History provides us with a natural comparison. Beginning in the nineteenth century, the world saw a remarkable rise in international trade that came to a grinding halt during World War I and later on in the wake of the Great Depression. This "first wave of globalization" from about 1870 until 1913 led to a degree of international integration - measured by trade-to-output ratios - which many countries only achieved again in the mid-1990s.
Taking a comparative perspective, we juxtapose the first wave of globalization from 1870 to 1913 and the second wave after World War II. We also study the retreat of world trade during the interwar period from 1921 to 1939. We are interested in the driving forces behind these trade booms and trade busts. Was it changes in global output or changes in trade costs that explain the evolution of international trade?
I.2. INTERNATIONAL TRADE BACKGROUND
International trade has been and is today an economic force that has spurred commerce, promoted technology and growth, spread cultural patterns, stimulate exploration and colonization, and frequent fanned the flames of war.
The history of international trade has gone hand in hand with the development of civilizations. From very ancient times, international trade brought about the exchange of products and raw materials between one land or nation and another. Although such trade was often conducted in barter form and was of small volume by today's standard, this interchange of products was important in economic and historic development.
International trade in its early beginnings was necessary, not just because it provided one society with products such as cowries from West Africa to other areas; international trade also formed the idea of cultural interchange, thus trading not only on product, but also on lifestyles, customs and technology.
In addition international trade prompted the development of monetary system of record keeping and accounting, and of an entire vocation of commerce. In fact international trade added in public displeasure towards usury (interest in excess of legal rate charged to a borrower for the use of money).
One can state that the economic and political development of the entire western world was spurred and enhance by international trade.
Another distinct contribution of international trade was the strong promotion given to the field of exploration, map making, and ship construction technology. Early international trade routers ranged over vast expanses, thus requiring advances in transportation to make possible further search for new products and markets.
Let us not forget, of course, that such desire for new trade routes products, and markets was the driving force that launched explorations leading to the discovery of the new world.
Columbus set out, as you can recall, not to settle in a new nation, but to discover a new trade route of the Orient. The interest upon his return to Europe center not on his accounts of forest and soil, but on the new products available such as tobacco, corn, cowries etc.
As international trade progressed and technology developed, these explorations were to turn up another area of foreign trade, still important today. This was the import of raw materials by a nation and the re-export of finished and manufactured products. As a result, not only living standards advanced, but national incomes were also increased.
I.3. INTERNATIONAL TRADE- DEFINED
International trade is exchange of capital, goods, and services across international borders or territories. In other word, to know what is happening in the course of international trade, governments keep track of the transactions among nations.
The records of such transactions are made in the balance of payment accounts. International trade and balance of payment are therefore two important aspects in the relationship between nations.
In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (refer to Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.
International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.
Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in goods and services can serve as a substitute for trade in factors of production.
Instead of importing a factor of production, a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An example is the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor.
I.4. IMPORTANCE AND ROLES OF INTERNATIONAL TRADE
There are many areas in which the importance of trade can be established. Perhaps the most critical of these areas concerns economic growth. During the 19th and 20th centuries, trade has played a leading role in bringing about global economic growth. In addition to its role as an "engine of growth" for the world economy, international trade has also played a pivotal role in bringing about rapid economic growth and development in several countries. The 19th century was perhaps the important century for (primary commodity) export-led growth. Expansion of exports can lead to growth through stimulating technical change and investment, or by spilling demand over other sectors.
Expansion of primary commodity exports often led to growth in the 19th century particularly in Sweden, Australia and Canada. In Sweden, growth was propelled by the exportation of timber and wood products, and in Australia, growth was driven by the exportation of wool, lamb and mutton. In Canada, growth was propelled by the export of wheat. This gave rise to the so-called "staple theory" of growth. In practice, different primary products will have different effects on economic growth because they differ as regards conditions of supply and demand.
I.5. THE TWO WAVES OF GLOBALIZATION: "trade booms and trade busts"
Researchers were so much interested in the driving forces behind these economic terminologies "trade booms and trade busts" known as the two waves of globalization.
Among those researchers, David Jacks et al. (2008), in their study "Globalization and the costs of international trade from 1870 to the present", they tried to describe the impact of transaction costs in international trade.
The results show that international trade costs dropped much faster during the first wave of globalization up to World War I than during the second wave after World War II. The average level of trade costs for the countries fell by 23% in the 40 years before World War I. But from 1950 to 2000 average trade costs only fell by 16%. For the same countries, the average level of trade costs increased by 10% in the 20 years from the end of World War I to the beginning of World War II.
