Outline
Since the end of World War II, there has been rapid economic growth, subsequently leading to increased world trade and output. This was the result of a major increase in the degree of international specialization between states. An increase in specialization would consequently result in an increase in world trade even with no apparent increase in world output (Feenstra 1998, p.31). Even though this growth has been realized in all sectors of the economy, it has been more prominent in the manufacturing sectors of the different states’ and region’s economies (Krugman, Cooper & Srinivasan 1995, p.327).
The reasons for this significant rise in trade volume and output are highlighted as infrastructure, merchandise, technology. There are numerous accruing benefits of this rise, and the proponents have not fallen short of stating improved living standards as one of them. The main concern is the long term impact of this phenomenon on both developed and developing countries.
Introduction
Half a century has passed since the end of World War II. It has inevitably experienced extremely rapid economic growth, with a number of observers and theorists developing their views as a result of this phenomenon. On average, world output has grown at a faster rate than any other period of history during this period of time. Davis& Weinstein (2001, p. 88) observe that one major cause for this growth has been the rapid growth in world trade and that throughout this period, world trade consistently and continuously grew faster than world output. This in turn was the result of a major increase in the degree of international specialization between states. An increase in specialization would consequently result in an increase in world trade even with no apparent increase in world output (Feenstra 1998, p.31). The hence mere fact that trade has been growing faster than output is a clear implication of an increase in the degree of specialization. Even though this growth has been realized in all sectors of the economy, it has been more prominent in the manufacturing sectors of the different states’ and region’s economies (Krugman, Cooper & Srinivasan 1995, p.327).
The speedy expansion of trade relative to output may mean that the countries that have shared the process and efforts in the international trade have consistently remained interdependent on each other (Krugman 2000, p.51; Obstfeld & Rogoff 2000, p. 17). Subsequently, the proportion of output traded has constantly increased in most regions of the world. This, as observed in the current economic downturn means, means that any deficit or “shock” realized in one part of the globe is likely to be transmitted at a faster rate than expected to other parts of the world, especially to exporting states to the affected nation (Krugman 2000, p. 53).
In addition, world trade growth has brought about some significant changes in global business or world trade. Seyoum (2008, p.147) identifies the significant changes as:
- World Trade Geographical composition:which shows the share of world trade as contributed by different countries and/ or regions
- World Trade Commodity Composition:These structural shifts show the share of different product groups in the world trade. For instance, the share of the primary products has tended to fall while manufacturing products have conversely increased in volume. In this aspect, Wild & Han (2006, p.142) notes the conspicuous growth of the service sector in world trade has been the driving force.
This paper will closely outline and analyze both trends in the world output and the growth of world trade, and finally establish the relationship between the two phenomena of the global economy.
World Trade and Output Growth: Historical Perspective
Growth of World Output
The past 50 years or so has seen unprecedented growth in the overall output than any time recorded in the history of the world economy. Immediately after World War II (1950) up to 1990, a steady increase in the world output saw the period recording an annual growth of 3.9% (Davis& Weinstein 2001, p. 64). This was better than the 2.8% for an approximated 40 years immediately preceding World War II of between 1870 and 1913 and 2.1% for the period between the two wars (1924-1937). The exception during this period was the rise in growth between 1924 and 1929 of same order 3.7%, but this growth was later interrupted by the historical Wall Street Crash and the ensuing depression afterward (Davis& Weinstein 2001, p. 71).
Helpman (1999, p.121) observes that the growth has been nevertheless stable but never even since World War II than in the early period. Output on the other hand tends to oscillate between the irregular periods of rapid growths of booms and upswings and periods of slow of up to negative growth characterized by the recession (p.124).
The post-war period realized differences in the growth of output in different regions of the economies. Between the 1960s and 1970s, Japan recorded the most impressive growth as compared to UK’s lowest (Baier & Bergstrand 2001, p.1). In 1980s, there was an improvement in the UK economy, even though Germany and France experienced slow growth during the same period (Herzberg, Sebastia-Barriel & Whitaker 2002). The US economy particularly grew rapidly between 1975 and 1978 due to the size of the US market that raised real incomes for goods and services in other developed market economies (Sevestre 200, p.142). At the same time, the advanced industrialized nations responded to higher oil prices by cutting their oil demand, hence felling the oil consumption (Im, Pesaran & Shin 1997, 124).
