Why do nations trade?

1. Why do nations trade? A simple guide into the history and theory of international trade

2. What will I talk about? • Links between the history and the theories of international trade • Most important trade theories and their implications You won’t see: • Complex math • Complex charts

3. Model of Intl. Trade Relations Country B Country A Goods & Services Production Factors Capital, Labour, Technology Trade Policy Tariffs, Non-Tariff Barriers Currency Exchange Rates International Organisations

4. The major theories • Absolute advantage • Comparative advantage • Factor abundance theory • Modern explanations Let’s start, then!

5. 3rd-4th Ancient Times • First trade: barter exchange between tribes (ca. 5000 B.C.) • Trade centres: China, India, Egypt, Phoenicia, Babylon, Persia, Greece, Rome • Inventions: money, wheel, weighing and measuring system, commercial law, sails, commodity exchanges • First trade routes established

6. 3rd-4th Ancient Times • No intensive international trade • Lack of safe and low-cost transportation • Dispersed trade centres (from global perspective) • Long-distance routes mostly for luxurious goods • Stability of the commodity structure, practically until the colonial conquest

7. 3rd-4th Silk Road

8. 3rd-4th Amber Road

9. 13th-14th Middle Ages • Lower importance of cities as trade centres • Feudal system- lords, vassals and fiefs (land given to a vassal by their lord) • Decreasing intensity of international trade • Trade centres: Byzantium, Arabia, Italian cities (Venice, Genoa, Firenze, Pisa), Hansa • Banking system, bills of exchange, credits for production • Trade – big share of products necessary for sailing (sailcloth, wood, tar, salt) Marco Polo at court of Kubilai Khan c.1280

10. 13th-14th Hansean Trade

11. 15th-16th Age of Discovery • Bartholomew Diaz – Cape of Good Hope (1487) • Vasco da Gama – new sea route to India (1498) • Christopher Columbus – the „discovery” of America (1492) • Ferdinand Magellan – expedition around the world (1519-21) • Colonial conquest Take a look at http://www.ucalgary.ca/applied_history/tutor/eurvoya/

12. 15th-16th Mercantilism • Colonial conquest – the basis • Not a theory, rather a set of policy guidelines • Positive trade balance • Governments as „gold-collectors” • High protectionism against import

13. 17th-18th Industrial revolution • Significant growth of output • Major change in trade volume and commodity structure • First trade patterns: (Europe) manufactured goods (Colonies) tropical products

14. 18th Theory of absolute advantage • Adam Smith, The Wealth of Nations” 1776 • First classical theory • Simple analysis of the causes of trade patterns • Major assumptions: two countries, two goods, no additional trade costs, labour as the only production factor

15. 18th Theory of absolute advantage Example: How can Home get oil?

16. 18th Theory of absolute advantage Example (cont.): Countries produce and export goods, which production costs are lower than abroad!

17. 19th Theory of comparative advantage • David Ricardo, 1817 • The most influencing classical theory • Same assumptions: two countries, two goods, no additional trade costs, labour as the only production factor Question: What if a country produces both goods at a lower cost?

18. 19th Theory of comparative advantage Example: How does it work now?

19. 19th Theory of comparative advantage Example (cont.): Why does it work now, either?Compare the opportunity costs!

20. 19th Theory of comparative advantage Example (cont.): Lower opportunity costs decides about „comparative advantage”

21. 19th Transportation revolution • Sea and land steam-powered transportation • Goods traded in large volumes • Diminishing transportation and communication costs – soaring trade • New trade patterns (West – developing countries)

22. 20th Factor abundance theory • E. Hecksher, B. Ohlin, 1930s • Two countries – two goods • Two production factors: labour and capital • Same technology of production • No transportation costs

23. 20th Factor abundance theory Example: Compare „factor abundance” and „factor-consumption”

24. 20th Factor abundance theory Example (cont.): Home is labour – abundant Foreign is capital – abundant Oranges are labour – consuming Cars are capital - consuming Home will export oranges – Foreign will export cars.

