Foreign Trade Dersi 1. Ünite Özet

Introduction

The change of goods among individuals is as old as human history. However, the history of international trade which refers to an exchange of goods and services among different nations dates back to the end of the Medieval Time in Europe. This period of time leads to the birth of nation states. The philosophers of that time studied on the function of the international trade for the nation states.

Today, many centuries after the Medieval Time, the study of international trade has still been keeping its importance within the scope of global economy. The studies no longer concern the functions but the effects of international trade on the economy as a whole.

Essentially, the tremendous increase in the literature of international trade is due to the rise of international transactions within our daily life. Most of us probably do not realize the huge volume of international transactions that we meet within an ordinary day.

The Scope of International Economics

There is no doubt that the discipline of international economics, like all the other branches of economics, tries to take optimal decisions under the constraint of scarce factors. Essentially, the behaviors of the individuals are more or less the same in international transactions as they are in the national economy.

The decisions on international transactions not only affect employment, income distribution, prices, economic development, growth, and welfare of the national economy but also the world economy as a whole. This interaction between a national economy and world economy justifies the importance of the discipline of international economics on its own.

Key Terms and Concepts of International Trade

International trade which constitutes one of the two main parts of international economics has its own key words and concepts. Although they are mostly well-known, it’d be useful to give their precise meanings so as to provide conformity and consistency throughout the chapters.

Volume of trade: Defining the key terms and concepts has to start with the term volume of trade. Volume of trade gives the total amount of imports and exports. Imports are the goods or services that are bought from a foreign country while exports refer to the goods or services that are sold to a foreign country. Thus, balance of trade gives the difference between total imports and total exports. If total imports are more than the total exports within an economy, then there is a trade deficit. On the other hand, when total exports exceed total imports, it means that there is a trade surplus.

Terms of trade: Another key term which is used within the scope of international trade is terms of trade. Terms of trade of a nation are found by the ratio of the price index of its exports to the price index of its imports. If this ratio is to be expressed in percentage, it is multiplied by hundred. These terms of trade can also refer to commodity terms of trade or net barter terms of trade.

Pattern of trade: Pattern of trade or in other words the composition of trade, is another key term used in international trade analysis. Pattern of trade refers to exported and imported commodities of each nation. In conjunction with the growth of world economy, pattern of trade has also changed, reflecting the ongoing structural transformation.

Due to the decrease in transportation costs, most of the non-traded commodities of the past are the traded commodities of today. Homogeneous commodities are traded only if the pretrade price difference in the two trading countries exceeds the transportation costs.

Trade Restrictions: Although the theory of international trade postulates that free trade maximizes the world output and gains of the trading partners, almost all the countries restrict their international trade. Actually, trade restrictions are part of the trade policy of all countries, or in other words, they are the trade policy instruments.

Foreign exchange rate: International trade as well as international investments entail currency of the foreign country which is dealt with. The exchange of national currency with foreign currencies is done at the foreign exchange market. It is the price of a national currency in terms of another currency.

World Trade Outlook at a Glance

As discussed in the previous part, the pattern of trade is not static. Not only the technological improvements but also the changes within the consumer preferences might lead to structural changes within the world trade. On the other hand, the volume of trade can easily be affected by economic instabilities and turmoil.

At times of crises, the countries tend to implement protectionist trade policy so as to combat with the negative economic consequences. The instruments to implement protectionist trade policy are tariffs, quotas, and non-tariff restrictions like export subsidies, product standards, antidumping duties, etc.

In 2017, the top trading countries in merchandise trade are China, the US, and Germany. In total exports, China is the leader but in total imports it is the US while the position of Germany is the same in both rankings, the third. Among the regional and economic blocks, the European Union (EU) remained the most dynamic economic integration, accounting for a one-third of the total world exports in 2017.

A few words should be spelt on e-commerce. Global ecommerce amounted up to US $ 27.7 trillion in 2016 from US $ 19.3 trillion in 2012. Business-to-business (B2B) ecommerce was six times larger than the business-toconsumer (B2C) e-commerce in 2016.

