7.

2 – Globalization and International

Trade
Author: Dr. Jean-Paul Rodrigue
International trade is an exchange of goods or services across national jurisdictions.
Inbound trade is defined as imports, and outbound trade is defined as exports.
International trade is subject to the regulatory oversight and taxation of the involved
nations, namely through customs.

1. The Flows of Globalization

In a global economy, no nation is self-sufficient, which is associated with specific flows
of goods, people, and information. Each nation is involved at different levels in trade to
sell what it produces, acquire what it lacks, and produce more efficiently in some
economic sectors than its trade partners. International trade, or long-distance trade, has
taken place for centuries, with some ancient trade routes predating history. Trade is an
important part of economic and cultural history, as ancient trade routes such as the Silk
Road can testify. Historically, trade was limited both by the demand and the capacity to
transport cost-effectively goods having a market value at the destination. Commercial and
technological developments have allowed trade to occur at an ever-increasing scale
over the last 600 years. By the mid-19th century, trade was taking an increasingly active
role in the economic life of nations and regions, and after the mid-20th century, trade
became an active tool of economic globalization.
The Flows of Globalization

The Silk Road and Arab Sea Routes

Major Global Trade Routes, 1400-1800

International trade is an expansion of the market (or exchange) principle at a scale

beyond the region or the nation. It should be taking place only if there is a benefit for the
partners involved, underlining that the rationale for trade can be a convenience but also
a necessity. It is for convenience, as supported by conventional economic theory, when
trade promotes economic efficiency by providing a wider variety of goods, often at lower
costs. This is because of specialization, economies of scale, and related comparative
advantages. Trade is a necessity when it enables a nation to acquire goods that would
otherwise not be available in a national economy, such as energy, raw minerals, or even
agricultural goods. However, the benefits of trade can be subject to contention with
several theoretical foundations of international trade have been articulated to explain its
rationale:

 Mercantilism. A trading system where a nation tried to impose a positive trade

balance (more exports than imports, particularly value-wise) on other nations to
favor the accumulation of wealth. This system was prevalent during the colonial
era and often undertaken by charter companies receiving a monopoly on trade.
Mercantilism represents the antithesis of free trade since trade relations are
controlled and aligned to benefit one partner at the expense of others, implying
that what can be traded, the conditions and the partners involved are regulated.
Still, mercantilism established the foundations of a global trading system, albeit an
unequal one.
 Neomercantilism. A more recent trade system, which like mercantilism, leans on
establishing a positive trade balance to meet economic development goals through
control of the cost structure. Export-oriented strategies can be considered a form
of neomercantilism, particularly if a government puts forward an incentive and
 subsidy system (e.g. free trade zones), which confers additional advantages to the
factors of production. Neomercantilism can also be a response by some
governments to the competitive and disruptive consequences of free trade,
particularly if the trade partners are engaged in neo-mercantilist strategies. The
outcomes are tariff and non-tariff measures regulating trade and protecting
national commercial sectors, which are forms of protectionism. Therefore, neo-
mercantilist strategies can be controversial and subject to contention.
 Absolute advantages. A free trade mechanism relying on a nation (or a firm)
being able to produce more effectively in an economic sector while using fewer
resources (e.g. capital, labor) than any other potential competitors. Therefore It has
an absolute advantage. Global efficiency can thus be improved with trade as a
nation can focus on its absolute advantages, trade its surplus, and import what it
lacks. The drawback of this perspective is that, in theory, nations having no
absolute advantages should not be involved in trading since they may have little to
gain from it. Absolute advantages tend to be an enduring characteristic,
particularly for resources such as energy. Large producers keep an advantage as
long as a resource is available or has a market.
 Comparative advantages. Even if a nation (or a firm) has absolute advantages
over a wide array of economic sectors, it can focus on the sectors it has the highest
comparative advantages (the difference between its production costs and those of
its competitors) and import goods in sectors it has less comparative advantages.
Comparative productivity increases the total production level since even if a
nation (or a firm) has no absolute advantages, it can focus on sectors where the
total productivity gains are the most significant. Comparative advantage can also
be the outcome of economies of scale applied to a product or sector where the
resulting lower costs provide competitiveness. Comparative advantages tend to be
a temporary characteristic, that can change with the evolution of labor costs and
technology.
 Factor endowments. Expands the perspective of the comparative advantages by
underlining that trade is related to the factor endowments of a nation, the most
basic being capital, land, and labor. A nation will export goods to which it has
notable factor endowments and import goods to which it has scarce factor
endowments. As such, nations that have low-cost labor available will focus on
labor-intensive activities, while nations having high capital endowments will focus
on capital-intensive activities. Factor endowments can be improved through
capital and human resources investments.
The Rationale for Trade
Dutch East India Company, Trade Network, 18th Century

