School of Economics
Flinders University of S.A.
Presented to the International Conference on Trade, Education and Research, organised by the Australian APEC Study Centre, University of Melbourne and Victoria University of Technology and held at University of Melbourne, December 5-6, 1996
Thanks go to Kym Anderson for letting me pilfer his library for back issues of the GATT Annual Reports.
It would appear that during late 1996 the number one economic issue would be international trade policy. With the euphoria and momentum created by the APEC Leaders meeting and the build up towards the First Ministerial Meeting of the World Trade Organisation, international trade issues are front and centre. Forget debt, forget exchange rates, forget deregulation, forget social issues, the focus is on international trade.
The affect of this attention, except for the increasing propensity for academics to do the conference circuit, is that a number of issues that pose considerable challenges to the multilateral trading system have arisen. The uneven implementation of the Uruguay Round, the stalled negotiations in the service sector, as well as the built-in agenda seem to be strangling government bureaucrats. These problems are further compounded by the introduction of a new set of issues that will dominate the trade policy discussions in the next ten years: foreign investment, environment, labour and competition policy. Within the context of this conference the discussion of these issues need to be placed in perspective. Why now? Why is there momentum in the system to expand discussion on trade issues into new areas? The purpose of this paper is to set the stage, or scene, for the discussion on these topics over the next two days.
The paper is organised around the central questions concerning the structure of international trade.
A phrase we hear commonly is that "the global economy is more globalised than it was 50 years ago". What this precisely means has been the source of discussion. In some sense most economists share the common belief that the net effect of globalisation is that the economic significance of national boundaries has deteriorated. As a result, firms have significantly increased their international trade of goods and services, as well as the value and distribution of their portfolio of assets. This is achieved by introducing more stages of production, in order to capitalise on opportunities for specialisation or by seeking new investment opportunities.
In the context of an increase in international trade in goods and services, a simple index that is used is the ratio of international trade in goods and services over production. This is sometimes referred to as an 'openness' index.1 It indicates that a greater share of production is destined for foreign markets, and a greater share of domestic consumption consists of foreign goods and services.
The 'openness' index should be interpreted in a relative context. We know that the absolute value of trade has increased. In 1928 world exports were US$31.7 billion dollars. By 1994 this figure had risen to US$4,215,000.2 The jump looks impressive, but obviously huge price increases would deflate the 1994 figure substantially. This is precisely why a relative measure such as an openness index provides deeper insights into the changing structure of trade.
Figure 1 compares developments in the volume of world merchandise trade and output from 1950-1994. It indicates that in each time period the growth in merchandise trade has outstripped the growth in output. The interesting observation is for the period 1984-1994 where the ratio of trade to output was 2.8. Prior to that period the largest ratio was 1.6 during the 1964-74 period.
When combined the data in figure 1 indicate that the openness index from 1950 to 1994 would have increased. In figure 2 the ratio of trade in goods and services to GDP is graphed for selected regions from 1974-1994. The data is unique in many respects. First, it includes services and not just merchandise trade. Second, it is based on constant dollars and exchange rates, so that it reflects real movements in both trade and output. Third, the graph use logarithmic scales so that movements reflect percentage changes. Fourth, it incorporates all available data on a regional basis.
The Figure shows that there is a distinct upward trend for the world values of exports and imports. This confirms the story that was indicated in figure 1 where the growth rates of trade exceeded the growth rates of outputs. We can conclude unambiguously that international trade has become increasingly important to the world economy.
The figure also yields some interesting observations about the source of the world figures. Asia and North America have almost doubled their figures during the period. For Asia, the interest is in the composition of the aggregate. It includes the dynamic East Asian economies, but also includes other economies, especially some in the South Pacific and South Asia that have not had similar experiences. For North America, the definition is Canada and the United States. These two countries have the largest bilateral trading relationship of any two countries and from figure 2 we can conclude that the importance of trade to these economies continues to increase.
The previous section indicated that trade is now more important, but what is the nature of the transactions? Have these changed?
The short answer is, of course, yes there have been considerable changes over time. These changes reflect in many cases developing technologies which have introduced new goods into markets, such as computers and other electronic items. It also reflects the outcome of policies that have been implemented in many countries which developed comparative advantages and structural changes. Some of these changes we shall observe in the next section when we look at the major players, but here the focus is on the changing composition of international transactions.
Perhaps the most significant change over time has been the growth in services trade. Bora (1996) reviews the developments in factor and non-factor services trade between the 1980 and 1993 period for the APEC region.3 He concludes that as a share of GDP both types of international transactions grew faster than merchandise trade.4 Similar results were also obtained in joint World Bank and UNCTAD study on services. They concluded that "while trade in commercial service expanded at a faster pace than merchandise trade during the 1980s, there was no dramatic increase in the importance of such trade during the 1970-1990 trade" (UNCTAD, 1994) Nevertheless, the trend is still positive and the expansion of trade in services is a development which is changing the structure of world trade.