The Effects of Technological Improvements on International Trade

The world has been tremendously changing, driven by the technological improvements. Certainly, these technological improvements not only affect our way of living but also the way of doing business.

Essentially, technology has always taken a prominent role in shaping international trade. Since the invention of the wheel, technology has been affecting not only the volume but also the pattern of trade.

We have been experiencing an unprecedented technological improvement along with the speedy spread of internet. Yet, we have been getting familiar with the new terms and new ways of doing business and trade in conjunction with these swift developments.

Technological advances, we have been responding the challenge of the digital economy. Next to a wide range of facilities, digital economy introduces us with a number of concerns, including the loss of privacy, security threats, marketing management and the question of whether digital economy ensures an increase in productivity.

Digital economy affects the international trade via new instruments. These new instruments have the potential of altering not only the way of trading and the profile of traders but also the commodities being traded. Main instruments of the digital economy which have started to affect the international trade are the Internet of Things, Artificial Intelligence, 3D Printing and Blockchain.

Digital economy induced by technological improvements has been altering the purchasing habits and the way of doing business. Certainly, these changes have been affecting international trade, as well. As mentioned before, global e-commerce has been increasing. Nevertheless, technological improvements not only pave the way to the increased global e-commerce but also create new opportunities that are mostly hard to realize today.

Recent studies anticipate that technological improvements may reduce trade costs. Before talking about trade cost reducing impacts of technological improvements, it’d be better to analyze the ingredients of the trade costs. Actually, trade costs are classified into five categories, namely transport costs, logistic costs, border crossing costs, information and transaction costs, and trade restriction costs.

Transports costs, logistic costs and border crossing costs are the costs of delivering the goods from producers to consumers. They embrace the costs of cargo loading, shipping, storage and compliance with the customs procedures.

Information and transaction costs include collecting information about the demand preferences of the consumers, searching for new trade partners and regulations about new trading countries. It also includes the contracting costs. Among all these costs, information and transaction costs are usually quite high due to the difficulties of making a new market research.

In spite of the negative welfare effects, most of the countries impose trade restrictions on their international trade today. Although there are many different types, trade restrictions are mostly analyzed into two groups, namely tariffs and nontariff restrictions. Regardless of their type, all the trade restrictions serve as barriers on free trade and thus increase trade costs.

According to the WTO calculations based on the 2014 data, transport costs of the goods account for 37 percent of the total trade costs. Information and transaction costs follow the transport costs with a percentage of 25. The other costs have more or less similar percentages like 10 percent each. The minimum share goes to the border crossing costs with a percentage of 5.

Along with the reductions within the trade costs, technological improvements are altering the pattern of trade. The importance of the services trade has been increasing. Recent studies show that greater internet usage rises the services trade, both in exports and imports terms.

Regarding the trade in goods, technological improvements have the capacity to change the location and the way of the production of some goods that can easily be replaced by digitizable subsidiaries. A number of examples can be given in this respect:

Printed books have been replaced by e-books, newspapers have been replaced by news applications, video and computer games are now downloadable. In time, as the cost of 3D printing declines, the pattern of trade will be changed fundamentally.

Due to the changes in the pattern of trade, the basis of the comparative advantage of the trading countries will be changed, as well. The level and usage of the technological improvements would most probably be the new basis of comparative advantage of the trading countries.

It’d be interesting to see technology as the determinant of comparative advantage, which was excluded from the international trade theory analysis for years.

Heckcsher-Ohlin Theory developed upon the Classical Trade Theory takes the differences within the labor and capital endowments as the basis of the comparative advantage. Post- HeckcsherOhlin models mostly comprise of the economies of scale, imperfect competition, geography, time lags on imitation and the differences in technology.

Although new models embrace the technology usage, they cannot foresee the effects of the AI or the robotics as the substitutions of labor. Thus, the impacts of technological improvements on the productivity of labor and capital will pave the way to the enhancement of the international trade theory as a whole.

In spite of the rapid and dizzy technological improvements, their reflections on the international trade theory are relatively slow. Theory evolves upon real life occurrences. Therefore, we, the economists, still analyze the theory as far as the common trade implementations allow.