Session 3: Trade

Dr. Evita Pangaribowo

[email protected]
 Reference:
Rodrigue, J., Comtois, C., and Slack, B., 2006. The
Geography of Transport, Routledge: London.
Barnes, T. J., and Gertler, M. S., 2006. The New
Industrial Geography, Routledge: London.
 Economic Rationale of Trade
• The economic benefits of international or regional trade are numerous.
 Without trade, each unit must produce a set of basic goods to satisfy
the requirements of the national economy. In the above example, four
countries are each producing four different goods.
 National markets tend to be small, impairing the potential economies
of scale leading to higher prices and often monopolistic or
oligolopolistic situations.
 Product diversity also tends to be limited because of the market size
and standards (such as safety or component size) may even be
different.
 With trade, competition increases and a redistribution of production
often takes place as comparative advantages are being exploited. In
the above example, the outcome of trade liberalization involves a
specialization of production of one good in each country and the trade
of other goods between them  Greater economies of scale that are
achieved through specialization result in lower prices.
 Economic Integration and Interdependencies

• International trade consequently demonstrates the extent of

globalization with increased spatial interdependencies
between elements of the global economy and consequently
their level of integration.
• Interdependencies imply numerous relationships where
exchanges of capital, goods, raw materials and services are
established between regions of the world.
• Trade has also been facilitated by growing levels of economic
integration that have been established by processes such as
the European Union or the North American Free Trade
Agreement.
Economic Integration and Interdependencies

Independent Nations Interdependent Groups

of Nations

a a
G1
h h
b
b

g g

c
f d d c
e f e G2
 Impacts of Integration Processes on Networks and Flows

Before Integration After Integration

International border
Network
Flows
 Impacts of Integration Processes on Networks
and Flows
• Prior to integration processes, the development of
national transportation networks supporting national
flows was privileged.
Transborder linkages and flows tended to be not well
developed.
• Integration obviously promotes transborder flows,
which may be accompanied by the development of
new linkages to support them.
The Canadian / American border is a good example
of the impacts of economic integration (NAFTA) on
transborder trade flows, with the north / south
component growing substantially.
 Levels of Economic Integration

Political Common government

Union

Common currency, harmonized tax

Economic
Union rates, common monetary and fiscal
policy: EU (partial)

Common Factors of production move freely

Market between members

Customs Common external tariffs

Union

Free Free trade between members: NAFTA,

Trade Mercosur, ASEAN (partial)

Complexity
 World Trade Flows

• The liberalization of trade, as confirmed by the

implementation of the World Trade Organization,
has given a strong impetus and a positive trend in
the growth rate of world trade and industrial
production.
• This can be further exemplified by the amount of
world trade flows since the last decade where trade
within regions accounts for a greater share of total
trade than trade between regions.
 Geography of International Trade
• The graph also reveals a dominance of a small number of
countries, mainly in North America and Western Europe:
 The United States, Germany and Japan account for about 30%
of all global trade (28.5% of exports and 32.1% of imports);
 G7 countries account for 45.7% of all global exports and for
49.0% of all imports;
 A growing share is being accounted by the developing
countries of Asia, with China accounting for the most
significant growth.
• Those geographical and economic changes are also reflected
over trans-oceanic trade with Trans-Pacific trade growing
faster than Trans-Atlantic trade.
 Share of Asia in World Trade

• Over the last 20 years, the contribution of Asia to global trade

has increased substantially, notably its exports.
 From about 16% of global exports in 1980, this share climbed
to about 27% in 2000.
 This trend can partially be explained by substantial
investments that went into new export-oriented production
facilities using the advantages of low production costs,
notably in terms of labor.
 The gap between exports and imports have also substantially
increased, especially since 1997 when currency devaluations
made the region more competitive.
 Exports and Received FDI