Economic Rationale of Trade

Absolute and Comparative Advantages

The globalization of production is concomitant to the globalization of trade as one

cannot function without the other. This process has been facilitated by significant
technical changes in the transport sector. The scale, volume, and efficiency of
international trade have all continued to increase since the 1970s. As such, global
space/time convergence was an ongoing process that implied a more extensive market
coverage that could be accessed in a lower amount of time. It has become increasingly
possible to trade between parts of the world that previously had limited access to
international transportation systems. Further, the division and the fragmentation of
production that went along with these processes also expanded trade. Trade thus
contributes to lower manufacturing costs.

Without international trade, few nations could maintain an adequate standard of living,
particularly those of smaller size. With only domestic resources being available, each
country could only produce a limited number of products, and scarcity would be
prevalent. Global trade allows for an enormous variety of resources – from Persian Gulf
oil, Brazilian coffee to Chinese labor – to be made more widely accessible. Each item
being traded is subject to an internationally recognized classification (called Standard
International Trade Classification; SITC), allowing nations to clearly identify the goods
and the extent they are subject to tariffs and duties. Clear categorization also facilitates
the distribution of a wide range of manufactured goods that are produced in different
parts of the world to global markets. Wealth becomes increasingly derived through the
regional specialization of economic activities. This way, production costs are lowered,
productivity rises, and surpluses are generated, which can be transferred or traded for
commodities that would be too expensive to produce domestically (convenience) or
would simply not be available (necessity). As a result, international trade decreases the
overall costs of production. Consumers can buy more goods from the wages they earn,
and standards of living should, in theory, increase.

International trade demonstrates the extent of globalization with increased spatial

interdependencies between elements of the global economy and their level of integration.
These interdependencies imply numerous relationships where flows of capital, goods,
raw materials, people, and services are established between regions of the world.
International trade is also subject to much contention since it can, at times, be a disruptive
economic and social force. It changes the conditions in which wealth is distributed within
a national economy, particularly due to changes in prices, wages and employment
sectors. One challenge concerns the substitution of labor and capital. While in a simple
economy, labor and capital (infrastructures) can be reconverted to other uses, in complex
economies, labor and capital cannot be easily reallocated. Therefore, trade can, at the
same time, lead to more goods being available at a lower price, but with enduring
unemployment and decaying infrastructures (unused factories and real estate). In turn,
this can incite economies to adopt protectionist policies since this transition is judged to
be too disruptive.

Days Required to Circumnavigate the Globe

Standard International Trade Classification (SITC)

Economic Integration and Interdependencies

Favorable and Contentious Factors in International Trade

2. The Setting of the Contemporary Global

Trade System
International trade, both in terms of value and tonnage, has been a growing trend in the
global economy. It is important to underline when looking at the structure of global trade
that it is not nations that are trading, but mainly corporations with the end products
consumed in majority by individuals. A nation is simply a regulatory and jurisdictional
unit where data is collected since freight crossing boundaries are subject to customs
oversight and tabulated as trade flows. Inter and Intra corporate trade takes place across
national jurisdictions is accounted for as international trade. The emergence of the current
structure of global trade can mainly be articulated within three major phases:

