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Global Trade

By: EconomyWatch Date: 30 June 2010

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Global trade is the exchange of raw materials, goods and services across the geographical borders of countries across the globe. Foreign trade got its first impetus from the industrial revolution in the late eighteenth and early nineteenth century. Rapid development in transportation facilities resulted in a surge in international trade in the twentieth century. Today, international trade has taken the form of outsourcing and multinational companies (companies that have a presence in several countries).

The History of World Trade

World trade was prevalent much before the formation of nation states. Some important examples of ancient long distance trade are:

The Egyptians imported spices from Arabia and the ‘Land of Punt’ (present day Somalia).

The Ptolemaic dynasty, which ruled in Egypt from 305 BC to 30 BC, traded with India.

Arabian vessels were used to transport Indian goods to Aden.

Chinese goods made their way to India, Persia and Rome through the silk route.

From the eighteenth century, industrialization and colonization went hand in hand. The European nations increased their political power through trade. They exploited trading opportunities in eastern countries like India.

Present Global Trade Scenario

There was a dramatic rise in world trade volumes in the twentieth century. While in 1928, world exports amounted to US$31.7 billion, this figure had risen to US$4,215,000.2 billion by 1994. Studies conducted by the UNCTAD in 1994 show that trade in commercial services rose much faster than merchandise trade between 1970 and 1990.

The G-7 group, comprising of the US, France, Germany, the UK, Italy, Japan and Canada, has always commanded a dominant position in world trade. Gradually the significance of certain Asia Pacific nations, such as China, Singapore, India, Hong Kong, Taiwan and Korea, has risen.

World Trade Organization

The World Trade Organization (WTO) is the most powerful body for controlling the dynamics of global trade. It has the power to enforce its rules through sanctions and helps in the formulation of trade agreements between various countries. It also oversees that agreement terms are adhered to by the participating countries and resolves disputes.

International Trade Models

The theory of international trade and its possible effects can be explained with the help of the following models:

Absolute Advantage Theory

Country A is said to have absolute advantage over country B if it can produce commodity C with lower cost of resources than Country B. On the other hand Country B can have an absolute advantage over country A in the production of commodity D. In this case the countries A and B would benefit by trade. Adam Smith put forward his theory of absolute advantage.

Comparative Advantage Theory

According to this theory a country would produce and specialize in those commodities in which it has comparative advantage in terms of resources. The relative factor endowments in a country play a vital role to govern the pattern of trade.

Heckscher-Ohlin Model

According to this theory a country will export that good which utilizes its abundant its factor of production more intensively. Conversely, the country will import goods that utilize factors of production that re locally less abundant in nature. Hence we see that variation in the factor endowments play a key role in the pattern of international trade in the case of the Heckscher-Ohlin Model.

On testing this theory empirically Wasily Leotieff found that this theory might not hold true always. For instance United States was found to export commodities that were labor intensive although it was a capital abundant country itself. This phenomenon was termed as the Leontief Paradox.

Specific Factors Model

This model assumes labor to be mobile but capital fixed in the short run. According to this model if the price of a commodity increases then the producer of that used the specific factor to produce the good would profit. The model is most suited for particular types of industries.

Gravity Model

According to this model the distance between the countries would influence the pattern of trade. Econometric findings have also supported this assumption.