Higher real incomes in the western industrialized countries led to an increased demand for goods and services, higher output and some fall in levels of unemployment (Balassa 1998, p.584). The rise in output growth was realized again after 1983 in most of the developed countries although Western Europe experienced a sluggish growth for most of the next four years (Herzberg, Sebastia-Barriel & Whitaker 2002, p.206). Other periods and events that saw the sluggish growths in the world output were: the 1990- 1993 economic downturn and the East Asian Financial Crisis (p.207).
The Growth of World Trade
Many economic experts concur that one major reason why there was a rapid growth in the world output immediately after World War II is the growth of World Trade. This period has seen the growth of World Trade at a rate higher of about one and a half times that of world output (Davis& Weinstein 2001, p. 89). While the period of 1950 all the way to 1990 the output grew by an average of 3.9% per annum, world trade grew by an average volume of 5.8% per annum. This presented the fastest growth in the history of the world economy (Davis& Weinstein 2001, p. 89).
World export grew in the 1960s at about 1.4 times world output, but the growth slowed down in the late 1970s and early 1980s while the ratio of trade to output was relatively stable (Feenstra 1998, p. 33). This figure later rose in the 1990s as the trade between nations grew. It is worth noting that this rise has been consistent except in the recent global economic crisis.
The World Trade Vs World Output
Many Economists and observers alike attribute this relationship in growth to the growth of merchandise trade and the service industry (Feenstra1998, p.38; Krugman 2000, p.53). Due to this aspect of the concurrent growth pattern of world trade and world output, many commentators say that it is only countries that make use of an outward-oriented development strategy such as encouraging international investors have benefited in the international business outfit and are predicted to continue holding sway in the international trade output (Walton 2003; p.180; Hummels 1999, p.19). This probably explains why Hummels (1999, p.19) insist that the protectionist business ideology seen in some of leading economies and regional blocks will in essence hurt the countries involved in the long term rather than short-term gain. Furthermore, Linder (1961, p.252) states that the need to balance the local economy to be at par with the global ones prompted such countries like Australia to deregulate what used to be highly regulated markets like the Airline and manufacturing industries.
It is a common agreement that the rise in global trade and global output of skilled labor around the world will be beneficial to develop nations, especially in Africa, South America, and Asia. The reason fronted for this highly held notion is because of the skill transferability associated with global trade and labor output in the world (Krugman, Cooper & Srinivasan 1995, p.329). However, most political economists have refused to buy this argument highlighting their concern on the balance of trade between the developed economies Vs developing economies, which they say is inclined to favor the big economies (p.330). They say that if such a trade exists in the true sense; the currently developing countries that rely on international trade are likely to face a similar financial crisis as that was experienced by the Asian Tigers of the last century. Even though there has been world trade growth since 1950s especially in the developed nations, it must be noted that other emerging economies like China have enjoyed the benefits of borderless trade. For example, the world’s populous nation exported around 25 percent of its GDP in 1995, a tremendous improvement from 1978 and below when it was completely out of the picture in the world economy (Krugman, Cooper & Srinivasan 1995, p.328). As a part of globalization and the development of the modern world, a major factor in the growth of world trade is the vast improvements in technology that have occurred in recent times (Krugman 2000b, p.61).
What role has the service industry played in the growth of both the world economy and the world output? There have been several changes in the global infrastructure since the end of World War II, attributed to the increase in technological inventions like mobile phones and the internet that has kept the global more of a village than large vast of lands separated by seas and oceans. Again, the role of transport means in “narrowing” of traveling distance between nations through cheaper and faster means of transport can never be ignored (Hummels 1999, p.96). This means, for example, that horticultural product output from a country as far as Brazil can reach the UK in a short span of hours rather than years. Logically, it is easy to concur with most of the economic experts who believe that a combination of both trade opportunities as well as knowledge transferability is what has kept both output and world growth in the upward trend.