 First phase (immobile factors of production). Concerns a conventional

perspective on international trade that prevailed until the 1970s, when factors of
production were much less mobile. Prior to the end of World War I, global trade
was mainly structured by colonial relations but was fairly unregulated. There was
a limited level of mobility of raw materials, parts, and finished products.
Developments in transport technology in the shipping and rail sectors allowed for
greater volumes and distances to be covered. After World War I, international
trade became fairly regulated with impediments such as tariffs, quotas, and
limitations to foreign ownership. Trade mainly concerned a range of specific
products, namely commodities (and very few services) that were not readily
available in regional economies. Due to regulations, protectionism, and relatively
 high transportation costs, trade remained limited and delayed by inefficient freight
distribution. It was challenging to coordinate production and distribution. In this
context, trade was more an exercise to cope with scarcity than to promote
economic efficiency.
 Second phase (mobility of factors of production). From the 1970s to the 1990s,
the mobility of factors of production, particularly capital, became possible. The
legal and physical environment in which international trade was taking place leads
to a better realization of the comparative advantages of specific locations.
Concomitantly, regional trade agreements emerged, and the global trade
framework was strengthened from a legal and transactional standpoint
(GATT/WTO). In addition, containerization provided the capabilities to support
more complex, and long-distance trade flows, as did the growing air traffic. Due to
high production (legacy) costs in old industrial regions, activities that were labor-
intensive were gradually relocated to lower costs locations, which came to be
known as offshoring. The process began nationally, then went to nearby countries
when possible, and afterward became a truly global phenomenon. Thus, foreign
direct investments surged, particularly towards new manufacturing regions, as
multinational corporations became increasingly flexible in the global positioning
of their assets. The trade of finished and intermediate goods surged.
 Third phase (global value chains). There is a growth in international trade, now
including a wide variety of services that were previously fixed to regional markets
and a surge in the mobility of the factors of production. Since these trends are well
established, the priority is shifting to the geographical and functional integration of
production, distribution, and consumption with the emergence of global value
chains. Complex networks involving flows of information, commodities, parts,
and finished goods have been set, which in turn demands a high level of command
of logistics and freight distribution. In such an environment, powerful actors have
emerged who are not directly involved in the function of production and retailing,
but mainly take the responsibility of managing the web of flows. International
trade becomes increasingly supported by digital technologies allowing for more
efficient transactions, compliance with regulations, and the management of the
transportation and logistics assets supporting trade.

The global economic system is thus characterized by a growing level of integrated

services, finance, retail, manufacturing, and distribution. This is mainly the outcome
of improved transport and logistics, more efficient exploitation of
regional comparative advantages, and a transactional environment supportive of the
legal and financial complexities of global trade. International trade requires a full array of
services related to distribution and transactions. The volume of exchanged goods and
services between nations is taking a growing share of the generation of wealth, mainly by
offering economic growth opportunities in new regions and by reducing the costs of a
wide array of manufacturing goods. By 2007, international trade surpassed for the first
time 50% of global GDP, a twofold increase in its share since 1950. This share has
fluctuated since but remains in the 45-50% range.

Changes in the Global Trade Environment

Trade, Connectivity and Spatial Inequalities

World Merchandise Trade, 1960-2021

3. Trade Costs and Facilitation

Trade facilitation involves how the procedures regulating the international movements
of goods can be improved so that actors involved in international trade have move
efficient formalities.

For regulatory authorities, trade facilitation improves their effectiveness as well as

reduces the risk of customs duty evasion. It relies on the reduction of the general costs of
trade, which considers transaction, tariff, transport, and time costs, also known as
the “Four Ts” in international trade. These trade costs are derived from two main sources:

 Separation factors. These are usually exogenous factors separating two trade
partners, such as distance, transportation costs, travel time, as well as common
attributes shared by trade partners. These usually involve being part of an
economic agreement (e.g. a free trade zone), which is facilitated when partners
have a common boundary.
 Country-specific factors. Relates endogenous to factors that are either related to
the origin or the destination of trade. This usually involves customs procedures
(tariff and non-tariff factors), the overall performance of the national transport and
logistics sector, and how well an economy is connected to the international
transport system through its gateways (mostly ports and airports).

United Nations estimates have underlined that for developing countries, a 10% reduction
in transportation costs could be accompanied by a growth of about 20% in international
and domestic trade. Thus, the ability to compete in a global economy is dependent on the
transport system as well as a trade facilitation framework that includes measures related
to economic integration, the capabilities of international transportation systems, and the
ease of negotiating and settling transactions.