Below are the graphs representing the increase and decrease in transaction costs (i.e. Trade cost indices).
Figure 1.a: Trade cost indices, 1870-1913 (1870=100)
Figure 1.b: Trade cost indices, 1921-1939 (1921=100)
Figure 1.c: Trade cost indices, 1950-2000 (1950=100)
What are the factors underlying these trade costs? the evidence suggests that the determinants that matter most for explaining trade costs are standard factors like geographic distance (which is a rough proxy for information and transportation costs), trade policy and tariffs, adherence to fixed exchange rate regimes. In particular, the technological breakthrough and spread of the steamship in the course of the nineteenth century is associated with increased international trade, as is the spread of container shipping from the 1960s.
I.6. COMPARING TWO WAVES OF GLOBALISATION
On the surface, the percentage growth in trade volumes is roughly comparable in the two waves of globalization (at 400% and 471%, respectively). But since trade costs dropped faster during the first wave, they are also more important in explaining the growth of trade in that period. From 1870 to 1913, falling trade costs account for over half of the growth in international trade, while the rest is explained by secular increases in output. But from 1950 to 2000, falling trade costs account for only a third of trade growth.
In explaining the trade bust of the 1930s, the role of trade costs is dominant. Based on output growth alone, we would have expected world trade volumes to increase by nearly 90%. The fact that they declined by 13% highlights the critical role of the general tariff hike during the Great Depression and the collapse of the Gold Standard.
I.7. SHIPPING COSTS BEFORE WORLD WAR I
Historical evidence also suggests that shipping costs are endogenous. David Jacks and Krishna Pendakur (2008) use data on over 5000 maritime shipping transactions between 21 countries in the period from 1870 to 1913. Over that period maritime freight rates fell on average by 50% due to the spread of the steamship and general productivity growth in the shipping industry, and global trade increased by roughly 400%. But freight rates might be driven by bilateral trade, as they are partially determined by import demand. In the short run, increases in import demand could interact with capacity constraints in the shipping industry to create higher freight rates. To address this simultaneity, Jacks and Pendakur (2008) use shipping input prices and weather conditions on major shipping routes as an instrumental variable. Overall, they find that there is little systematic evidence to suggest that the maritime transport revolution was a primary driver of the late nineteenth century global trade boom. Rather, the most powerful force driving the boom was the secular rise in incomes across countries.
In this view, the key innovations in the shipping industry were induced technological responses to the heightened trading potential of the world. Strong income growth in the late nineteenth century caused high demand for foreign goods. As a consequence the shipping industry had a strong incentive to increase its productivity and exploit new technologies such as steamships, iron hulls and the screw propeller, ultimately leading to lower shipping costs. In a similar view, Marc Levinson (2006) shows that the movement towards containerization of the world mercantile fleet was strongly conditioned upon agents' expectations of commercial policy in light of attempts to re-establish the pre-World War I international economic order.
I.8. PROTECTIONISM AND TRADE COSTS
Instead of transportation costs, the biggest reversal of international trade in recent history is linked to large increases in protectionist measures. The Great Depression marked the most dramatic increase in trade costs over the last 130 years. Trade costs jumped on average by 18 percentage points in the space of the three years between 1929 and 1932. This corresponds exactly to the well-documented rise of protectionist trade policy during that period.
What does this study say about the future of world trade? Compared with historical patterns, the level of bilateral trade costs is still high for many country pairs, especially for those that are far away from each other. This means that there is scope for trade costs to fall further. Unless there is a backlash in the form of rising protectionism, world trade has the potential to keep growing strongly over the coming decades.
SECTION II.
PART A.
II.0. FACTORS CONTRIBUTING TO THE RECENT GROWTH IN INTERNATIONAL TRADE
Trade facilitation procedures, industrialization, advanced infrastructure, technological advancement, globalization, multinational corporations, documentary procedure requirements and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.
II.1. TRADE FACILITATION
Among the factors leading/contributing to the recent growth in international trade, trade facilitation is the critical issue debated under WTO and other multinational organizations.
It is said to be the critical issue, because it includes all other factors contributing to the recent growth of international trade.
