developing countries constitute two thirds of the WTOs membership the rise in numbers and significance of non state actors (NSAs) has also confirmed their role in shaping the worlds economic

For more specifically, the paper progressively introduces the following sections: • Section 1 provides a broad context for the analysis with some discussion of thetheory of international

The world trade pattern has never been the same as it used to be 100 years ago Back tothe past, it is the world that the most developed countries would have the voice in manyimportant decisions, global economy policies, political issues of other countries, forinstances

Fifteen years have passed since the entry into force of the Marrakesh AgreementEstablishing the World Trade Organization (WTO) During this time, the traditionalactors – namely, the United States, Japan, the European Union and Canada (the originalQuad) – have retained much of their leading role on the economic and political scene

While their influence on world affairs is irrefutable, over the years, their dominance haswaned Since 1995, the world has undergone major geopolitical changes and haswitnessed the rise of new state actors, who have asserted their own role in shaping theworld's economic and political environment Today, developing countries constitute twothirds of the WTO's membership The rise in numbers and significance of non-stateactors (NSAs) has also confirmed their role in shaping the world's economic and politicalenvironment

It is partly to admit, which many people may tell you, the growth of developingeconomies and the globalization trend have transformed the word trade sharply

However, that is not the whole story while there are more This assignment will bring you

a new point of view about what help shape the world trade pattern, how those factorsaffect it and some predictions of the writers about the future of the global trade

The world economy is currently striving to recover from its deepest economic crisis sincethe 1930s The crisis led to an unprecedented contraction in trade flows that stands incontrast to the process of economic integration and the significant expansion of tradeexperienced since the Second World War This expansion was partly driven by theprocess of globalization that rested on increased economic inter-dependence amongnations, which was stimulated by a combination of technological advances, economicpolicy reforms, and geopolitical changes

The new geopolitical environment, as well as the financial crisis, are factors that haveaffected international trade in different ways The development of new technologies hasalso contributed towards shaping international trade by changing the way business isconducted and the way people interact The rapid development of technology hasgenerated both new challenges and new opportunities for economic agents worldwide

What are the main economic, political and technological factors shaping world trade?

There are, definitely, enormous works of thousands of economists in the worldconsidering about this topic Understanding well what factors are determining world trademay help not only them but policy makers, businessmen… to make the right decision toearn profit and gain from world trade This assignment cannot cover all potential forcesaffecting the shaping of world trade It only looks at three major elements contributing tothe transformation of the world trade, especially in last decade

For more specifically, the paper progressively introduces the following sections:

• Section 1 provides a broad context for the analysis with some discussion of thetheory of international trade;

• Section 2 mainly describes the economical factors, namely Preferential TradeAgreements, Global production networks, Growth of developing countries

• Section 3 concentrates on how the development of Internet, International PaymentSystem and Transportation, called Technological factors, influences that of World trade.

• Section 4 illustrates the impacts of Globalization trend, WTO and local policies

by analyzing some situations and decisions that shape the global trade

TABLE OF CONTENTS

AbstractIntroductionChapter 1: Overview of theories of international trade 5

I Classical theories of international trade 5

2 The absolute advantage 5

3 The comparative advantage 6

4 Factor proportions theory 6

II New theories of international trade 7Chapter 2: Analyzing factors affecting the world trade pattern 12

1 Preferential trade agreements 12

2 Global production networks 15

3 Growth of developing countries 17

II Technological factors 20

2 Globalization trend and World Organization's influences 27

IV Forecast about the future of world trade pattern 29

ReferenceDuty chart

CHAPTER 1: OVERVIEW OF THEORIES OF INTERNATIONAL TRADE

 Classical theories of international trade

 Mercantilism (William Petty, Thomas Mun and Antoine de Montchrétien

model)

Mercantilism is a philosophy from about 300 years ago The base of this theory was the