The “Four Ts” in International Trade

The Main Dimensions of Trade Facilitation

Customs Fraud by Misclassification of Goods

Regional Averages in Trading Across Borders, 2012

Levels of Economic Integration

The quality, cost, and efficiency of trade services influence the trading environment as
well as the overall costs linked with the international trade of goods. Many factors have
been conducive to trade facilitation in recent decades:

 Integration processes, such as the emergence of economic blocks and the

decrease of tariffs at a global scale through agreements, promoted trade
as regulatory regimes were harmonized. One straightforward measure of
integration relates to custom delays, which can be a significant trade impediment
 since it adds uncertainty to supply chain management. The higher the level of
economic integration, the more likely the concerned elements are to trade.
International trade has consequently been facilitated by a set of factors linked with
growing levels of economic integration, the outcome of processes such as the
European Union or the North American Free Trade Agreement. The transactional
capacity is consequently facilitated by the development of transportation networks
and the adjustment of trade flows that follows increased integration. Integration
processes have also taken place at the local scale with the creation of free zones
where an area is given a different governance structure in order to promote trade,
particularly export-oriented activities. In this case, the integration process is not
uniform, as only a portion of an area is involved. China is a salient example of the
far-reaching impacts of the setting of special economic zones operating under a
different regulatory regime.
 Standardization concerns the setting of a common and ubiquitous frame of
reference over information and physical flows. Standards facilitate trade since
those abiding by them benefit from reliable, interoperable, and compatible goods
and services, which often results in lower production, distribution, and
maintenance costs. Measurement units were among the first globally accepted
standards (metric system), and the development of information technologies
eventually led to common operating and telecommunication systems. It is,
however, the container that is considered to be the most significant international
standard for trade facilitation. By offering a load unit that can be handled by any
mode and terminal with the proper equipment, access to international trade is
improved.
 Production systems are more flexible and embedded. It is effectively productive
to maintain a network of geographically diversified inputs, which favors
exchanges of commodities, parts, and services. Information technologies have
played a role by facilitating transactions and the management of complex business
operations. Foreign direct investments are commonly linked with the globalization
of production as corporations invest abroad in search of lower production costs
and new markets. China is a leading example of such a process, which went on par
with the growing availability of goods and services that can be traded on the
global market.
 Transport efficiency has increased significantly because of innovations and
improvements in the modes and infrastructures in terms of their capacity and
throughput. Ports are particularly important in such a context since they are
gateways to international trade through maritime shipping networks. As a result,
the transferability of commodities, parts, and finished goods has improved.
Decreasing transport costs does more than increase trade; it can also help change
the location of economic activities. Yet, transborder transportation issues remain
to be better addressed in terms of capacity, efficiency, and security.
 Transactional efficiency. An international trade transaction can generate up to 27
documents, nine of which are related to the transfer of possession from the seller
 to the carrier and to the beneficial cargo owner. The financial sector also played a
significant role in integrating global trade, namely by providing investment capital
and credit for international commercial transactions. For instance, a letter of
credit may be issued based upon an export contract. An exporter can thus receive a
payment guarantee from a bank until its customer finalizes the transaction upon
delivery. This is particularly important since the delivery of international trade
transactions can take several weeks due to the long distances involved. Recent
efforts towards digitalization are further pushing towards higher levels of
transactional efficiency since documentation is in digital format. During a transfer,
it is also common that the cargo is insured in the event of damage, theft, or delays,
a function supported by insurance companies. Also, global financial systems allow
for currency exchanges according to exchange rates that are commonly set by
market forces. In contrast, some currencies, such as the Chinese Yuan, are
influenced by policy. Monetary policy can thus be a tool, albeit contentious, used
to influence trade.

All these measures are expected to promote the level of economic and social
development of the concerned nations since trade facilitation relies on the expansion of
human, infrastructure, and institutional capabilities.