It involves harmonization, standardization, integration, synchronisation of international trade procedures.
trade facilitation in global trade
No widely agreed definition. WTO defines it as simplification and standardization of International Trade Procedures. International Trade Procedures are defined as "activities, practices and formalities involved in collecting, presenting, communicating and processing data required for movement of goods in International Trade.
II.1.a. OBJECTIVE
The objective of Trade Facilitation is to reduce cost of doing business by eliminating unnecessary administrative hurdles.
II.1.b. IMPORTANCE & ROLES
Poor border procedures account for 2% to 15% of the total transaction value. This highlight wastefulness.
Concept to consumption - goods assembled or manufactured in one country sold in another. Complex - delays if border procedures are slow and tidy.
Increased reliance on JIT,
Lean Manufacturing,
Short Production Cycles,
Higher carrying costs.
Manufacturing sector growth is backed by efficient logistics chain
Cumbersome customs procedures pose a major impediment to trade liberalization &globalization - integration of markets is difficult.
Investment decisions based on logistics infrastructure - low cost of flow of goods, FDI conducive atmosphere.
Trade Facilitation is of paramount need. Responsibility rests with Governments to facilitate trade by creating congenial environment. Convenient procedures and infrastructure support. Export optimism demands international norms of efficiency, productivity & cost.
Moving goods across country's borders is a critical determinant of a country's competitiveness.
Price & time: Delivery schedule reliability is vital for companies to reduce costs (inventory carrying costs).
Good governance is essential for trade facilitation.
II.1.c. REPORTS ON TRADE FACILITATION IMPORTANCE
OECD STUDY: The cost of poor border procedures varies between 2% and 15%.
UNCTAD REPORT: 20/30 parties; 40 documents, 200 data elements (most of which is repeated).
APEC STUDY: - Gain of 0.26% of real GDP to APEC through trade facilitation programme - Saving of 1% to 2% of import price.
II.1.d. WORLD BANK STUDY ON 21-MEMBERS OF APEC SAYS:
i) Direct relationship between trade facilitation & trade flows
ii) At the centre of trade facilitation is the role of customs & other controlling organizations
iii) Key issues in trade facilitation are:
Excessive Documentation
Insufficient use of I.T.
Lack of Transparency
Unclear import/export requirements
Lack of cooperation among customs authorities
II.1.e. TRADE FACILITATION: MULTILATERAL TRADE NEGOTIATIONS AT WTO
Trade facilitation is relatively a new issue at WTO. It was first discussed at Singapore Ministerial Conference in 1996. Group of Countries friendly to Trade Facilitation (mostly developed world) are known as COLO-RADO group at WTO. India was not favorably disposed to trade facilitation at WTO because of (i) lack of resources and (ii) consequential legal obligations and disputes. Trade Facilitation, India felt, should remain a regional, national concern or bilateral issue rather than multi-lateral trade concern.
II.1.f. GATT & WTO
Singapore Ministerial Conference defines trade facilitation as simplification and harmonization of trade procedures. This issue was again discussed at Doha Ministerial Conference in 2001. Doha Ministerial Declaration referred to GATT Articles in the context of trade facilitation. These Articles are:
Article V - concerning (i) freedom of transit and (ii) simplification of procedures.
Article VIII - concerning (i) fees and charges not for fiscal purposes, (ad valorem charges not compatible with WTO), (ii) transparency, and (iii) reduction in documentation.
Article X - concerning (i) dissemination of information - publishing of rules, (ii) right to appeal and judicial review and (iii) e-mode/website.
The common features of these Articles obviously referred to the following:
i) Transparency in publication of laws and procedures.
ii) Information dissemination through fair and equitable administration or procedures.
iii) Right to appeal and judicial review.
It is clear that Trade Facilitation relates to variety of activities, viz., import/export procedures, customs valuation, simplification of procedures, online handling of documents, etc. all along the logistics chain.
Multilateral organizations that oversee Trade Facilitation include World Customs Organizations, IMF, UNCTAD, OECD, and WTO & World Bank.
Former World Bank President (JAMES WOLFENSOHN) said reducing port/customs transit line by one day has the same effect as reducing customs duty by 1%.
A number of specific agreements that have been negotiated during Uruguay Round and relevant to trade facilitation under WTO are:
Customs Valuation Agreement
(Sets out guidelines for customs valuation).
Agreement of Rules or Origin
(Principles for original determination in neutral & transparent manner).
Agreement on Pre-shipment Inspection
(Sets standards to avoid delays & disputes).
