Ch. 1: Trade in the Global Economy: An Overview

The course opens with a picture of what international trade and investment look like today, before any model is introduced. Three sources are used: a set of world trade and investment data (WTO and World Bank tables and charts for 2024 and earlier years), a short parable called A Bedtime Story for Grown-ups about a fishing village that starts to trade, and an opinion article Free trade? When it suits us (openDemocracy, 2006) about the politics of the WTO Doha round. Together they raise the questions that the rest of Part A answers with models: why do countries trade, who gains and who loses, and why do governments so often interfere with trade even though economists stress the gains from free trade. In the textbook (Feenstra and Taylor) this material corresponds to Chapter 1.

Basic vocabulary

• Merchandise trade: trade in physical goods (manufactures, agricultural products, fuels and mining products).
• Commercial services trade: trade in services such as transport, travel, finance, insurance, business and computer services.
• Digitally delivered services: services supplied across borders through computer networks (software, cloud services, consulting delivered online, streaming and so on). They are a growing part of services trade.
• Re-exports: goods that are imported and then exported again without substantial transformation. Hub economies such as Hong Kong and Singapore have large re-exports, so the tables split their exports into domestic exports and re-exports, and their imports into total and retained imports (imports that stay in the economy).
• Trade balance: exports minus imports. A surplus means exports exceed imports; a deficit means imports exceed exports.
• Openness (trade as % of GDP): (exports + imports) divided by GDP. It measures how important trade is for an economy.
• Foreign direct investment (FDI): investment by a firm in one country that gives it a lasting interest and control in a firm in another country (building a plant abroad, buying a controlling stake). It is a form of international factor movement (capital), discussed further under factor movements.

Leading merchandise exporters and importers, 2024

Table 1 of the data set ranks the leading exporters and importers of merchandise in 2024 (values in billions of US dollars, share of world trade, and annual percentage change). The top of the ranking is shown below.

Observations that follow from the table:

• World merchandise trade is concentrated: the top 30 exporters account for about 83% of world exports (total of $20,332 billion) and the top 30 importers for about 82%.
• China is by far the largest exporter of goods (14.6% of the world total) and the second largest importer. Its merchandise trade surplus is roughly 3,577 minus 2,587 = about $990 billion.
• The United States is the largest importer (13.6%) but only the second exporter; its merchandise deficit is roughly 2,065 minus 3,359 = about minus $1,294 billion.
• Germany is third on both sides and has a goods surplus (1,683 minus 1,425 = about $258 billion).
• Hong Kong's exports of $646 billion consist almost entirely of re-exports ($612 billion); domestic exports are only $34 billion. Singapore ($506 billion) also has large re-exports ($291 billion). This shows that gross trade figures can overstate how much a hub economy produces itself.
• Fast growing exporters in 2024 include Hong Kong (+12%), Viet Nam (+14%), Chinese Taipei (+10%) and Korea (+8%), which reflects the importance of East Asian manufacturing and electronics supply chains. Viet Nam (+16%) and the United Arab Emirates (+14%) were also among the fastest growing importers.

Trade in commercial services and digitally delivered services, 2024

The ranking for services differs clearly from the ranking for goods. Advanced economies with strong financial, business and digital sectors dominate.

• The United States runs a deficit in goods but a surplus in services (1,077 minus 787 = about $290 billion). The United Kingdom also has a sizable services surplus (645 minus 399 = about $246 billion).
• Ireland ranks third in services exports (growth of 20% in 2024), largely because of multinational technology and pharmaceutical firms located there.
• India is a major services exporter (8th, $374 billion), in particular of digitally delivered services (IT and business services), where it ranks 5th ($269 billion).
• For digitally delivered services the leaders are the United States ($707 billion, 15.2%), the United Kingdom ($452 billion, 9.8%) and Ireland ($417 billion, 9.0%, growth +25%).

