The Changing Pattern of World Trade
World trade is a moving target. The direction and composition of world trade is quite different
today from what it was a generation ago, and even more different from what it was a
century ago. Let’s look at some of the main trends.
Has the World Gotten Smaller?
In popular discussions of the world economy, one often encounters statements that modern
transportation and communications have abolished distance, so that the world has become a
small place. There’s clearly some truth to these statements: The Internet makes instant and
almost free communication possible between people thousands of miles apart, while jet
transport allows quick physical access to all parts of the globe. On the other hand, gravity
models continue to show a strong negative relationship between distance and international
trade. But have such effects grown weaker over time? Has the progress of transportation
and communication made the world smaller?
The answer is yes—but history also shows that political forces can outweigh the effects
of technology. The world got smaller between 1840 and 1914, but it got bigger again for
much of the 20th century.
Economic historians tell us that a global economy, with strong economic linkages between
even distant nations, is not new. In fact, there have been two great waves of globalization, with
the first wave relying not on jets and the Internet but on railroads, steamships, and the telegraph.
In 1919, the great economist John Maynard Keynes described the results of that surge
of globalization:
What an extraordinary episode in the economic progress of man that age was which
came to an end in August 1914! . . . The inhabitant of London could order by telephone,
sipping his morning tea in bed, the various products of the whole earth, in such quantity
as he might see fit, and reasonably expect their early delivery upon his doorstep.
Notice, however, Keynes’s statement that the age “came to an end” in 1914. In fact, two
subsequent world wars, the Great Depression of the 1930s, and widespread protectionism
did a great deal to depress world trade. Table 2-2 shows estimates of world exports as a
percentage of world GDP for selected years since the 19th century. World trade grew
rapidly between 1870 and 1913, but suffered a sharp setback in the decades that followed,
and did not recover to pre–World War I levels until around 1970.
Since 1970, world trade as a share of world GDP has risen to unprecedented heights.
Much of this rise in the value of world trade reflects the so-called “vertical disintegration” of
production: Before a product reaches the hands of consumers, it often goes through many
production stages in different countries. For example, consumer electronic products—cell
phones, iPods, and so on—are often assembled in low-wage nations such as China from
components produced in higher-wage nations like Japan. Because of the extensive crossshipping
of components, a $100 product can give rise to $200 or $300 worth of international
trade flows.
What Do We Trade?
When countries trade, what do they trade? For the world as a whole, the main answer is
that they ship manufactured goods such as automobiles, computers, and clothing to each
other. However, trade in mineral products—a category that includes everything from
copper ore to coal, but whose main component in the modern world is oil—remains an
important part of world trade. Agricultural products such as wheat, soybeans, and cotton
are another key piece of the picture, and services of various kinds play an important role
and are widely expected to become more important in the future.
Figure 2-5 shows the percentage breakdown of world exports in 2008. Manufactured
goods of all kinds make up the lion’s share of world trade. Most of the value of mining
goods consists of oil and other fuels. Trade in agricultural products, although crucial in
feeding many countries, accounts for only a small fraction of the value of modern
world trade.
Meanwhile, service exports include traditional transportation fees charged by airlines
and shipping companies, insurance fees received from foreigners, and spending by foreign
tourists. In recent years new types of service trade, made possible by modern telecommunications,
have drawn a great deal of media attention. The most famous example is the rise
of overseas call and help centers: If you call an 800 number for information or technical
help, the person on the other end of the line may well be in a remote country (the Indian
city of Bangalore is a particularly popular location). So far, these exotic new forms of
trade are still a relatively small part of the overall trade picture, but as explained below,
that may change in the years ahead.
The current picture, in which manufactured goods dominate world trade, is relatively
new. In the past, primary products—agricultural and mining goods—played a much more
important role in world trade. Table 2-3 shows the share of manufactured goods in the
exports and imports of the United Kingdom and the United States in 1910 and 2008. In the
early 20th century Britain, while it overwhelmingly exported manufactured goods (manufactures),
mainly imported primary products. Today manufactured goods dominate both
sides of its trade. Meanwhile, the United States has gone from a trade pattern in which
The Changing Composition of Developing-Country Exports
Over the past 50 years, the exports of developing countries have shifted toward
manufactures.
Source: United Nations Council on Trade and Development.
primary products were more important than manufactured goods on both sides to one in
which manufactured goods dominate on both sides.
A more recent transformation has been the rise of third world exports of manufactured
goods. The terms third world and developing countries are applied to the world’s poorer
nations, many of which were European colonies before World War II. As recently as the
1970s, these countries mainly exported primary products. Since then, however, they have
moved rapidly into exports of manufactured goods. Figure 2-6 shows the shares of agricultural
products and manufactured goods in developing-country exports since 1960. There
has been an almost complete reversal of relative importance. For example, more than
90 percent of the exports of China, the largest developing economy and a rapidly growing
force in world trade, consists of manufactured goods.
