4.1.3 - Pattern of trade

What Pattern of Trade Shows

The pattern of trade has three main dimensions:

• Composition: the goods and services being traded
• Direction: which countries trade with each other
• Volume: how large the trade flows are

Patterns of trade are not fixed. The UK once exported far more manufactured goods and had especially strong trade links with Commonwealth countries. Over time, services became more important in UK exports, while trade with Europe and then with fast-growing emerging economies became more significant.

That is why economists treat trade patterns as dynamic rather than permanent. A country can keep trading heavily overall while still changing the mix of products it sells abroad, the countries it buys from, and the balance between imports and exports.

Comparative Advantage and Emerging Economies

One major reason trade patterns differ is comparative advantage. Countries tend to export the products they can make at lower opportunity cost and import the products they make at relatively higher opportunity cost.

This helps explain why different economies often specialise in different things:

• Countries with abundant low-cost labour, such as Bangladesh or Vietnam, often export labour-intensive manufactured goods.
• Countries with abundant natural resources, such as Saudi Arabia or Australia, often export oil, gas, or minerals.
• Countries with strong skilled labour and capital, such as Germany or Japan, often export high-value manufactured goods.
• Countries with strong service sectors, such as the UK or the US, often export services such as finance, consultancy, and education.

Comparative advantage is not fixed. As economies develop, wages, skills, technology and demographics change. That is one reason many developed countries saw deindustrialisation as lower-cost producers expanded manufacturing. The UK, for example, has become relatively more focused on services exports, especially financial and business services. At the same time, China has become less dominant in some low-skill manufacturing as wages rise, so some production has shifted towards countries such as Vietnam, Bangladesh and Ethiopia.

Emerging economies change trade patterns both as exporters and as importers. As they industrialise, they often export more manufactured goods and take a larger share of world trade. They also import more raw materials, capital goods and consumer goods as incomes rise and firms expand capacity. To finance those imports, they need export earnings too, so their role in world trade deepens on both sides of the market. China's growth, for example, increased manufactured exports to many developed economies while also increasing demand for iron ore from Australia, soybeans from Brazil, and a range of minerals from African economies.

Trade has also become more important for many developing economies as more countries have joined the global trading system. The opening of previously closed economies after the collapse of communism widened the number of countries participating in world trade and changed who traded with whom. China's entry into the World Trade Organization in 2001 had a similar effect: lower barriers to its exports helped make it the world's largest goods exporter.

Trading Blocs and Trade Agreements

Trade patterns are also shaped by policy. When countries reduce barriers between themselves, they make some trade relationships easier and cheaper than others.

Common trading arrangements include:

Two named effects matter here. Trade creation happens when lower internal barriers lead members to switch from higher-cost domestic production to lower-cost imports from producers inside the bloc. Trade diversion happens when preferential treatment or common external tariffs shift purchases away from lower-cost non-members towards higher-cost firms inside the bloc. In both cases, the direction of trade changes because membership alters relative prices and market access.