“commercial revolution”, the transition from local economies to national economies,from feudalism to capitalism, from a rudimentary trade to a larger international trade

Mercantilism was the economic system of the major trading nations during the 16th,17th, and 18th century, based on the premise that national wealth and power were bestserved by increasing exports and collecting precious metals in return It superseded themedieval feudal organization in Western Europe, especially in Holland, France, UnitedKingdom, Belgium, Portugal and Spain The monarch controlled everything Their policywas to export in the countries that they controlled and not to import (to have a positiveBalance of Trade) Geographical discoveries not only stimulated the international trade,but also produced an affluent flow of gold and silver, which could be used to encouragethe economy based on money and prices The state exercised much control overeconomic life, chiefly through corporations and trading companies Production wascarefully regulated with the object of securing goods of high quality and low cost, thusenabling the nation to hold its place in foreign markets The theory states that the worldonly contained a fixed amount of wealth and that to increase a country wealth; onecountry had to take some wealth from another, either through having a higherimport/export ratio So, this tendency, to export more and import less and to receive inexchange gold (the deficit is paid in gold) is called MERCANTILISM The theory wascriticized by the newly appeared class More money was associated with less productsand inflation The standard of living is weaker Mercantilist ideas did not decline until thecoming of the Industrial Revolution and of laissez-faire

 The Absolute Advantage (Adam Smith model)

In the second half of the XVIII century, mercantilist policies became an obstacle for theeconomic progress Adam Smith (father of liberalism and economical science) broughtthe argument in his book “The Wealth of Nations”, published in 1776, that themercantilist policies favorised producers and disadvantaged the interests of consumers

Adam Smith’s theory starts with the idea that export is profitable if you can import goodsthat could satisfy better the necessities of consumers instead of producing them on theinternal market The essence of Adam Smith theory is that the rule that leads theexchanges from any market, internal or external, is to determine the value of goods bymeasuring the labour incorporated in them In order to demonstrate its theory, AdamSmith analyzed for the beginning country A, using one factor of production, theproductivity of labour, evaluated in the necessary of hours needed to produce a unit ofmeasure of the products X and Y He used a unifactorial system of economy

Symbolizing H-hours, L-labour, the unitary necessary of labour for product X is HLXand for Y HLY Because all the economies have limited resources, there are limits in thelevel of production, and if a country wants to produce much of one product it has to give

up producing another goods, existing in this case renounce of trade Renounces can beillustrated by a graphic

 The Comparative Advantage (David Ricardo model)

David Ricardo theory demonstrates that countries can gain from trade even if one of them

is less productive then another to all goods that it produce

Country A is more productive in X than in Y

Country B is more productive in Y than in X

Then, each country should specialize in the production for which it has less opportunitycost.

 Factor proportions theory

A country should choose what to produce on the basis of the relative scarcity of labor,land, and capital Basically, on this view the relative scarcity of a factor or of factorsdetermines the comparative advantage of the country Leontief Paradox - There areinstances of reversal of this common sense An example is a capital intensive countryexporting labor-intensive goods The reaction is to save the theory by pointing out apossible weakness, in this case that the Heckscher-Ohlin theory erroneously assumes thatthe factors of production are homogeneous The use of different production methods rests

on the heterogeneity of factors of production For example, recently Canada and Egyptwere net exporters of wheat Clearly, wheat can be produced in at least two ways

Multiple production methods presents a difficulty for the Heckscher-Ohlin theory

II) New theories of international trade

A new body of international trade theory emerged in the 1980s The foundations ofthis theory were that competition in markets was imperfect, and that firms andgovernments could act strategically to affect trade flows and national welfare Formany economists, this growing body of literature represented a radical departurefrom previous scholarship Rigorous mathematical models were developed whichquestioned the heart and soul of classical comparative advantage Respectableacademic economists began asking whether unconditional free trade was acountry’s best policy choice

This case reviews the background and central hypotheses of these “new” theories,which have also been called theories of strategic trade policy The case looks at whymany economists and policymakers thought alternative approaches were necessary, atwhat the contributions of industrial organization to this new theory were, and atwhat some of the tentative results in the 1980s were The case ends with a questionsabout the value of classical comparative advantage and the role of firm and industry-level variables in determining who competes successfully in international trade

Changes in the trading environment.