By 1995, the food share in the world had fallen to a low of 9% from 22% in 1955 (Linder 1961, p. 231). One explanation advanced by trade experts is the relatively slow growth in the volume of trade in food products over this period. Within the advanced economies, the demands for food tend to be relatively income-inelastic, i.e. the demand for food increases less than proportionately with per capita income (Markusen 1986, p.1003; United Nations 2008, p.12). This means that the demands for food by these countries are unlikely to grow at a rate faster than per capita income. Additionally, throughout the past half a century most of the advanced nations adopted highly protectionists policies in an effort to boost domestic production of food and reduce dependence on the imported foodstuff (Davis & Weinstein 2001, p.19). In reality, these policies have led to massive overproduction of food that is more than enough for the nationals of these countries. This has consequently led these countries to adopt subsidies to boost the exports of this foodstuff to the rest of the world. This trend has seen advanced industrialized nations shifting from being net importers to becoming net exporters of food products (Davis & Weinstein 2001, p. 32). In contrast, the developing nations have often not kept up with the food demand due to rapid population growth and poor agricultural policies (p.32). These countries have therefore resorted to importing more food than they produce. The net effect of these phenomenal changes has seen the increase in trade of food products but the volume of trade has tended to expand more slowly than for manufactures’ products (p.33).
The increased world trade and output were also facilitated by the manufacturing industry. After World War II, a new trend of manufacturing strategy emerged. The process of collaboration between nations was the beginning of collaborative manufacturing where one product would be manufactured in different countries, and the parts produced at a particular level with a different value or value addition (Obstfeld & Rogoff 2000, p.114). The products such as those of electronics and car parts are examples of the products that have benefited from this world growth of both trade and output.
The early part of 20th century saw Britain use colonies as business partners, importing raw materials from their former colonies and exporting finished products to these countries (Herzberg, Sebastia-Barriel & Whitaker, 2002, p.206). From this trade arrangement, UK’s export was entirely manufactured products, while most of its former colonies wholly relying on agricultural export to seal the trade gap. This as explained earlier, is one of the reasons why the world output remained relatively slow while trade increased rapidly.
Theories of Global trade
World trade means that there is the art of export and import. For the importing country, they are able to get the product they are not in a position to produce. On the other hand, exporting country is in a position to export to get either what they have in surplus and in return get the financial income to buy what they lack from another country. It, therefore, means that every nation is either an exporter or an importer in one way or another. World trade also helps the economy of countries, thereby affecting the world output (Williamson 1971, p.23). This means that if there is a slow growth of the economy of a particular country, the volume of trade remitted by that particular country will also be slow (p.25). On the other hand higher output produces more trade. Another consistent example is that if a county’s currency weakens, as compared to other trading partners of the world, the price of the imported good is likely to be higher than the locally produced goods (Walton 2003, p.98).
Global trade entails various aspects of relationships between different countries. Some of the theories that have been spanned to explain the nature of global trade and its output are mercantilism, absolute advantage, comparative advantage, factor proportions theory, international product life cycle, new trade theory and national competitive advantage (Wild & Han 2006, p. 124).
Mercantilism: this theory states that nations should accumulate financial wealth through exports and discouraging imports, a process that was achieved through trade surpluses, government intervention and colonization (Wild & Han 2006, p. 124). The three concepts were used together by the colonizing nations. These countries maintained a trade surplus by colonizing the less developed countries with the sole intention of exploiting their raw materials (Wild & Han 2006, p. 126). The intervention from the government would occur when they imposed a ban or tariffs on particular imports (p.128). Again, the government would subsidize their own industries to expand exports and minimize imports (p.129).
Absolute advantage theory: this was the ability of a nation to produce a product more efficiently than any other nation using the same amount or even fewer resources (Davis & Weinstein2001, p.32). Its uniqueness is that that trade should not be banned or restricted by tariffs but allowed to flow freely according to the demand of the market (p.33). Instead of measuring the money, the state has in its reserve, this theory measures the wealth of a nation on the living standards of the people.