Service Offshoring
One of the hottest disputes in international economics right now is whether modern
information technology, which makes it possible to perform some economic functions at
long range, will lead to a dramatic increase in new forms of international trade. We’ve
already mentioned the example of call centers, where the person answering your request for
information may be 8,000 miles away. Many other services can also be done in a remote
location. When a service previously done within a country is shifted to a foreign location,
the change is known as service offshoring (sometimes known as service outsourcing). In
addition, producers must decide whether they should set up a foreign subsidiary to provide
those services (and operate as a multinational firm) or outsource those services to another
firm. In Chapter 8, we describe in more detail how firms make these important decisions.
20 PART ONE International Trade Theory
In a famous Foreign Affairs article published in 2006, Alan Blinder, an economist at
Princeton University, argued that “in the future, and to a great extent already in the present, the
key distinction for international trade will no longer be between things that can be put in a box
and things that cannot. It will, instead, be between services that can be delivered electronically
over long distances with little or no degradation of quality, and those that cannot.” For example,
the worker who restocks the shelves at your local grocery has to be on site, but the
accountant who keeps the grocery’s books could be in another country, keeping in touch over
the Internet. The nurse who takes your pulse has to be nearby, but the radiologist who reads
your X-ray could receive the images electronically anywhere that has a high-speed connection.
At this point, service outsourcing gets a great deal of attention precisely because it’s still
fairly rare. The question is how big it might become, and how many workers who currently
face no international competition might see that change in the future. One way economists
have tried to answer this question is by looking at which services are traded at long distances
within the United States. For example, many financial services are provided to the nation from
New York, the country’s financial capital; much of the country’s software publishing takes
place in Seattle, home of Microsoft; much of America’s (and the world’s) Internet search
services are provided from the Googleplex in Mountain View, California, and so on.
Estimates based on trade within the United States suggest that trade in services may
eventually become bigger than trade in manufactures.
Source: J. Bradford Jensen and Lori. G. Kletzer, “Tradable Services: Understanding the Scope and Impact
of Services Outsourcing,” Peterson Institute of Economics Working Paper 5–09, May 2005.
CHAPTER 2 World Trade: An Overview 21
tradable at long distances. As the figure shows, the study concluded that about 60 percent
of total U.S. employment consists of jobs that must be done close to the customer,
making them nontradable. But the 40 percent of employment that is in tradable activities
includes more service than manufacturing jobs. This suggests that the current dominance
of world trade by manufactures, shown in Figure 2-5, may be only temporary. In the long
run, trade in services, delivered electronically, may become the most important component
of world trade.
World trade is a moving target. The direction and composition of world trade is quite different
today from what it was a generation ago, and even more different from what it was a
century ago. Let’s look at some of the main trends.
Has the World Gotten Smaller?
In popular discussions of the world economy, one often encounters statements that modern
transportation and communications have abolished distance, so that the world has become a
small place. There’s clearly some truth to these statements: The Internet makes instant and
almost free communication possible between people thousands of miles apart, while jet
transport allows quick physical access to all parts of the globe. On the other hand, gravity
models continue to show a strong negative relationship between distance and international
trade. But have such effects grown weaker over time? Has the progress of transportation
and communication made the world smaller?
The answer is yes—but history also shows that political forces can outweigh the effects
of technology. The world got smaller between 1840 and 1914, but it got bigger again for
much of the 20th century.
Economic historians tell us that a global economy, with strong economic linkages between
even distant nations, is not new. In fact, there have been two great waves of globalization, with
the first wave relying not on jets and the Internet but on railroads, steamships, and the telegraph.
In 1919, the great economist John Maynard Keynes described the results of that surge
of globalization:
What an extraordinary episode in the economic progress of man that age was which
came to an end in August 1914! . . . The inhabitant of London could order by telephone,
sipping his morning tea in bed, the various products of the whole earth, in such quantity
as he might see fit, and reasonably expect their early delivery upon his doorstep.
Notice, however, Keynes’s statement that the age “came to an end” in 1914. In fact, two
subsequent world wars, the Great Depression of the 1930s, and widespread protectionism
did a great deal to depress world trade. Table 2-2 shows estimates of world exports as a
percentage of world GDP for selected years since the 19th century. World trade grew
rapidly between 1870 and 1913, but suffered a sharp setback in the decades that followed,
and did not recover to pre–World War I levels until around 1970.
Since 1970, world trade as a share of world GDP has risen to unprecedented heights.
Much of this rise in the value of world trade reflects the so-called “vertical disintegration” of
production: Before a product reaches the hands of consumers, it often goes through many
production stages in different countries. For example, consumer electronic products—cell
phones, iPods, and so on—are often assembled in low-wage nations such as China from
components produced in higher-wage nations like Japan. Because of the extensive crossshipping
of components, a $100 product can give rise to $200 or $300 worth of international
trade flows.
What Do We Trade?