Several economic changes in the international trading system stimulated executives,policymakers, to revisit international trade theory in the 1980s The first was growingeconomic interdependence among nations, especially the increasing importance of tradefor the United States The rapid growth of imports into the United States, for instance,meant that trade suddenly became a primary concern for executives and policymakersalike For the first time, virtually all American companies began facing serious foreigncompetition at home; at the same time, U.S government policymakers found thatpolicies for such diverse activities as antitrust or innovation could no longer be set inisolation from the world economy Moreover, the possibility that foreign governmentswere providing assistance to their domestically-based firms raised the question ofwhether the U.S government should counter such assistance through its own initiatives.

By the 1980s, some governments had demonstrated an ability to affect the welfare ofAmericans through policy actions

Traditional predictions of trade patterns were further confounded by the emergence ofhuge scale economies in some industries, and the growth of very large firms (usuallymultinationals) which dominated selected global markets Classical theory assumed thatfirms did not have the power to affect prices As long as there were many firmsoperating at arm’s length, theory did not have to account for strategic behavior; allfirms could be assumed to be price takers But as industries became increasinglyconcentrated, with large firms capable of affecting the structure and conduct of themarket, firms and governments had the opportunity to make strategic choices thatcould build competitive advantage in global markets

Demand for government intervention.

A second stimulus to the new trade theory was shifting political and policydynamics Rising demands for protectionism and growing pressures for regionaltrade blocs, especially in Europe and North America, led economists andpoliticians to search for solutions as well as justifications for their preferredpolicies Mature industries continued lobbying for more protection whilenormally free traders, such as semiconductors, telecommunications, and airframefirms, actively started to seek government assistance

New analytical tools.

While some economists had questioned classical trade theory for many years, theywere never able to provide rigorous alternatives As a result, theories such as theproduct life cycle, which incorporated ideas about imperfect competition, remainedoutside the mainstream of academic economics Industrial organization theorists haddeveloped new tools for analyzing economies of scale, economies of scope, learningeffects, R&D races and technological spillovers These tools could explain why itwas sometimes beneficial for firms to engage in certain activities that otherwise didnot seem feasible or rational A few economists began to speculate that if thesemodels of imperfect competition could be applied to international trade, we mightbetter understand the new patterns of international flows

Origins of the New Trade Theory: Industrial Organization

While theories of trade under imperfect competition are a phenomenon of the 1980s,the roots of these theories can be traced back 150 years to when industrialorganization (IO) first began describing how firms might behave when excessprofits were available

These types of behavior were referred to as strategic because firms couldconsciously undertake them to capture control of markets and could anticipatethe reactions of rivals to their actions Among the types of strategic behaviorfirms could engage in were dumping (selling in markets below cost to developeconomies of scale), preemption in R&D, product introduction, market penetration,etc (moving before rivals to capture competitive advantage), and predation(incurring losses from price cutting to drive rivals out of the marketplace)

Crossing Over From Industrial Organization to International Trade

An iconoclastic handful of trade theorists realized that there were reasons to beconcerned with market imperfections and with strategic behavior in theinternational arena The central proposition of the new trade theorists was thatfirms and governments could behave in strategically self-conscious ways inimperfect global markets, and thereby affect a country’s balance of trade and

The profit-shifting argument was built on the assumption that a domesticgovernment seeks to maximize national welfare, and not the welfare of the world

or foreign consumers and producers Based on the new trade theory, economistsbelieved that governments could help domestic firms to capture profits thatwould otherwise accrue to foreign firms Governments could use tax relief orsubsidies, for example, to increase the profitability of private investments Ifgovernment policy facilitated domestically-based firms to make a crediblecommitment to expand production facilities, foreign firms might be discouragedfrom expanding their own operations The result would be increased marketshares and profits for the domestic firms