Agreement on Import Licensing Procedure
(Single window clearance).
Agreement on Technical Barriers to Trade
(Unnecessary hurdles to be avoided).
Agreement on SPS Measures
(Undesirable obstacles to be avoided).
II.1.g. TRADE FACILITATION UNDER FTP 2004-09
Unshackling of controls
Creating an atmosphere of trust and transparency
Simplification of Procedures
Bringing down Transaction Cost
Facilitating Technological and Infrastructural Up-gradation.
II.2. INDUSTRIALIZATION
The mushrooming of industries all over the world caused by industrial revolution is another factor contributing to the recent growth in international trade. This factor is characterized by mass production, standardized and customized products.
II.3. ADVANCED INFRASTRUCTURE
It is a basic responsibility of the government to facilitate/support trade by improving physical, institutional and virtual infrastructures.
The physical infrastructures involve: roads, railways transport, sea transport, air transport, and multimodal transport.
Virtual infrastructure; this means facilitation through intermediaries such as, logistic agencies, insurance companies, and freight forwarders.
Institutional infrastructure, this involves universities/colleges,for business studies management.
The improvement of all these kind of infrastructures in many countries contributes/lead to the recent growth in international trade.
II.4. TECHNOLOGICAL ADVANCEMENT
The 21st century, is the era of technological advancement characterized by the stiff competition in E-commerce model, whereby the international business focus has changed significantly.
Technological advancement has been proven to be a vital factor in expanding the market and enabling businessmen to make the most effective use of information.
Modernized industries presently are enjoying economies of scale due to mass production, standardized and customized products leading to low cost of production and are becoming competitive in the global markets.
Currently, the world is connected and brought together as a small village; this is due to technological improvement.
From this point of view, it is proven that technological advancement is one among the critical factors contributing to the recent growth in international trade.
II.5. GLOBALIZATION
Globalization is integration in its concept, nowadays the world is integrated and people are connected. Goods and services are moving from one point of the globe to another in few hours. From this argument, we can say that the world has been turned into a sustainable village.
As a result, globalization has played a major role in contributing rapid growth in global trade.
II.6. MULTILATIONAL ORGANIZATIONS
These are international organizations dealing with the control of international trade policies and procedures.
Multilateral organizations that oversee Trade Facilitation include World Customs Organizations, IMF, UNCTAD, OECD, and WTO & World Bank.
II.7. DOCUMENTARY PROCEDURE REQUIREMENTS
The process of documentary requirements in Export-Import transactions was very cumbersome, this in term of EXIM duties, export-import license, and global standards license, etc.
But, due to trade facilitation concept, the days of processing import goods are becoming reduced.
The relevant example is from Dar es-salaam port, the processes to clear import goods took three weeks to one month in the past years. Presently, the average days to clear cargos are 7 to 14 days. (This is due to implementation of using new equipments- cranes machines, and new systems- Automated System of Customs Data-ASYCUDA by TRA).
Another example is of PERU, this country has 19 ports along the literal of the Pacific Ocean.
In these ports no effective customs procedures. Cargo clearance time stakes about 15 to 30 days. As result, no transparence, no uniformity and consistence.
Due to the emphasis on documentary procedure by the multilateral organizations (WTO and World Bank), the release times under these ports came down from 15-30days up to 2-3days export-import perspective (World Bank studies on Trade facilitation, 2008).
SECTION II.
PART B.
II.1. REGULATION OF INTERNATIONAL TRADE
CURRENT MEMBERS OF THE WORLD TRADE ORGANISATION
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in the United Kingdom, a belief in free trade became paramount. This belief became the dominant thinking among western nations since then. In the years since the Second World War, controversial multilateral treaties like the General Agreement on Tariffs and Trade (GATT) and World Trade Organization have attempted to promote free trade while creating a globally regulated trade structure. These trade agreements have often resulted in discontent and protest with claims of unfair trade that is not beneficial to developing countries.
Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.
Traditionally agricultural interests are usually in favor of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.
During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression. Many economists have attempted to portray tariffs as the underlining reason behind the collapse in world trade that many believe seriously deepened the depression.
The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely because of opposition from the populations of Latin American nations. Similar agreements such as the Multilateral Agreement on Investment (MAI) have also failed in recent years.