25. 20th – 50’s Leontief paradox • Leontief made an empirical research to verify the H-O theory using data on the U.S. trade • He surprisingly found that the U.S. – a capital-abundant country – exported more labour-consuming goods • Possible explanation: assumptions underlying the H-O theory no longer reflected fast-changing situation in the post-war world economy • This inspired economists to look for new explanations to international trade

26. late 20th New trends in a post-war world • Fall of colonial empires led to a growing number of independent states 2010 1935 Source: WTO

27. late 20th Governments Shape the country’s economic policy and attitudes towards foreign trade. INTERNATIONAL ORGANISATIONS Government or Non-Government DOMESTIC BUSINESSES Run commercial transactions with foreign companies (export, import, foreign direct investments) TRANSNATIONAL CORPORATIONS Run global business operations through foreign subsidiaries HOUSEHOLDS, INDIVIDUALS E.g. tourists, private investors, workers REGIONAL INTEGRATION GROUPINGS Groups of neighbouring countries that eliminate trade barriers Domestic level International level New trends in a post-war world • Variety of actors in international trade

28. late 20th New trends in a post-war world • Intra–industry trade – similar products are imported and exported

29. late 20th New trends in a post-war world • New actors – international organisations

30. Grzegorz Karpiuk Koordynator projektu „Program rozwoju WSIiZ – Uczelnia Jutra” late 20th New trends in a post-war world • New actors – international organisations Source: WTO

31. II poł. XXw New trends in a post-war world • New actors – multinational corporations Żródło: Forbes, http://www.forbes.com/lists/2009/18/global-09_The-Global-2000_MktVal.html

32. late 20th New trends in a post-war world • Changing trade structure Source: WTO

33. late 20th New trends in a post-war world Trade structure Source: World Trade Report 2010, WTO

34. late 20th Source: World Trade Report 2010, WTO

35. late 20th Source: World Trade Report 2010, WTO

36. late 20th Leading exporters (bn USD)Goods Services Source: World Trade Report 2010, WTO

37. late 20th Leading importers (bn USD)Goods Services Source: World Trade Report 2010, WTO

38. late 20th

39. late 20th Source: International Trade Statistics 2010, WTO

40. late 20th Source: International Trade Statistics 2010, WTO

41. late 20th Statistical Data on Trade

42. late 20th Globalisation • Global financial market • Institutional development of international trade • „McDonaldisation” – global convergence of customer preferences towards certain products • Increase of FDI flow • Dominating position of MNEs • Geographical development of value chains (distribution channels) • Knowledge-based economy emerged • Lower importance of states in the global trade • New sector of economy – knowledge management

43. 20th, 60’s Modern theories • Imitation lag theories (Posner, 1961): Technological gap between the Leader and the Rest of World lag in reaction lag in demand TRADE Leader starts production Demand occurs in the Rest of World Rest of World starts production

44. 20th, 60’s Modern theories • Theory of overlapping demands (Linder, 1961) Country Ahigh GDP Country Bavg. GDP Country Clow GDP Explanation of the intra – industry trade

45. 20th, 60’s „New” theories • International product life cycle (Vernon, 1966) • Uses a marketing concept of product life cycle • Explains: international trade; foreign direct investments (FDI) , intra-industry trade (IIT). • Three actors: • Leader • Developed countries (DC) • Rest of World (RW) • Empirical evidence proves the theory can explain the developments in the post-war international trade flows of teletransmission equipment

46. 20th, 60’s Export net DEVELOPED COUNTRIES LEADER REST OF WORLD Time: T0 Leader starts production of cars. No international trade so far Simulation of the int’l product life cycle - cars Produce

47. 20th, 60’s Export net T1 T2 T3 T4 T5 T6 DEVELOPED COUNTRIES LEADER REST OF WORLD Time: T1 Leader’s domestic market matures. Demand for cars arises in DC Trade is initiated Simulation of the int’l product life cycle - cars Produce

48. 20th, 60’s Export net T1 T1 T2 T2 T3 T3 T4 T4 T5 T5 T6 T6 DEVELOPED COUNTRIES LEADER REST OF WORLD Time: after T1 Leader is the only exporter of cars. Growing demand in DC causes trade growth. Simulation of the int’l product life cycle - cars Produce

49. 20th, 60’s Export net T1 T1 T1 T2 T2 T2 T3 T3 T3 T4 T4 T4 T5 T5 T5 T6 T6 T6 DEVELOPED COUNTRIES LEADER REST OF WORLD Time: T2 Leader is still the only exporter of cars. Demand for cars emerges in RW, which begins import. Simulation of the int’l product life cycle - cars Produce

50. 20th, 60’s Export net T1 T1 T1 T2 T2 T2 T3 T3 T3 T4 T4 T4 T5 T5 T5 T6 T6 T6 DEVELOPED COUNTRIES LEADER REST OF WORLD Time: T2 Technological advancement in DC and Leader’s outward FDIs make it possible to start production in DC. Leader can now import cheaper cars from DC (IIT) Simulation of the int’l product life cycle - cars Produce Produce