Hi there. In the last video, we looked at the concept of globalization. We examined the debate on the nature of the process, on its benefits, on the role if any for the nation-state. In this video, we're going to be looking at international trade. We'll look at the barriers that can hinder trade growth and we'll look at some of the explanations of why some countries experience more trade growth than others. Now, there are first of all several problems involved with international trade statistics. The first one is that whereas national income is the sum of values added where the only parts that count between transactions is the additional value, in the international trade, the total value of a product is counted every time it crosses a border. The second problem is that when a country exports the finished product to another country, a proportion of each value may well have originated further back down what we call the value chain. Let me give you one true example. Now, if the Chinese exported iPod to the United States it will cost a $150, that figure will appear in China's export statistics and in its balance of payments statistics, but only $4 of that value is added in China. The R'n'D and the design values originate in the United States and the parts come from the USA and Japan. A third problem is that trade is only counted when it crosses a border. In Africa where cross-border trade is often unrecorded, this can lead to major distortions. But finally, there are bigger problems in Africa. Official trade statistics have frequent gaps. Only six countries have a complete series of annual statistics dating from 2000 to the present and many of the other statistics don't conform to international definitions or standards. In such cases, the gaps have to be filled from the statistics of other countries and that's really far from satisfactory. So why does international trade grow? Well, there are many reasons, but World Trade can't grow if it's discouraged or disadvantage by high cost penalties that operate to discriminate against foreign goods. In the past, most of the literature placed the emphasis on trade barriers erected by government policy. So let's have a look at some of these. The first of these is tariffs; taxes levied on imports. Once tariffs that raise the price of imports relative to domestic goods is left for supply and demand to determine how much is bought or sold. In Western Europe and the West in general, the average tariff on industrial goods was just under three percent, but the West did charge about 11 percent on agricultural products. Among developing countries, tariffs are generally higher and the highest is in South Asia, charges 13 percent on industrial goods and 30 percent on agricultural products. The next barrier are import quotas. Now, these are limits placed on imports regardless of prices or demand. In Western Europe, most of these were phased out in the 1950s but in the 1970s they were reintroduced for textiles. Elsewhere they still persist. The third measure is what we call foreign exchange controls. These are often introduced when countries come into balance of payments difficulties or have speculative movements of capital but there are powerful weapons of trade manipulation. If an importer can't get his hands on foreign currency to pay for the goods, very often, the transaction cannot take place. The fourth official control or so-called non-tariff barriers usually in the form of technical barriers such as minimum safety standards or they could be hygiene regulation against infected food products. They may have a legitimate function, but they will always have a negative impact on imports and often deliberately so. Finally, there are rules or what we call government procurements or purchases made by governments. Many governments only buy from domestic producers arguing that their hard-earned tax revenues should be best used to boost national output and employment. Now, in addition to government policy, measures there are other impediments to international trade, and these are called transaction costs and they measure the other incidental costs incurred in imports. The first of these obviously are freight costs. Although of course these needn't necessarily be higher than the costs of moving a good inside a country domestically. But the second are time costs. For example, if you want to import a container into a high-income country, it will stay in dock for an average of 10 days. In Uzbekistan, Chad, and South Sudan, the average delay was over three months. Now final cost is the cost of assembling the administrative documents and these are also far higher for example in Sub-Saharan Africa and in OECD countries. Now these many have afforded some measure of protection against Western competition in Africa, but the same high-cost strangle their own exporters when they wish to break into world markets. Now, a lot of attention in the literature concentrates on the removal of barriers to trade. But once they are reduced or are out of the way, the real motors of growth lie elsewhere. Now one way in which trade can grow is to have fast growth in one's traditional trading partners. Especially if there's growth, there is transformed into import demand. But since much of this trade is neighborhood trade, this dynamic has been translated into gravity models of trade and this adds distance, connectivity, and cultural similarity to the explanation. Now another way to perform comparatively well in international trade is to have a domestic production structure that's concentrating on products in which world demand is growing fast. In that case all you have to do is to keep a constant market share and if you have a concentration in a product which has fast grow, obviously then you'll experience faster growth of international trade. The final way to experience relatively fast trade growth is to increase one's competitiveness, and the only sustainable way to do this is to produce more goods for the same amount of inputs. This requires access to more capital and to better technology. One short cut to get that is through foreign direct investment. Lets pull all of this together now. In this lecture, we've been looking at international trade. We've looked at the barriers to trade and we've looked at the explanation for differential trade performance. In the next video, we'll turn our attention to foreign direct investment. Meanwhile, we invite you to view the visualization of the map of world trade that we've prepared for you.
