The value of world trade has been growing at a faster rate than world GDP. Asses the factors which might explain this trend. (20) Between 1980 and 2002, world trade has more than tripled while world output (measured in terms of GDP) has only doubled. The rise in trade relative to output is common across countries and regions. Some of this increase can be accounted for by the fact that traded goods have become cheaper over time relative to those goods that are not traded.
However, even in nominal terms the trade to GDP ratio has increased over this period. This means other factors may also be contributing to the phenomenon; one such factor is globalisation. Globalisation has no definitive meaning although it is described by the IMF as "the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology".
As stated by the IMF in their definition, technology has played an integral part in the rise of globalisation. The ascent of communication methods such as the internet and email have allowed firms to become multinational due to the ease and lack of expense of managing a global supply chain efficiently in the twenty-first century. The marginal costs of technology are now close to zero, and thus only fixed costs remain. The ease of communication also enables people to voluntarily cross national trade boundaries.
Many multinationals have utilised the low communication costs to their advantage by offshoring more and more of their operations to countries with lower variable (labour) costs. Production teams may have been moved to China, a relatively new economy to the world of trade, since the cost of production is much lower there and ease of communication allows headquarters (which are usually based in an MEDC) to keep in touch easily. However, it is widely speculated that technology efficiencies have run their course and that few further improvements can be made to the industry.
A key indication is that marginal costs are already near zero. This suggests the breakthrough efficiencies such as wireless internet will not come as frequently, nor be as 'breakthrough', and thus will not have the same effect as before. As a result, world GDP is likely to begin to grow at the same rate as world trade in the future. Another source of the rise of globalisation is the reduction in trade barriers. The World Trade Organisation has sought to reduce the overall level of protectionism in the world economy through successive rounds of negotiations.
Tariffs quotas and subsidies are inconsistent with globalisation, and the WTO has managed to diminish these with significant success, for example Uruguay saw a reduction in tariffs on the average industrial good fall from 6% to 4%. This has stimulated world trade, and hence has meant increased interdependence. This has been heightened by increasing pressure from the Americans through the Washington Consensus. America is a poster country for capitalism with its exports amounting to $1. 3 trillion and imports amounting to $1.
9 trillion in the 2010-2011 fiscal year. A reduction in protectionism creates increased ability to make use of comparative advantage, which is synonymous with greater trade flows. Comparative advantage is where the internal opportunity cost of producing one good in terms of another is lower in one country. Less tariffs aid this as they allow the terms of trade to be more exploitative. Although the rise in trade relative to output is common across countries and regions the relative growth in trade and output varies greatly.
The reductions in tariffs have tended to be on the goods which MEDCs (namely the USA, Japan and the UK) have wanted to export, whilst damaging the trading terms of newly developing countries. This, as well as the poor labour wages exploited by MEDC multinationals, is cited as a factor in the lack of domestic demand in growing economics such as China, which as a result has caused political tension, among other problems. Furthermore, the continuance of retaliatory tariffs as a response to transgressions also indicates the problems with more liberal borders.
A final factor explaining the surprising rate of world trade is the transport developments which have occurred over the last 100 years, particularly in the aviation industry. The internal economies of scale of increased dimensions, reduces average total costs. This is particularly true in NEDCs who previously had poor transport links. Improvements in their infrastructure, combined with fast economic development in these countries have lead to an increase in demand for foreign imports. An example of transportation developments is the Panama Canal, which will reduce the cost of importing goods from China to East America by up to 30%.
Ability to move goods cheaply greatly effects trade since high transport costs can outweigh the benefits received from lower internal opportunity costs, which would result in trade no longer being mutually beneficial for bother countries (there is no comparative advantage). In the future transportation of goods and services could take a step backwards if no feasible alternative to oil is found. Not only are there currently spiralling oil costs due to the political instability of nations holding the oil, but it is a finite resource and thus is going to become more expensive as it grows to be scarce.
Overall, the most significant factor is likely to be the reduction of trade barriers however globalisation cannot occur without all the factors working together. The growth of globalised products and transnational corporations leads to continuation of this sort of economic integration. Nevertheless, the sustainability of the rate of increase for world trade is in doubt, not only because the accuracy of measurements can be questioned but also because the rise of the BRICs may soon mean MEDCs can no longer determine the conditions of trade as they used to.