Long-run trends in world trade

The charts in the data set show several trends. Because the slides present them as graphs, they are summarised in words here (values read from the charts, so approximate).

The chart on tariffs compares the weighted average bound tariff (about 14%), the weighted average MFN applied tariff (just under 4%), and the effectively applied tariff (about 2%). The bound tariff is the maximum rate a WTO member has committed not to exceed; the MFN applied tariff is the rate actually charged to all WTO members that have no preferential agreement; the effectively applied rate also takes preferential rates in trade agreements into account. The difference between the bound and the applied rate is called tariff water (about 12 percentage points in the chart). Tariff water gives governments room to raise tariffs without breaking WTO commitments, which creates uncertainty for traders.

Country trade profiles

The data set ends with WTO trade profiles for Cambodia, China, the European Union, France, Germany, India, Japan, the Russian Federation and the United States (data for 2021 and 2022). Each profile reports GDP, the current account, openness, the composition of exports and imports by product group, and the main partners. Some key features:

The profiles illustrate two points used later: countries export goods in which they are relatively efficient or well endowed (manufactures for China, Japan and Germany, fuels for Russia, clothing for Cambodia), and neighbours and members of the same regional agreement trade intensively with each other.

A Bedtime Story for Grown-ups: the fishing village

The story (a well known parable about globalisation) traces the stages of a village that opens to trade. Each episode corresponds to an economic idea.

The lesson is that trade raises total income but has distributional and institutional consequences. Sustaining openness requires institutions that regulate externalities and compensate losers; if globalisation undermines those institutions, political support for trade erodes, and societies may choose some limits on integration rather than full free trade or full closure.

Free trade? When it suits us (openDemocracy, 2006)

The article argues that rich countries preach free trade to developing countries but turn protectionist when their own interests are threatened. Its main points:

• Economic nationalism in rich countries: France arranged a merger of Suez with Gaz de France to block a takeover by the Italian firm Enel, calling energy strategic; in the United States a Dubai company (DP World) was stopped from running six American ports; the EU threatened tariffs on Chinese shoes after the 2005 "bra wars" over Chinese textile imports.
• Hypocrisy: the same governments welcomed their firms' expansion in poor countries, for example Suez's water operations in Bolivia, where a price increase left many slum residents without clean water.
• The Doha round: the WTO round launched in 2001 was meant to correct imbalances in the trading rules in favour of developing countries. Little was achieved at the Hong Kong ministerial of December 2005 apart from an end date for EU farm export subsidies and a small development package.
• WTO decision making: officially the WTO decides by consensus, unlike the IMF and World Bank where votes follow money. In practice key deals were negotiated in small groups (such as the G6: EU, United States, Australia, Brazil, India, Japan), and at Doha in 2001 poorer delegates who had to leave were counted as agreeing.
• Brazil and India speak for the developing world (Brazil chairs the G20 of developing countries), but also pursue their own priorities: access to EU agricultural markets for Brazil, and freer movement of skilled workers for India.
• Less than full reciprocity: the original Doha mandate allowed developing countries to open their markets more slowly than rich countries, giving them policy space to protect sectors not yet ready for competition. The article claims this principle was being abandoned.
• Distribution of gains: a World Bank projection put the gain for the developing world at only about one cent per person per day; the UN estimated that lost import tax revenue could cost poor countries $63 billion, while industrialised countries would get $96 billion, 83% of the gains.

For the course, the article is an illustration of the political economy of trade policy: governments respond to concentrated producer interests, trade negotiations are shaped by power, and the aggregate gains from trade may be unevenly shared between and within countries. The trade policy chapters explain with welfare analysis why tariffs, quotas and subsidies are nevertheless so common.

How this chapter connects to the rest of Part A

• Why countries trade and whether all gain: the Ricardian model (comparative advantage).
• Who wins and who loses within a country: the specific factors model.
• Movements of people and capital: international factor movements (migration, FDI).
• Why and how governments intervene: tariffs, quotas and export subsidies.