Empirical Research

By developing clear, mathematical formulations, the new trade theorists gavestrategic trade policy academic respectability However, the models remained verytightly tied to narrow and unrealistic sets of assumptions, which reduced theirusefulness for prescribing policy To sort out which models were more or lessrobust, economists turned to empirical research

Research on trade under imperfect competition faced daunting obstacles such asthe lack of data As a result, theorists mixed modeling techniques and relied oneducated guesswork to set missing parameters

Implications for Trade Policy

These empirical limitations of the new trade theory left theorists cautiousabout its application to real-world problems What concerned economistsmost was that governments generally lacked sources of unbiased data uponwhich to base their decisions Even when data was available there was a greatdeal of uncertainty about its veracity Mistaken estimates could lead to misguidedpolicies A second concern was that few believed the models captured enough ofthe key elements of real-world behavior to provide a satisfactory guide to decisionmaking Even if the theory was refined sufficiently, it was unlikely that frontlinepolicy analysts would have the time and resources necessary to build models ofsufficient sophistication Third, the sensitivity of the models to assumptions about

the reactions of foreign firms and governments reduced the confidence ofpolicymakers and academics in making prescriptions R&D investment that wasintended to be preemptive, as in the aircraft example, could also trigger an R&Dsubsidy war rather than preclude entry And fourth, the complexity of themodelling could have made the policy process less transparent and, therefore,more difficult to monitor for fairness.

Given these hesitations, some new trade theorists concluded that governmentswould be wisest to follow a rule of “conditional, cooperative” trade initiatives

Unconditional cooperative strategies (such as “the U.S will always support freetrade regardless of the behavior of other countries”) invited foreign governments

to take a “free ride” at America’s expense Conditional strategies which offeredthe carrot of liberalized trade backed up by the stick of retaliation wereconsidered the most likely to induce cooperation as the foreign response

Moreover, cooperative strategies avoided the potentially severe consequences ofmiscalculating the foreign response to a noncooperative move

Implications for Government Policy

Porter based his prescriptions for government policy on a number of premises thatdiffered from standard economic analyses First, since firms competed, notnations, the policies of governments should be set to encourage an environmentwhich creates competitive opportunities and pressures for continued innovations

Governments were discouraged from undertaking direct interventions Second,sustaining national advantage demanded continuous innovation and change Thus,governments were discouraged from resorting to policies that conveyed short-term, static advantages because they undermined innovation and dynamism

Third, some bases for national competitive advantage were more sustainablethan others As a consequence, governments were advised to encourage thedevelopment of specialized and advanced factors of production, superior productdifferentiation, and unserved market segments Fourth, national competitiveadvantage was created over decades, not over one- or two-year businesscycles Thus, the most beneficial government policies were the slow andpatient ones, based on a long planning horizon, not on short- term economic

fluctuations Finally, a nation’s firms and work force could not be relied upon

to understand their own long-term self interest This meant that governmentswere encouraged to choose their policies without undue regard for the immediatecomfort or desires of their constituents

Summary

By the end of the 1980s, relatively few scholars or practitioners accepted the theory

of factor proportions and comparative advantage as an adequate explanation of theobserved patterns of trade, particularly for manufactured goods traded amongindustrialized countries To provide a new explanation, two very different types

of research were undertaken Trade economists developed a new set of theoreticaltools for examining trade under imperfect competition and produced an eclecticbasket of models Despite a growing number of empirical studies, inadequatedata continued to plague the field In contrast to the trade theorists’ research,Michael Porter chose an inductive approach and built a complex framework foranalyzing the competitiveness of nations

