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Global trade, also known as global trade, is simply the exchange of goods
and services across international boundaries.
Global trade involves the export and import of goods and services between
international borders. Goods and services that enter into a country for sale are called
imports. Goods and services that leave a country for sale in another country are called
exports. For example, a country may import wheat because it doesn't have much
arable land but export oil because it has oil in abundance.
The global trade landscape has witnessed dramatic shifts over the pastseveral
decades. World trade has grown steadily since World War II, with theexpansion
accelerating over the past decade. Despite a post-crisis dip, thecurrent level of world
gross exports is almost three times that prevailing inthe 1950s. With the exception of
commodity price booms in the1970s and more recently in 20042008, commodity
trade accounted for adeclining share of this growth, with the share of non-commodity
trade risingto more than 20 percent of global gross domestic product (GDP) in 2008.
The expansion in global trade was characterized by three important trends:

The rise of emerging market economies (EMEs) as systemically important

trading partners; the growing importance of regional trade; and the shift of
higher-technology exports toward dynamic EMEs.


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interconnectedness. Not only has the number of systemically important


trading nations increased over time, their trade links have also multiplied.
A chief contributor is the growing role of global supply chains in overall
trade, facilitated by lower tariffs and technology-led declines in
transportation and communication costs. With vertical specialization,
production of certain goods is fragmented into several stages, with each
stage produced in the most cost-effective location or country. As a result,
goods cross borders several times before being transformed into final
products, further increasing trade interconnectedness. Outsourcing of
production stages from advanced upstream countries to neighboring
EMEs has also supported a shift in the technology content of exports
toward the latter.

1. To study the Role and Significance of Global Trade
2. To study the recent trends in Global Trade
3. Toanalyze the changes in the pattern of Global Trade

This data has been collected from different sources like reference books, reports and


This project represents the Role,Significance of Global Trade and Recent Trends in
Global trade along with the Changes in the Pattern of Global Trade.

This study contains only the Role, Significance of global trade and its recent trends.


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This project comprises of four Chapters mainly as shown below:
1. Role and Significance and Growth of Global Trade
2. Recent Trends in Global Trade
3. Changing Patterns of Global trade

Global Trade plays an important role in every country's economy. The balance
of trade, or the amount of imports versus exports, drives a country's evaluation of its
gross domestic product (GDP) and ultimately impacts the public's perception of the
health of the economy. More importantly, global trade opens up untapped markets for
sellers and increases the home country's productivity as workers are employed to
make the goods to sell globally.
It is a common axiom in business that 95 percent of a company's potential
market is located overseas. A company that limits itself to sales generated within
domestic borders is missing out on the potential to grow the business exponentially.
From a business perspective, the role of global trade is to maximize profits for
owners, the single most important mandate forcorporations and many other types of
Governments consider the role of global trade from a larger perspective on the
health of the economy. The ability of the business sector to manufacture goods for
export means that more of the country's workforce is employed, producing a larger
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amount of inventory. It also means that the country is in a stronger position globally,
as it is virtually exporting the country's values and lifestyle along with its products.
Every domestic product that takes off in a foreign country makes it that much harder
for the foreign country's government to risk damaging trade relations in international
negotiations on unrelated issues.
Gross domestic product, an economic indicator that monitors a country's level
of production, is impacted by global trade. If a country imports more than it exports,
its GDP will likely decrease over time as the country becomes reliant on imported
goods and loses the ability to employ its own citizenry in the production of goods the
public wants to buy. The role of global trade in the economy is to find a balance
between importing and exporting that keeps the country's economy strong and its
standard of living high.
Perhaps, the most important role of global trade is to keep the citizens of a
country healthy and happy. Global trade provides all of the goods and resources that a
country cannot effectively produce itself. From making coffee available in Alaska to
providing wood products to desert countries, many would be unhappy if they could
only buy what their own country could produce. As people are better able to
communicate across the globe, it has become harder for governments to convince the
public that it should happily do without modern conveniences that people in other
countries enjoy. The unavailability of modern goods over time has contributed to
citizen uprisings in countries with governments that attempted to cut the country off
from the world.


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The buying and selling of goods and services across national borders is known
as global trade. Global trade is the backbone of our modern, commercial
world, as producers in various nations try to profit from an expanded market,
rather than be limited to selling within their own borders. There are many
reasons that trade cross national borders occurs, including lower production
costs in one region versus another, specialized industries, lack or surplus of
natural resources and consumer tastes.

