IV INTERNATIONAL TOPICS

International Trade and the Global Trading System

International trade involves cross-border exchanges of products. These voluntary exchanges are based on the principle of mutual benefit. That is, both parties expect to benefit from the exchange. Governments sometimes erect trade barriers, such as tariffs and import quotas, to protect domestic producers from foreign competition. Since the close of World War II, however, a number of trade agreements have reduced trade barriers and created a more open global trading system. Trade liberalization has benefitted many peoples. These benefits are uneven, however, which creates additional challenges for countries in the less connected corners of the global economy.

TRADE BASICS

International trade is the cross-border exchange of merchandise and commercial services. International trade occurs when an individual, business, government, or other entity imports or exports products. An import is a product that is purchased from another country. An export is a product that is sold to another country. The items that are traded between countries are divided into two broad categories: merchandise and commercial services. In 2012 the value of global trade, measured by global exports, was $22.7 trillion. Trade in merchandise accounted for about 81 percent of global trade ($18.3 trillion), and trade in commercial services accounted for the remaining 19 percent ($4.4 trillion). In 2012 U.S. exports hit $2,161 billion, which made the United States the world's second largest exporter behind China. U.S. exports included merchandise valued at $1,547 billion and commercial services valued at $614 billion.^[1]

Growth in International Trade

International trade is viewed as a pillar of globalization. The benefits of international trade are built on the principle of mutual benefit and the theory of comparative advantage. The principle of mutual benefit emphasizes the benefits received by both parties in a voluntary exchange. For instance, international trade expands the range of consumer choice

PRIMARY DOCUMENT: WTO Director-General Pascal Lamy Explains Global Value Chains

One reason for deep [economic] integration has been the emergence of global value chains. Until not long ago, we thought of products in terms of a single national origin, bearing a label saying “made in China” or “made in Germany.” The expansion over the last two decades or so of global value chains means that most products are assembled with inputs from many countries. In other words, today’s goods are increasingly “made in the world.” Trade in intermediate goods—a proxy for global value chains—now comprises close to 60 percent of total trade in goods, and continues to be a dynamic sector in international trade.

Speech at the University of International Business and Economics, Beijing (September 20, 2012), Pascal Lamy

and sparks technological advances, innovations, and entrepreneurial opportunities in competitive global markets. The theory of comparative advantage, which was popularized by David Ricardo about two centuries ago, argues that international trade promotes regional specialization, production efficiency, and economic growth. In recent decades trade agreements such as such as the General Agreement on Tariffs and Trade (1947–1994) and the World Trade Organization (1995–present) have helped create a rules-based global trading system.

The global trading system represents the sum total of international trade, as well as the institutions and practices that influence cross-border exchanges of merchandise and commercial services. Exchanges within the global trading system have increased dramatically in recent years. The World Trade Organization (WTO) reported that global exports nearly tripled from 2001 to 2012, climbing from $7.7 trillion to $22.7 trillion during the period.^[2] In addition, international trade supported economic integration in recent years. In the above passage Pascal Lamy, director-general of the WTO, explains the growing interdependence among trading partners as semifinished goods pass through global value chains.^[3]

The top three world regions in the global trading system accounted for 82 percent of all global exports in 2012. The top three exporting regions are Europe (37.8 percent of global exports), Asia (30.6 percent), and North America (13.9 percent). The remaining 18 percent of global exports came from Africa, the Commonwealth of Independent States (CIS), the Middle East, and South and Central America.^[4] The world's top five exporting and importing nations are shown in Table 11.1.^[5]

Table 11.1 Top Exporting and Importing Nations, 2012

Top Exporters Top Importers

Source: World Trade Organization, “Appendix Tables 3 and 5,” Press Release, April 10, 2013, 21, 23.

• [1] World Trade Organization (WTO), “Appendix Table 3: Merchandise Trade: Leading Exporters And Importers, 2012,” “Appendix Table 5: Leading Exporters and Importers in World Trade in Commercial Services, 2012,” World Trade 2012, Prospects for 2013, Press Release/688, April 10, 2013, 21, 23.
• [2] Ibid.; WTO, “Table A6: World Merchandise Exports by Region and Selected Economy, 2001–2011,” “Table A8: World Exports of Commercial Services by Region and Selected Economy, 2001–2011,” International Trade Statistics: 2012, 211–214, 220–223
• [3] Pascal Lamy, WTO director-general, “Lamy Warns Rise of Regional Trade Agreements Could Lead to ‘Policy Fragmentation,’ ” September 20, 2012,
• [4] WTO, “Appendix Table 1: World Merchandise Exports by Region and Selected Economies, 2012,” “Appendix Table 2: World Trade of Commercial Services by Region and Selected Country, 2012,” World Trade 2012, Prospects of 2013, Press Release/688, April 10, 2013, 19–20.
• [5] WTO, “Appendix Table 3: Merchandise Trade: Leading Exporters and Importers, 2012,” “Appendix Table 5: Leading Exporters and Importers in World Trade in Commercial Services, 2012,” World Trade 2012, Prospects for 2013, Press Release/688, April 10, 2013, 21, 23.