While no definitive theory of international trade had yet emerged by the late1980s, the decade produced significant advancement into new ideas andpromising areas of research Perhaps the only certain policy conclusion wasthat free trade had fallen from being considered an unequivocally superiorpolicy to being the preferred policy of economists in an imperfect world

Academic research continued on work towards identifying the exceptions to this rule

CHAPTER 2: ANALYZING FACTORS AFFECTING THE WORLD TRADE PATTERN

 Economical factors

 Preferential Trade Agreements

 Overview about preferential trade agreementsPreferential Trade Agreements (PTAs) are agreements among a set of countriesinvolving

preferential treatment of bilateral trade between any two parties to the agreement relative

to their trade with the rest of the world

Types of Trade Agreements

 Financial Pact

 Free Trade Agreement

 Single External Tariff

 Common Market

 Monetary Areas

 An overview of the economic effects of PTAs The basic economic effects of preferential agreements can be illustrated in a simplemodel (Baldwin, 2009) Consider a world composed of three identical countries calledHome, Partner and Rest of the World (RoW) Each country imports two goods from theother two nations, and exports one good to both destinations The trade patterns of thismodel economy are depicted in Figure C.1 below Further assume that in an initialsituation, all countries impose on each other the same (non-discriminatory) tariff, referred

to as the Most- Favoured Nation (MFN) tariff In this scenario, the domestic price ishigher than the border price faced by the two suppliers and imports are lower compared

to open trade Importantly, however, the two suppliers share equally the reduction inexports due to the imposition of an MFN tariff

What are the effects of a preferential trade agreement? To help answer this question,consider the case where Home and Partner form a free trade area (or a customs

union), so that Partner producers get duty-free access in the Home market, and Homeproducers get duty free access in the Partner market

Focusing first on the market for good 1, the good that is imported by the Home economy,the following price and volume effects take place The domestic price falls relative to thesituation where there is a single MFN tariff as the supply of the good in the Homeeconomy is increased, but now there are two distinct border prices The border pricefaced by Partner is higher, as exporters no longer face a tariff in the Home market, whilethe border price faced by exporters in RoW is lower, as they still face a tariff but thedomestic price in the Home economy is lower As a result, exports from Partner expand,while exports from RoW contract

As the PTA is reciprocal, the effects discussed above on the market for good 1materialize symmetrically for good 2 The only difference, intuitively, is that in thismarket the Home economy is an exporter, while Partner is the importer Therefore, in this

market, Home gains from a higher border price and greater exports to Partner, whileRoW loses from the drop in border price and the reduction in its exports in sector 2.

Finally, the formation of a preferential arrangement has no effect on the market for good

3, where RoW is the importer, as that country is assumed to maintain the same MFNtariff

A PTA has two types of effects on the export side First, exporters in member countriesgain from improved market access as the tariff is removed Secondly, these exporters alsobenefit from the fact that tariff discrimination reduces imports from RoW The lattereffect is sometimes referred to as the “preference rent”, as it would not exist if tariffliberalization were carried out in a non-discriminatory fashion On the import side, thepreferential agreement has ambiguous effects on member countries Consider the marketfor good 1, where the Home economy is the importer (the effects on Partner for good 2are analogous) The formation of the PTA has offsetting volume and price effects Theincreased imports allow the Home economy to benefit from the replacement of high-costdomestic production with more efficient imports The terms of trade (i.e the price ofexports relative to imports) of Home improve relative to RoW and falls relative toPartner Overall, whether the members of a PTA gain or lose depends on the level of theinitial MFN tariff and on the elasticities of demand and supply (i.e to what extent thedemand and supply of a product is sensitive to changes in its price)

A final consideration relates to the welfare effect of a PTA on non-members Asdiscussed above, RoW suffers a reduction of its exports to the PTA member countries Inaddition, the non-member is hurt by a negative terms-of-trade effect, as the price of itsexports declines while the prices of its imports are unaltered In other words, apreferential agreement can be interpreted as a negative externality that PTA membersimpose on non-members