One of the most controversial components of global trade today is the lower
production costs of "developing" nations. There is currently a great deal of
concern over jobs being taken away from the United States, member countries
of the European Union and other "developed" nations as countries such as
China, Korea, India, Indonesia and others produce goods and services at much
lower costs. Both the United States and the European Union have imposed
severe restrictions on imports from Asian nations to try to stem this tide.
Clearly, a company that can pay its workers the equivalent of dollars a day, as
compared to dollars an hour, has a distinct selling advantage. Nevertheless,
American and European consumers are only too happy to lower their costs of
living by taking advantage of cheaper, imported goods.


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Even though many consumers prefer to buy less expensive goods, some global
trade is fostered by a specialized industry that has developed due to national
talent and/or tradition. Swiss watches, for example, will never be pricecompetitive with mass produced watches from Asia. Regardless, there is a
strong market among certain consumer groups for the quality, endurance and
even "snob appeal" that owning a Rolex, Patek-Philippe or AudemarsPiguet
offers. German cutlery, English bone China, Scottish wool, fine French silks
such as Hermes and other such products always find their way onto the global
trade scene because consumers in many parts of the world are willing to foster
the importation of these goods to satisfy their concept that certain countries are
the best at making certain goods.

One of the biggest components of global trade, both in terms of volume and
value of goods is oil. Total net oil imports in 2005 are over 26 million barrels
per day (U.S. Energy Information Administration figures) (Note: Imports
include crude oil, natural gas liquids, and refined products.) At a recent
average of $50 per barrel, that translates to $1billion, three hundred million,
PER DAY. The natural resources of a handful of nations, most notably the
nations of OPEC, the Organization of Petroleum Exporting Countries, are
swept onto the global trade scene in staggering numbers each day, and
consumer nations continue to absorb this flow. Other natural resources
contribute to the movement of global trade, but none to the extent of the oil
trade. Diamonds from Africa, both for industrial and jewelry use, wheat and
other agricultural products from the United States and Australia, coal and steel


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from Canada and Russia, all flow across borders from these nations that have
the natural resources to the nations that lack them.
Despite complaints about trade imbalances, effects on domestic economies,
currency upheavals, and loss of jobs, the reality of goods and services
continually crossing borders will not go away. Global trade will continue to be
the engine that runs most nations.




World trade has grown steadily since World War II, with the expansion
accelerating over the past decade. The current level of world gross exports is
almost three times that prevailing in the 1950s. The past half century has
been marked by an unprecedented expansion of international trade. Since
1950, world trade has grown more than twenty-seven fold in volume terms.
The expansion in global trade was characterized by the following
important trends:
1. The rise of Emerging Market Economies(EMEs) as systematic
important trading partners;


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2. The growing importance of regional trade;

3. The shift of higher technology exports towards dynamic EMEs;
4. The growing role of global supply chain;
5. The rising trade liberalization since the early 1950s;
6. The technology led declines in transportation and communication
By way of comparison, the level of world GDP rose eight-fold during
the same period. As a consequence, the share of international trade in world
GDP has risen from 5.5 per cent in 1950 to 20.5 per cent in 2006.
A number of factors have given rise to this spectacular expansion in
world trade. Foremost is technological change, which has considerably
reduced the cost of transportation and communications. In the second half of
the 20th century, the introduction of the jet engine and containerization
significantly reduced the cost of air and maritime transportation, thereby
expanding the range and volume of goods that are traded. The information
technology revolution has made it easier to trade and to coordinate production
of parts and components of a final good in different countries.
A second factor is more open trade and investment policies. Countries
have opened up their trade regimes unilaterally, bilaterally, regionally, and
multilaterally. Measures that taxed, restricted or prohibited trade have either
been eliminated or reduced significantly. These changes in economic policies


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have not only facilitated trade, they have also broadened the number of
countries participating in global trade expansion. In particular, developing
countries now account for 36 per cent of world exports, about double their
share in the early 1960s.
Thus, technological innovations and changes in trade and investment
policies have both democratized trade and made it easier to unbundle
production. The parts and components that make up the final product can be
manufactured in different locations around the globe. Many of these
manufacturing plants are located in developing countries that, in turn, have
become increasingly integrated in global supply chains. Compared to the past,
more trade can be embodied in the manufacture of a final product and more
countries can be involved in the process.



