAN, GCC, etc.