Impacts of Economic Integration Processes on Networks and Flows

China’s Special Economic Zones

Value of Chinese Exports and FDI, 1983-2021 (Billions of $US)

Yuan Exchange Rate (per USD), 1981-2022 (Monthly)

4. Global Trade Flows

The nature of what can be considered international trade has changed, particularly with
the emergence of global value chains and the trade of intermediary goods they involve.
This trend obviously reflects the strategies of multinational corporations positioning their
manufacturing assets in order to lower costs and maximize new market opportunities.
About 80% of the global trade takes place within value chains managed by multinational
corporations. International trade has thus grown at a faster rate than global merchandise
production, with the growing complexity of distribution systems supported by supply
chain management practices. The structure of global trade flows has shifted, with many
developing economies having growing participation in international trade with an
increasing share of manufacturing.

Globalization has been accompanied by growing flows of manufactured goods and

their growing share of international trade. The trend since the 1950s involved a relative
decline in bulk liquids (such as oil) and more dry bulk and general cargo being traded.
The share of fuels in international trade tends to fluctuate in accordance with changes in
energy demand and prices. Another emerging trade flow concerns the increase in the
imports of resources from developing economies, namely energy, commodities, and
agricultural products, which is a divergence from their conventional role as exporters of
resources. This is indicative of economic diversification as well as increasing standards
of living. However, significant fluctuations in the growth rates of international trade are
linked with economic cycles of growth and recession, fluctuations in the price of raw
materials, as well as disruptive geopolitical and financial events.
Changes in the Value World’s Merchandise Trade, Production and GDP, 1950-2021

Global Trade, 2017

Share of Product Groups in World Merchandise Trade, 1900-2020

Merchandise Exports by Trade Agreement, 2015

Share of World Goods Exports, Leading Exporters, 1950-2021

Share of Merchandise Exports by Region, 1948-2021

The geography of international trade remains dominated by a few large economic

blocs, mainly in North America, Europe, and East Asia, which are commonly referred to
as the triad. Alone, the United States, Germany, and Japan account for about a quarter of
all global trade, with this supremacy being seriously challenged by emerging economies.
Further, G7 countries account for half of the global trade, a dominance that has endured
for over 100 years. A growing share is being accounted for by the developing economies
of Asia, with China accounting for the most significant growth both in absolute and
relative terms. Those geographical and economic changes are also reflected in trans-
oceanic trade, with the Trans-Pacific trade growing faster than the Trans-Atlantic trade.
Neo-mercantilism is reflective of global trade flows as several countries have been
actively pursuing export-oriented economic development policies using infrastructure
development, subsidies, and exchange rates as tools. This strategy has been followed by
developing economies and is associated with growing physical and capital
flow imbalances in international trade. This is particularly reflected in the American
container trade structure, which is highly imbalanced and has acute differences in the
composition of imports and exports. A large share of these imbalances was the outcome
of the fiscal policies of exporting countries purchasing American financial instruments,
such as bonds. This enabled the US dollar to uphold its value and purchasing power.

Imbalances can also be misleading as products are composed of parts manufactured in

several locations with assembly often taking place in low-cost locations and then
exported to major consumption markets. In international trade statistics, a location
assumes the full value of finished goods imported elsewhere while it may have only
contributed to a small share of the total added value. Electronic devices are illustrative of
this issue. Trade imbalances also do not reflect well the utility an economy derives from
it, such as cheaper goods for consumers. Further, the growth of e-commerce has resulted
in new actors being involved in international trade, at times indirectly. For instance,
ordering a product online may result in an international trade transaction controlled by a
single corporation.

World’s 20 Largest Exporters and Importers of Goods and Services, 2015-2020

Value Creation and Capture, iPhone 4

Regionalization has been one of the dominant features of global trade as the bulk of
trade has a regional connotation, promoted by proximity and the setting of economic
blocs such as NAFTA and the European Union. The closer economic entities are, the
more likely they are to trade due to lower transport costs, fewer potential delays in
shipments, common customs procedures, and linguistic and cultural affinities. The most
intense trade relations are within Western Europe and North America, with a more recent
trend involving trade within Asia, particularly between Japan, China, Korea, and Taiwan,
as these economies are getting more integrated.