The 2008-09 financial crisis had dramatic effects on the global
economic activity. One of the mostsalient features was the decline in
international trade relative to gross domestic product (GDP),which was
unusually abrupt compared with past recessions for most economies, including
for theemerging market economies.The global financial crisis started showing
its effects from mid-2008. The indicators for the downturn in the economies
include high oil prices which led to soaring food prices and global inflation.
The economic failure of large investment banks as well as commercial banks


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in nations around the world in the mid 2008 added fuel to the global economic
Around the world, stock markets have fallen significantly, large
financial institutions have collapsed or been bought out, and governments in
even the wealthiest nations have come up with rescue packages to bail out
their respective financial systems.Many industrialized nations like US, UK,
Germany have slid into recession. The World economy is in turmoil and its
cascading impact is being witnessed by all countries around the globe with
varying degree. IMF world economic outlook for 2009 pegs negative growth
in the US, Japan and the EU. Only emerging economies like India and China
will have a positive growth.
The financialcrisis that struck high-income economies in 2008 reached
low- and middle-income economies in 2009. World exports of goods Global
output and trade flows had started to recover from mid-2009 and particularly
world trade rebounded strongly in 2010. The global output grew by 3.6% in
2010, while global trade recorded highest ever annual growth as world
merchandiseexports in volume terms24 surged by 14.5% and world imports
grew by 13.5%. Boththe sudden and steep fall during the crisis and robust
recovery of world trade comparedto output were actually influenced by the






effects.International trade had a sharp and globally synchronized fall in the

second half of 2008 and early 2009. Exports of advanced, emerging, and
developing economies were all growing robustly through mid-2008 before
dropping sharply in the second half of 2008 and early 2009. The reversal was
most pronounced for developing economies in which the effects of rising
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partner country demand for commodities until mid-2008 and the subsequent
sharp fall in demand were reinforced by a commodity price boom and decline
following a roughly similar time path. Although exports of advanced,
emerging, and developing economies stabilized in early and mid-2009 and
have recovered sharply in late 2009/early 2010 in most major economies, trade
was still much lower in early 2010 than at the mid-2008 peak.
Both trade and output grew faster in developing economies than in
developed ones in 2010. Exports in volume terms were up 13% in developed
countries while the increase for developing countries was nearly 17%. The
difference between trade of developed and developing economies was even
greater on import side, where developed economies import rose by 11%
compared with 18% in the rest of the world.


Merchandise trade only includes trade in goods, not services nor capital

transfers and foreign investments. Official merchandise trade statistics measure the
level, month-over-month and year-over-year changes in total trades, exports and
imports. Balance of merchandise trade is equaled to total exports minus general
a. World Merchandise trade in volume terms:
In 2007, the variation in real trade growth among regions remained large,
reflecting marked differences in economic activity and relative price developments.
Major terms-of-trade gains could be observed again in countries and regions
exporting primarily fuels or minerals.


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More recently net-food exporters have also enjoyed gains from favourable
terms-of-trade movements. Unsurprisingly, thanks to their faster income growth and
increased international purchasing power, net exporters of mining products (fuels and
minerals) recorded a double-digit rise in their imports, while exports tended to
increase less than the global average.
South and Central America and the Commonwealth of Independent States
(CIS) increased their real merchandise imports by about 20%, more than three times
the global average in 2007. South and Central American exports were up by 5% and
those of the CIS by 6%. As mining products account for more than half of African
and Middle Eastmerchandise exports, these regions have been major beneficiaries of
relative price changes over the last three years. Consequently, these regions increased
their import volume by about 12% while their exports almost stagnated in real terms.

Exports from Asia rose by 11.5% in real terms, again exceeding significantly the
regions import growth (8.5%). Within the Asian region very large variations could be
observed on the import side. While China and India recorded double digit import
growth, the comparable figure for Japan was practically stagnant (1%). The trade
performance of the four so-called newly industrialized economies Hong Kong
China, Republic of Korea, Singapore and Chinese Taipei continued to be less
dynamic than that of the region as a whole, but still recorded an excess of export








North Americas real merchandise exports rose somewhat less than global trade but
more than twice as fast as imports. The excess of regional export growth over import


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growth can be attributed largely to the United States, where import volumes increased
only marginally (1%), while exports expanded by 7% in 2007. Canada and Mexico,
two net exporters of mining products, with currencies strongly appreciating against
the US dollar, increased their merchandise imports much faster than exports.
European trade performance was somewhat atypical in 2007. A slight
deceleration in economic growth (by 0.1 percentage points) is reported, together with
a sharp reduction in the expansion rate of both exports and imports (3.5 percentage
points). The slowdown in Europes trade is particularly pronounced for intra-EU
Europes real merchandise export and import growth of 3.5% in 2007
continued to lag behind the global rate of trade expansion, as has been the case since
2002. Within Europe, individual countries trade performances differed widely in
2007. Three groups can be distinguished. First, most of the new EU members and
Turkey expanded exports and imports by more than 10%. Second, Germany, the
Netherlands, Austria, Belgium and Switzerland registered trade growth of about 5%.
The third groups trade was almost stagnant (eg, France, Spain, Ireland and Malta).

