4.1 - International trade and changing patterns
International trade connects what an economy produces with what its residents can consume. You will explain why countries trade, interpret changes in trade patterns and judge how the gains and adjustment costs differ across developed, emerging and developing economies.
Trade and specialisation
International trade is the exchange of goods and services across national borders. An export is sold to a buyer abroad; an import is bought from abroad. A resident buying a foreign company's online design service imports a service even though no physical package crosses a border. Buying an imported machine is goods trade; acquiring ownership of a foreign factory is investment, although investment can later generate trade.
Countries have different resources, skills, technologies and climates. Trade allows production to specialise while consumption remains varied. A country can export engineering services and import coffee instead of using scarce resources to grow coffee in unsuitable conditions. This can increase the consumption attainable from given resources. The relevant comparison is the resources forgone to produce each good, developed in comparative advantage, rather than a claim that one country must be best at everything it exports.
Access to a larger market can also let firms spread fixed costs over more output. A specialised manufacturer able to sell abroad may operate a larger plant and lower average costs. Imports provide inputs as well as final goods: cheaper or better components can improve domestic firms' productivity. Competition from foreign firms may reduce market power and encourage innovation. These are possible mechanisms, not proof that every firm or worker benefits.
Suppose an illustrative economy exports goods worth £80 billion and services worth £40 billion in one year. Services are one third of its £120 billion exports: £40 billion divided by £120 billion. This measures the composition of exports. It does not measure the country's trade balance, which also needs imports, or the domestic value added in exports, which may contain imported inputs.
Changing trade patterns
A trade pattern describes what is traded, who trades with whom and how important trade is to economic activity. A rise in an economy's share of world exports is different from a rise in its exports: its exports may grow while its share falls if other exporters grow faster. Values measured in money can rise because quantities or prices rise, so nominal trade growth does not establish the same growth in trade volumes.
Historical WTO data provide a useful comparison. Commercial services increased from 19% of world goods and commercial-services trade in 1995 to 25% in 2023. This is a six-percentage-point increase, or approximately 31.6% relative growth in the share: . The measure excludes local sales by foreign-owned service affiliates. The WTO also reports a growing share of trade between developing economies over 1995–2022. These are dated patterns, not a forecast or a description of every country today. Source: WTO Secretariat data blog, 24 April 2024.
Transport improvements reduce the cost and time of shipping. Digital communications allow some services to be delivered remotely and firms to coordinate production across borders. A global value chain divides stages of production among countries: a final product may combine design, materials, components and assembly from several economies. A component crossing borders several times can appear repeatedly in gross trade figures; these figures are not simply the value of the finished product's domestic contribution.
Industrialisation and rising incomes in emerging economies can increase their manufacturing exports and their imports of energy, machinery and consumer services. Domestic productivity changes, exchange rates, trade agreements, conflict and supply-chain risks can alter partners and products. Businesses may diversify suppliers or locate some production nearer buyers. Geography still matters: distance, transport infrastructure and neighbouring markets influence trade costs. There is no rule that globalisation continuously increases every trade flow.
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