When countries trade, what do they trade? For the world as a whole, the main answer is
that they ship manufactured goods such as automobiles, computers, and clothing to each
other. However, trade in mineral products—a category that includes everything from
copper ore to coal, but whose main component in the modern world is oil—remains an
important part of world trade. Agricultural products such as wheat, soybeans, and cotton
are another key piece of the picture, and services of various kinds play an important role
and are widely expected to become more important in the future.
Figure 2-5 shows the percentage breakdown of world exports in 2008. Manufactured
goods of all kinds make up the lion’s share of world trade. Most of the value of mining
goods consists of oil and other fuels. Trade in agricultural products, although crucial in
feeding many countries, accounts for only a small fraction of the value of modern
world trade.
Meanwhile, service exports include traditional transportation fees charged by airlines
and shipping companies, insurance fees received from foreigners, and spending by foreign
tourists. In recent years new types of service trade, made possible by modern telecommunications,
have drawn a great deal of media attention. The most famous example is the rise
of overseas call and help centers: If you call an 800 number for information or technical
help, the person on the other end of the line may well be in a remote country (the Indian
city of Bangalore is a particularly popular location). So far, these exotic new forms of
trade are still a relatively small part of the overall trade picture, but as explained below,
that may change in the years ahead.
The current picture, in which manufactured goods dominate world trade, is relatively
new. In the past, primary products—agricultural and mining goods—played a much more
important role in world trade. Table 2-3 shows the share of manufactured goods in the
exports and imports of the United Kingdom and the United States in 1910 and 2008. In the
early 20th century Britain, while it overwhelmingly exported manufactured goods (manufactures),
mainly imported primary products. Today manufactured goods dominate both
sides of its trade. Meanwhile, the United States has gone from a trade pattern in which
The Changing Composition of Developing-Country Exports
Over the past 50 years, the exports of developing countries have shifted toward
manufactures.
Source: United Nations Council on Trade and Development.
primary products were more important than manufactured goods on both sides to one in
which manufactured goods dominate on both sides.
A more recent transformation has been the rise of third world exports of manufactured
goods. The terms third world and developing countries are applied to the world’s poorer
nations, many of which were European colonies before World War II. As recently as the
1970s, these countries mainly exported primary products. Since then, however, they have
moved rapidly into exports of manufactured goods. Figure 2-6 shows the shares of agricultural
products and manufactured goods in developing-country exports since 1960. There
has been an almost complete reversal of relative importance. For example, more than
90 percent of the exports of China, the largest developing economy and a rapidly growing
force in world trade, consists of manufactured goods.
Service Offshoring
One of the hottest disputes in international economics right now is whether modern
information technology, which makes it possible to perform some economic functions at
long range, will lead to a dramatic increase in new forms of international trade. We’ve
already mentioned the example of call centers, where the person answering your request for
information may be 8,000 miles away. Many other services can also be done in a remote
location. When a service previously done within a country is shifted to a foreign location,
the change is known as service offshoring (sometimes known as service outsourcing). In
addition, producers must decide whether they should set up a foreign subsidiary to provide
those services (and operate as a multinational firm) or outsource those services to another
firm. In Chapter 8, we describe in more detail how firms make these important decisions.
20 PART ONE International Trade Theory
In a famous Foreign Affairs article published in 2006, Alan Blinder, an economist at
Princeton University, argued that “in the future, and to a great extent already in the present, the
key distinction for international trade will no longer be between things that can be put in a box
and things that cannot. It will, instead, be between services that can be delivered electronically
over long distances with little or no degradation of quality, and those that cannot.” For example,
the worker who restocks the shelves at your local grocery has to be on site, but the
accountant who keeps the grocery’s books could be in another country, keeping in touch over
the Internet. The nurse who takes your pulse has to be nearby, but the radiologist who reads
your X-ray could receive the images electronically anywhere that has a high-speed connection.
At this point, service outsourcing gets a great deal of attention precisely because it’s still
fairly rare. The question is how big it might become, and how many workers who currently
face no international competition might see that change in the future. One way economists
have tried to answer this question is by looking at which services are traded at long distances
within the United States. For example, many financial services are provided to the nation from
New York, the country’s financial capital; much of the country’s software publishing takes
place in Seattle, home of Microsoft; much of America’s (and the world’s) Internet search
services are provided from the Googleplex in Mountain View, California, and so on.
Estimates based on trade within the United States suggest that trade in services may
eventually become bigger than trade in manufactures.
Source: J. Bradford Jensen and Lori. G. Kletzer, “Tradable Services: Understanding the Scope and Impact
of Services Outsourcing,” Peterson Institute of Economics Working Paper 5–09, May 2005.
CHAPTER 2 World Trade: An Overview 21
tradable at long distances. As the figure shows, the study concluded that about 60 percent
of total U.S. employment consists of jobs that must be done close to the customer,
making them nontradable. But the 40 percent of employment that is in tradable activities
includes more service than manufacturing jobs. This suggests that the current dominance
of world trade by manufactures, shown in Figure 2-5, may be only temporary. In the long
run, trade in services, delivered electronically, may become the most important component
of world trade.
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