II.2. RISKS IN INTERNATIONAL TRADE
Companies doing international business face many of the same risks as would normally be evident in strictly domestic transactions. For example,
Buyer insolvency (purchaser cannot pay);
Non-acceptance (buyer rejects goods as different from the agreed upon specifications);
Credit risk (allowing the buyer to take possession of goods prior to payment);
Regulatory risk (e.g., a change in rules that prevents the transaction);
Intervention (governmental action to prevent a transaction being completed);
Political risk (change in leadership interfering with transactions or prices); and
War and other uncontrollable events.
In addition, international trade also faces the risk of unfavorable exchange rate movements (and, the potential benefit of favorable movements).
SECTION III.
III.0. CONCLUSION AND RECOMMENDATION REMARKS
III.1. SUMMARY AND CONCLUSION
This essay focuses solely on the factors contributing to the recent growth in International Trade. It has been arranged into three sections; whereby section I includes the concept of international trade, section II comprises part A: factors contributing to the recent growth in international trade, and part B: regulations and risks in international Trade. Finally, section III includes conclusion and recommendation remarks of the essay.
Through different contexts in this essay, it's proven that International trade acts as an engine of growth in developing country. There are many areas in which the importance of trade can be established. Perhaps the most critical of these areas concerns economic growth. During the 19th and 20th centuries, trade has played a leading role in bringing about global economic growth. In addition to its role as an "engine of growth" for the world economy, international trade has also played a pivotal role in bringing about rapid economic growth and development in several countries. The 19th century was perhaps the important century for (primary commodity) export-led growth.
III.2. RECOMMENDATION REMARKS
The lifting of trade barriers should not be followed by the introduction of new ones" - should be modified to reflect that, after years of market distortions favoring developed countries, some form of medium-term investment/tariff/subsidy policy will be necessary to enable developing countries to build their productive capacity, meet their food security needs, and generate surpluses for international markets.
Similarly the calls for elimination of output and export subsidies in developed countries' agriculture, and of their trade barriers to developing country manufacturing exports are also positive. However, these commitments would be strengthened by reference to the need for concrete policies designed to enhance local productive capacity in developing countries. Distinction should also be drawn between the elimination of developed country export subsidies and the proposal for export credits to stimulate infrastructure investment in developing countries.
A Draft should be made to commit UN agencies to "ensuring greater policy coherence and better cooperation among UN, its agencies, the Breton Woods Institutions and the World Trade Organization, as well as other multilateral bodies", so as to better provide global public goods and consolidate the international financial system. It should be strengthened to note that the primary goal of enhanced coherence is "development," as defined and measured by the UN human rights framework. Such organizations (the Breton Woods Institutions and the World Trade Organization) should serve to support nationally-designed development strategies, rather than undermining them.
To end this, it is therefore imperative that conscious efforts should be made by government to fine-tune the various policy measures relating to the various macroeconomic variables in order to provide an enabling environment to stimulate international trade.
III.3. REFERENCES
Anderson, James; van Wincoop, Eric. "Gravity with Gravitas: A Solution to the Border Puzzle." American Economic Review93(1), March 2003, pp. 170-192.
Anderson, James; van Wincoop, Eric. "Trade Costs." Journal of Economic LiteratureXLII, September 2004, pp. 691-751.
Hummels, David; Ishii, Jun; Yi, Kei-Mu. "The Nature and Growth of Vertical Specialization in World Trade." Journal of International Economics54, 2001, pp. 75-96.
Jacks, David; Meissner, Christopher; Novy, Dennis. "Trade Costs, 1870-2000." American Economic Review98(2), Papers &Proceedings, May 2008, pp. 529-534.
Jacks, David; Pendakur, Krishna. "Global Trade and the Maritime Transport Revolution." National Bureau of Economic Research Working Paper No. 14139, June 2008.
Levinson, Marc. The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. Princeton University Press, 2006.
Novy, Dennis. "Gravity Redux: Measuring International Trade Costs with Panel Data." Working Paper, Warwick University, 2008.
Yi, Kei-Mu. "Can Vertical Specialization Explain the Growth of World Trade?" Journal of Political Economy111(1), 2003, pp. 52-102.
Milton Iyoha (2003) Macroeconomic: Theory and Practice, Mindex publishing Benin City, Edo State. Pp 142-166
United Nations Conference on Trade and Development (UNCTD).2005, developing countries in international trade: trade and development index 2005 united nations New York and Geneva, 2005.
WTO reports on "Trade facilitation", 2009.
World Bank Report on "21-members of APEC", 2009.
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