• China has experienced a fast integration to the global

economy and has become one of the world's leading
manufacturing center.
• This integration was accelerated through foreign direct
investments, bringing capital, technology and access to
foreign markets.
 FDIs boomed in the early 1990s to stabilize in the early 21st
century. The outcome was an export-oriented manufacturing
structure, centered around development zones, and a
spectacular growth of exports in the late 1990s that endured
in the early 21st century.
 By 2002, China was the world's 6th largest trader. This FDI /
export growth synergy substantially increased the demand for
international transportation and port development along the
Chinese coast.
 FDI going on par with international trade

• Trade flows of merchandises have also been

accompanied by a substantial growth in
foreign direct investments.
• There is thus a remarkable reallocation of
direct foreign investment following changes in
comparative advantages around the world.
 Changes in Global Trade Flows

Before 1970 After 1970

Developed Countries Developed Countries

Developing Countries Developing Countries

Industrial Pole Flows of merchandises Flows of raw materials

 Changes in Global Trade Flows
• Prior to the 1970s, global trade flows were dominated by three major
poles, North America, Western Europe and Japan.
 A dichotomy was observed between developed and developing countries
as raw materials were flowing north and finished goods were flowing
south.
 This situation can mainly been explained by differences in levels of
development as well as by a the domination of the majority of developing
countries by colonial powers.
• From the 1970s, this situation changed as industrial development took
place in many developing countries in Latin America (Mexico), Southeast
Asia (Malaysia, Thailand, Indonesia) and East Asia (China, South Korea,
Taiwan).
 Many industrial processes which initially took place in developed countries,
were relocated in new locations offering lower production costs, namely
because of cheaper labor.
 Consequently, global trade flows are now characterized by significant
flows of merchandises from developing to developed countries.
 Major changes occurred in the organization of
production
• Noticeable increase in the division of labor
concerning the design, planning and assembly in the
manufacturing process of world economies.
• Interlocking partnerships in the structure of
manufacturing have increased the trade of parts and
the supply of production equipment around the
world:
 One-third of all trade takes place among parent
companies and their foreign affiliates.
 International Standards
• A part of this dynamism of production organization resides in
the adoption of standards, a process which began in the late
19th century to promote mass production.
 It permitted the rapid development of many sectors of activity,
including railways, electricity, the automobile and the
telecommunication industry more recently (Internet,
Electronic Data Interchange – EDI).
• In the realm of globalization of economic activities, the
International Standards Organization developed the ISO
norms that serve as comparison between various enterprises
around the world.
 These norms are applicable to the manufacturing and services
industries and are a necessary tool for growth.
 Trends in International Standards
by Technical Field
• The constant quest of certified quality by ISO
generates a domino effect:
 If an enterprise fulfills ISO norms, obviously the
competitors in the same sector will attempt to reach
the same level of quality. As a result ISO standards
are increasing.
 This situation affects all economies as major public
and private contractors and purchasers around the
world require that their suppliers fulfill the ISO
norms of quality.
Market opportunities for exports from
developing countries
(1) ‘resource-based’ manufacturing or manufacturing
activities which involve further local processing of material
previously exported in raw state;
(2) light (labour-intensive) consumer goods (e.g. clothing,
toys, shoes, sporting goods),
(3) component production and assembly within vertically
integrated or otherwise tightly controlled production
systems; and
(4) mature technology final products (motor vehicles, radios,
TVs, computers).

A resource rich country (like Indonesia) has considerable room

for the expansion of exports in the first category.
Instruments of trade policy

1. Tariffs
2. Quotas
3. Other Non-tariff Barriers to Trade

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Tariffs
• Imports tariffs
– specific tariff: (a monetary sum that must be paid to import 1
physical unit of a product)
• Advantage: easy to collect
• Disadvantage: doesn’t take price changes into account
– ad valorem tariff: (a percentage of the monetary value of 1 unit of import)
• Advantage: takes price changes into account
• Disadvantage: Need to know the monetary value of the good and
seller is tempted to undervalue the price
• Other instruments
– Import subsidy  negative import tariff
– Export tariff/subsidy (levied/paid on home-produced
goods that are destined for export)
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Non-tariff Barriers to Trade (1)
• Import Quotas
– a government agency allocates the rights to import
– limits the number of goods (not the price) for a given time period
• “Voluntary” export restraints (VER)
– foreign suppliers agree to “voluntary” refrain from sending some
exports
• Government procurement provisions
– restriction on purchasing foreign products by the domestic
government agencies
• Domestic content provisions
– a given percentage of the value of a good must consist of domestic
components or labour

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Non-tariff Barriers to Trade (2)

• Administrative classification
– different tariffs to different product categories +
leeway for customs officials to decide on classification
• Restrictions on services trade
• Trade-related investment measures
• Domestic policies affecting trade
– health, environment and safety standards; packaging
and labeling requirements; inconsistent treatment of
intellectual property rights; subsidies to domestic
firms.