Figure 3 charts the changes in the share of merchandise exports of fourteen products during the past fourteen years. At an aggregate level the figures translate into quite clear changes. Between 1980 and 1994 the share of agricultural products declined from 14.7% to 11.9%, share of mining products from 27.7% to 10.7% and the increase in manufacturing from 53.9% to 74.3%. These figures point to a clear ascendancy of manufacturing trade and decline in mining products.
At a relatively disaggregated level, the most significant elements of the graph is the decline in the share of fuels from 23% to 7.6% and the increase in office and telecommunication equipment from 4.2% to 11.5%. These two groups have provided the greatest movement in the past five years, as well as in the past decade. Office and telecommunications equipment now almost matches the entire share of agricultural products which is 11.9%.
When observing these changes in product composition it is useful to consider a benchmark year. For our purposes a GATT report in 1958 (GATT, 1958) by a panel of experts addressed the issues of trends in international trade. The focus of the report on trends and issues was almost entirely on the classical distinction between primary and manufacturing products. It had a particular focus on petroleum products. This view began to change somewhat as the share of manufacturing products continued to increase during the post World War II period. In the 1967 GATT report a special study was done on world trade in engineering products. The study says that "During the past 15 years, engineering products have been the most rapidly growing sector of world production and trade" 5The data in figure 3 clearly indicate that the trend has continued during the past fifteen years from 1996. More importantly the decline in fuels.
Tables 1 and 2 provide data on the leading exporters and importers of merchandise trade and commercial services. The results of the table are not surprising to trade policy analysts in the Asia Pacific region.
The top order of the table has been stable over the past two decades with little change in the rank order. Italy has changed slightly to become the sixth rank exporter from ninth ranked. Once we go past the G-7 nations, however, we come across the dynamic Asia Pacific economies. Hong Kong, China, Singapore, Korea and Taiwan are all in the top 15 in 1994, despite not being in the top order in 1973.6
Similarly, what is interesting is the countries that have been displaced. They are all European nations - Denmark, Austria and Sweden. Interestingly enough, Australia was ranked 12th in 1973, but in 1994 was only ranked 21.
When we turn to commercial services we get a similar result. The top order revolving around the G-7 countries has been stable, but there has been a phenomenal rise in the Asia Pacific countries.
In the next two days this conference will focus on a number of trade issues, many of which are new to the trading system. This paper has prepared the background context for these discussions. It has reviewed the changing structure of world trade and highlighted some of the significant changes.
Perhaps the most important development, which is providing the momentum for trade policy is the clear and unambiguous embracement of international economic integration. National borders are becoming less significant in an economic sense, with the growth in international trade in goods and services outstripping the growth in production.
An added dimension to this growth is the fact that the most successful countries, in an economic sense, are the ones who have endorsed open trade policies. They have recognised that enormous contribution that international trade can make to economic growth such as providing jobs, a wider range of consumer goods and greater economic welfare. The task facing trade policy makers in the short and medium term is to ensure that remaining impediments to trade, be they transparent ones such as tariffs, or difficult barriers such as those caused by divergences in domestic standards, or weak competition policies.
In answering our final question on whether or not the pace of globalisation will continue we need to point out the fact that despite the huge increases in trade, substantial impediments still remain. Most of the impetus for the growth in international transactions in the past two decades has been from government policies such as privatisation, deregulation and liberalisation. If the momentum for reducing trade frictions continues and there is success in achieving the APEC Bogor vision, or an accelerated liberalisation in the WTO, then we can be confident that national borders for economic purposes will be completely dissipated.
Bora, B. (1996), "Trade and Investment Developments in APEC: 1980 - 1993", in P. Lloyd and L. Williams (ed.), Trade and Migration in the APEC Region, Melbourne, Oxford University Press.
GATT (1958), Trends in International Trade: A Report by a Panel of Experts, Geneva, GATT Secretariat.
World Trade Organisation (1995), Trends and Statistics in International Trade, Geneva, World Trade Organisation Secretariat.
1. Some economists use the term to refer to the protectionist policies of a country. That is not the context in which the ratio is used in this paper
2. The 1928 figure is obtained from GATT (1958) and the 1994 figure from WTO (1995). The 1928 figure does not include Russia, or mainland China. Given the time difference the figures are also not strictly comparable because of differences in collection methodology.
3. Factor services refer to income received from the cross-border movement of factors such as investment income for the movement of capital and wages paid to non-resident workers for the movement of labour. Non-factor services refer to other services such as shipment, transportation and travel.
4. The most significant expansion in international integration, however, was in foreign direct investment.
5. GATT (1958), page 31.
6. For exports only.
At its presentation this paper was illustrated by three figures and a table which have not been reproduced here. These illustrations were all from World Trade Organisation (1995), Trends and Statistics in International Trade as follows
Figure 1 Growth of merchandise trade relative to production, 1950-1994
Figure 2 Ratio of Goods and services to production, 1974-1994
Figure 3 Share of merchandise trade by product, 1980-1994
Table 1 Leading exporters and importers of world merchandise trade, 1973 and 1994
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