Trade creation and trade diversion

In this theory, preferential liberalization has two main effects – trade creation and tradediversion – and the net balance between the two determines whether a PTA increaseswelfare for its members As tariffs on trade between partners fall, some domestic

production is replaced by imports from more efficient producers from partners – thusresulting in trade creation and welfare gains But since the PTA also discriminates

against non-members, imports from partners replace imports from more efficient outsideproducers and the member countries end up paying more for the same good This secondeffect which harms members' welfare is known as trade diversion

 Global production networks

The global production network is a conceptual framework that is capable of grasping theglobal, regional and local economic and social dimensions of the processes involved inmany (though by no means all) forms of economic globalization Production networks –the nexus of interconnected functions and operations through which goods and servicesare produced, distributed and consumed – have become both organizationally morecomplex and also increasingly global in their geographic extent Such networks not onlyintegrate firms (and parts of firms) into structures which blur traditional organizationalboundaries – through the development of diverse forms of equity and non-equityrelationships – but also integrate national economies (or parts of such economies) in wayswhich have enormous implications for their well-being At the same time, the precisenature and articulation of firm-centred production networks are deeply influenced by theconcrete socio-political contexts within which they are embedded The process isespecially complex because while the latter are essentially territorially specific(primarily, though not exclusively, at the level of the nation-state) the productionnetworks themselves are not They ‘cut through’ state boundaries in highly differentiatedways, influenced in part by regulatory and non-regulatory barriers and local socio-cultural conditions, to create structures which are ‘discontinuously territorial’

In recent years there has been important development of production networks as firmsoutsource parts of their production to lower wage locations This phenomenon hasimportant implications for trade flows, involving increased trade in parts andcomponents, and for trade policy, as location may be very sensitive to small tradefrictions Due to the variety of forms in which international fragmentation of productioncan take place, the phenomenon has been measured adopting very different indicators

First, the fragmentation of production by MNEs (Multinational Enterprises) has beendocumented focusing on parent-affiliates relationships and intra-firm trade Intra-firmtrade covers a large share of total exports of US (45%), Japanese (30%) and Swedish(50%) parent companies Moreover, a large share of exports from US and Swedishparents to their subsidiaries is made of parts and components for further reprocessing.

Second, a number of studies measure international fragmentation of production takingplace among independent firms acting as a network One approach applied by Feenstraand Hanson (1999) for the US and by Campa and Goldberg (1997) for Canada, Japan, theUnited Kingdom and the US estimates the imported intermediate inputs used inproduction Also in this case the share of imported inputs is large and rising Hummels,Ishii and Yi (2001), use input-output tables to estimate the degree of ‘verticalspecialization’ of international trade; that is the use of imported inputs in producinggoods that are exported The role of imported intermediate inputs was also analysed bythese authors They find a growth in vertical specialization between 1970 and 1990 forten OECD countries and four emerging market countries

Finally, Yeats (2001), Ng and Yeats (1999) and Kaminski and Ng (2001) use foreigntrade statistics that classify goods in parts and components (a subset of intermediategoods) and finished products This distinction can be applied to a subset of products,mostly machinery and equipment (SITC 7 and 8 categories), still accounting for a largeshare of world trade Yeats (2001) shows that, for the OECD countries, trade in parts andcomponents has been growing faster than total trade over 1976-1996 and that it nowaccounts for around 30% of OECD trade Ng and Yeats (1999) and Kaminski and Ng(2001) find similar results for Eastern and Central Europe and East Asia

In this section, we turn to the role of international production networks in encouragingthe establishment of “deep” PTAs that go beyond reducing tariffs The econometricresults show that greater trade in parts and components is associated with the greaterdepth of newly signed agreements among PTA members In addition, the analysis showsthat the greater the depth of an agreement, the bigger the increase in trade among PTAmembers