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Openness to Trade

• Openness to trade is measured as the trade-to-GDP ratio.

• It weighs the combined importance of exports and imports of

goods and services in an economy, giving an indication of the
dependence of domestic producers on foreign demand and of
domestic consumers on foreign supply.
Measuring trade costs
Basis for a G20 monitoring framework
Captures all
trade frictions
Specific determinants
Tariffs

NTMs

Logistics performance/ trade facilitation

Trade
Connectivity Aggregate growth/
trade costs Productivity/
Investment climate Welfare

Services barriers

Geography

Cultural/historical ties

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 A metric of global integration and a policy
outcome
Exchange Rate
Cost of Starting… Trade costs are influenced by
Logistics Performance
Domestic given contingent factors such as
Air Connectivity
Costs distance, language or history
Shipping Connectivity and preferences.
Tariffs
Same RTA Bilateral Connectivity (e.g. logistics and
global networks) policies
Common Language Costs
Common Border
influence trade costs the most.
Distance

0 0.1 0.2 0.3 0.4 0.5 0.6

Elasticity of trade costs

“To what extent are trade costs affected by items on vertical axis (e.g., exchange rate)? ”

Aggregated trade costs per country is a metric of global economic integration as

connectivity on the international trade and production web.

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Trade Costs and policy variables

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 Modelling trade: Gravity Model
• The gravity equation has been widely used to model all
kind of interactions in space that can be explained from
the interplay of the attraction and repulsion forces.
• There are many applications in the fields of trade,
transport and immigration (Sen and Smith, 1995; Roy
and Thill, 2004).

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Gravity model
In Physics:
• The law of gravity states that the force of gravity
between two objects depends on the product of the
masses of the two objects and the square of the
distance between them (Baldwin and Taglioni, 2006):

M1 * M 2
FG12  G
Dist122

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 Gravity model
• In trade analysis, the force of gravity (FG) is substituted by the intensity of
the flow, and the masses M1 and M2 are replaced by variables that cover
the size of both elements, and that will depend on the analyzed
phenomenon.

Yi Y j
X ij  K
Tij
• The bilateral trade flow intensity between two specific geographical areas
(countries or regions), is directly proportional to the emission and
absorption capacity of the points of origin and destination, and inversely
proportional to the cost of interaction between the two points.
– Emission/absorption capacity = production capacity and demand
– The cost of interaction = distance or traveling time

ln Eij    1 ln GDPi  2 ln GDPj  3 ln Dij 31

The theoretical foundations of gravity
models
• Countries distance from the Rest of the World
matters for their bilateral trade

Rest of the World

Country A
Country B
Estimated gravity equation

• Normal trade

ln (Tradeij) = C + a ln(GDPi) + b ln(GDPj) +

+c ln(distanceij) + uij
Estimated gravity equation

• Normal trade with Resistances

ln (Tradeij) = C + a ln(GDPi) + b ln(GDPj) +
+c ln(distanceij) + d ln(Remoteness)i +
+ e ln(Remoteness)j+ uij
“Augmenting” the gravity equations
• Income per capita (higher income countries
trade more)
• Adjacency
• Common language, colonial links
• Institutions, infrastructures, labour flows,...
 Tugas
• Carilah data ekspor, impor, jarak dan jumlah
penduduk selama lima tahun terakhir
• Buatlah scatter plot dan korelasi antara
 Ekspor dan jumlah penduduk
 Ekspor dan jarak

Dikumpulkan Jumat, 6 April 2018.