Comparative advantage theory: in this theory, the country may not be able in a position to produce the good more efficiently than any other country but can produce the good more efficiently than any other good within its own country (Wild & Han 2006, p. 129). The theory can be accomplished if for example one country has the absolute advantage in two different types of exports but it costs more monetarily or in labor than another country; thus the second country has a comparative advantage (p.130). It has the ability to produce and export this second good to the first country cheaper and more efficiently (Wild & Han 2006, p. 131).
The factor proportions theory: this theory states that countries import goods only where resources to make them are in short supply and export goods where the resources are in excess (Wild & Han 2006, p. 131). This theory, unlike other theories which focus on the productivity of a specialized good while, it instead focuses on the abundance and cheapness of the goods produced; for example, a country may specialize in labor products if the cost of labor is lower than capital and land and specialize in capital and land if the cost is lower than labor (p.131). In case a country has large labor, it may specialize in industrial production at the expense of agriculture; likewise, if the country has large tracks of land, it is likely to specialize in agricultural production.
National competitive advantage theory: it states that a country’s competitive advantage in a particular industry relies on the ability of that particular country to innovate and upgrade that industry (Wild & Han 2006, p. 133). It is the theory that takes into consideration the county’s resources, educational skills of its population, and ability in technology (p.134). It, therefore, concentrates on the country’s ability to produce skilled labor and advance new technologies.
Conclusion
There are several reasons that have significantly led to the increase of world trade in the last 50 years. Some of the reasons are infrastructure, merchandise, technology. These factors have led to the growth of volume traded in the world and world trade in general, thereby increasing the interactions between nations across the borders. The main concern among many researchers has been to explicitly investigate the impact of this growth on both the developed and developing countries. The outcome of such studies will be significant on the nature of planning and reorganization of the global trade by the stakeholders.
Reference
Baier, S & Bergstrand, J 2001, The growth of world trade: tariffs, transport costs, and income similarity, Journal of International Economics 53:1–27.
Balassa, B 1998, The purchasing-power parity doctrine, Journal of Political Economy, pages 584–96.
Davis, D R & Weinstein, D E 2001, What role for empirics in international trade?, NBER Working Paper no. 8543.
Feenstra, R C 1998, Integration of trade and disintegration of production in the global economy, Journal of Economic Perspectives, 12(4), pp. 31–50.
Helpman, E 1999, The structure of foreign trade, The Journal of Economic Perspectives, Vol. 13, Issue 2, pages 121–44.
Herzberg, V, Sebastia-Barriel, M and Whitaker, S (2002), ‘Why are UK imports so cyclical?’, Bank of England Quarterly Bulletin, Vol. 42/2, pages 203–09.
Hummels, D 1999, Have international transportation costs declined?, University of Chicago, mimeo.
Im, K S, Pesaran, M H and Shin, Y (1997), ‘Testing for unit roots in heterogeneous panels’, revised version of University of Cambridge, DAE Working Paper No. 9526.
Krugman, P, Cooper, R & Srinivasan, T 1995, Growing World Trade: Causes and Consequences, Brookings Papers on Economic Activity, 25th Anniversary Issue, 327-377.
Krugman, P 2000, Technology, trade and factor prices’, Journal of International Economics, 50:51–71.
Linder, S 1961, An essay on trade and transformation, Wiley, New York.
Markusen, J R 1986, Explaining the volume of trade, American Economic Review, Vol. 76, pages 1,002–11.
Obstfeld, M & Rogoff, K 2000, The six major puzzles in international macroeconomics: is there a common cause?, Center for International and Development Economics Research, Paper C00-112.
Sevestre, P 2001,The Econometrics of Panel Data, Kluwer Academic Publishers.
Seyoum B 2008, Export-import theory, practices, and procedures, London: Routledge Publishers.
United Nations 2008, World Economic Situation and Prospects, Geneva: United Nations Publications.
Walton, P 2003, European Harmonisation, in Choi, F. (ed.), International Finance and Accounting Handbook, John Wiley & Sons, New York.
Wild, W& Han P 2006, International business: the challenges of globalization. Upper Saddle River, New Jersey. Prentice Hall
Williamson, E 1971, The Vertical Integration of Production: Market Failure Considerations’, American Economic Review.