5. Global Trade at a Threshold?

At the beginning of the 21st century, the flows of globalization have been shaped by five
salient trends:

 The ongoing growth of international trade, both in absolute terms and in

relation to global national income, appears to be leveling off. From 1980 to
2020, the value of exports has grown by a factor of 8.9 times if measured in
current dollars, while GDP increased 7.4 times and the population increased 1.7
times. Since the 2010s, international trade appears to be leveling and subject to
more volatility.
 A substantial level of containerization of commercial flows, with container
throughput growing in proportion with global trade. Containerization tends to
grow at a rate faster than that of trade and GDP. This has been associated with the
setting of intermodal transport chains connecting exporters and importers.
 A concentration of finished goods exports in a limited number of producing
countries. For instance, 79% of the provision of computer equipment and 75% of
the phones is accounted by five countries. The level of concentration is lower for
intermediate goods, underlining an active trade of parts within supply chains. For
 imports, the destinations tend to be much more diversified, reflecting an existing
demand irrespective of the origin of the products.
 A higher relative growth of trade in emerging economies, particularly in Pacific
Asia that focus on export-oriented development strategies that have been
associated with imbalances in commercial relations.
 The growing role of multinational corporations as vectors for international
trade, particularly in terms of the share of international trade taking place within
corporations and the high level of concentration of their head offices.

The World’s 20 Largest Corporations by Revenue, 2019

Global Trade and Container Throughput (1970=100)

Trade Within and Between Corporations

World’s Most Traded Goods, Lead Exporter and Concentration, 2016

US-China Tariffs, 2018-2022

The Four Industrial Revolutions

Still, many challenges are impacting future developments in international trade and
transportation, mostly in terms of demographics, politics, supply chain, energy, and
environmental issues. While the global population and its derived demand will continue
to grow and reach around 9 billion by 2050, demographic changes such as the aging of
the population, particularly in developed economies, will transform consumption patterns
as a growing share of the population shifts from wealth-producing (working and saving)
to wealth consuming (selling saved assets). Demographic trends in North America,
Europe, and East Asia (e.g. Japan, South Korea, Taiwan) may not place them as drivers
of global trade, a function they have assumed in recent decades. The demographic
dividend in terms of peak share of the working-age population that many countries
benefited from, particularly China, will recede. This has ramifications on both the
demand side (consumption structure) and the production side (workforce).

The regulatory environment and the involvement of governments, either directly or

indirectly, are subject to increasing contention. Reforms in agricultural trade have not
been effectively carried on, implying that many governments (e.g. in the EU) provide
high subsidy levels to their agricultural sectors, undermining the competitiveness of
foreign agricultural goods. This is undertaken with the intent to protect their agriculture,
considering the risks associated with dependency on foreign providers and possible
fluctuations in prices. Intellectual property rights remain a contentious issue as well since
many goods are duplicated, undermining the brands of major manufacturers and retailers.
There is also a whole array of subsidies that influence the competitiveness of exports,
such as low energy and land costs and tax reductions. The rise of protectionist policies, as
exemplified by higher tariffs imposed by the American government on several Chinese
goods in 2018, is underlining a contentious trade environment this is likely to endure.

As both maritime and air freight transportation depend on petroleum, international trade
remains influenced by fluctuations in energy prices. The paradox has become that periods
of high energy prices usually impose a rationalization of international trade and its
underlying supply chains. However, periods of low or sharply declining energy prices,
which should benefit international transportation, are linked with economic recessions.
Environmental issues have also become more salient with the growing tendency of the
public sector to regulate components of international transportation that are judged to
have negative externalities. International trade enables several countries to mask their
energy consumption and pollutant emissions by importing goods that are produced
elsewhere and where environmental externalities are generated. Thus, international trade
has permitted a shift in the international division of production, but also a division
between the generation of environmental externalities and the consumption of the goods
related to these externalities.

Technological changes are impacting the nature of manufacturing systems

through robotization and automation. The ongoing fourth industrial revolution is
changing input costs, particularly labor. Since a good share of international trade is the
result of the convenience of comparative advantages, automation and robotization can
undermine the standard advantages of lower labor costs and make manufacturing more
productive at other locations, such as those closer to major markets. Further, since many
developing economies remain complex places to undertake business as state and national
firms are privileged, the loss of labor cost advantages could undermine future
development prospects. This is likely to have a strong influence on the nature and volume
of international trade, which could level and even regress. If this is the case, absolute
advantages, such as resources, would play a greater influence on trade, as was the case
before the 1970s.