World Merchandise trade in nominal terms:

The structure of world merchandise exports in dollar value terms was strongly

affected by developments in relative prices and exchange rates in 2007. Price

developments differed widely by sector and region in the course of the year.
According to the International Monetary Fund (IMF), commodity price indices,
world export prices of fuels, food and beverages increased sharply in the course of the


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year while prices for agricultural raw materials ended the year at a lower level than at
the start. Prices for metals, which had risen by more than one half in 2006, continued
to rise to new record levels in the first half before falling back by December to the
level reached in January 2007. Comparing the annual averages, prices increased by
18% for metals, 15% for food and beverages, 10% for fuels andonly 5% for
agricultural raw materials.
Export prices of manufactured goods are estimated to have increased by about
9% in 2007. Different types of manufactured goods saw quite different price
movements. Export prices for iron and steel products rose at double digit rates, while
those of office and telecom equipment were estimated to have decreased again.
Available information on export prices for chemicals point to a faster increase in these
product groups than for the average of manufactured goods, while prices for
automotive products increased somewhat below average.
Prices of manufactured goods remained less strong than those of primary
products for the fourth consecutive year. These shifts in relative prices had a
significant impact on regional export unit values (prices) which ranged from increases
of about 10% to 13% for the Commonwealth of Independent States (CIS), Africa and
the Middle East, to between 4% and 5% in Asia and North America. Information on
price developments in world commercial services trade is not available. However, the
price deflators for US services exports and imports increased by 3% in 2007,
somewhat less strongly than in the preceding year.
Exchange rate developments in 2007 had a major impact on the dollar price
level of internationally traded goods. Contrary to developments in 2006, the US dollar


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depreciated strongly (in terms of annual averages) against the major European
currencies and the currencies of major exporters of mining products (such as Canada,
Australia and Russia).
In Asia the picture was mixed. The currencies of Japan, Hong Kong China,
and Chinese Taipei remained practically unchanged against the US dollar (annual
averages) while those of India, Thailand and the Philippines increased by about 10%.
An intermediate development can be observed for the currencies of China, Singapore
and Malaysia, which appreciated by about 5% against the US dollar.
The combination of an export structure concentrated largely on electronic
goods and other manufactures and a moderate average appreciation of the Asian
currencies against the US dollar kept Asian export prices at about half the world
average in 2007. In marked contrast, European dollar export prices rose at doubledigit rates, largely due to exchange rate changes.
World merchandise exports in dollar terms rose by 15% to $13.6 trillion in
2007. Almost two thirds of this change in the dollar value can be attributed to
inflation. Commercial services exports rose by 18% to $3.3 trillion. The increase in
commercial services exports in 2007 was markedly faster than in the preceding year
and somewhat faster than that of merchandise trade, which expanded slightly less than
in 2006.





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Developing economies are becoming increasingly important in the global

trading system. Since the early 1990s trade between high income economies and lowand middle income economies has grown faster than trade among high-income
economies. The increased trade benefits consumers and producers. More than half
the worlds merchandise trade takes place between high income countries. But lowand middle income economies participation in the global trade have increased in the
past 15 years. The trade among low- and middle income economies accounted for
about 9.2 percent of the worlds merchandise trade in 2009, compared with 4.5
percent in 1996. The share of trade from low-and middle income economies to high
income economies increased from 14.1 percent in 1996 to 19.7 percent in 2009.
Low income economies specialize in labor-intensive sectors, but their share in
the global market of labor intensive products is very small. Lower middle income
economies provided most of the textile, clothing, and footwear traded globally in
2009. High income economies accounted for the majority of trade in agricultural
products and manufactured goods.



Developing countries have become major players in global trade. Their share

of world trade rose from 15 percent in 1990 to 30 percent in 2009. Developing

economies share of world export has risen from 19 percent in 2000 to 27 percent in

It is observed that developing countries are increasingly becoming an

important destination for the exports of developed countries. The importance of

developing countries as a source of import demand has grown as well, reflecting
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increases in foreign exchange availability and purchasing power, a rapidly growing

middle class, and a great appetite for imported goods.



countries have often pursued export-led economic growth policies, diversifying from
primary commodities to manufactured goods. Chinas surpassed those of both the
United States and Japan in 2006, as its share increased from 3.2 percent in 1996 to 9.8
percent in 2006.Developing countries have been leading the recovery in international
trade in 2010, in line with the stronger expansion of their economies. As a result, the
developing countries share in global trade increased from about one third to more
than 40 percent between 2008 to 2010.
Trade between high income economies and low- and middle income
economies has grown faster than trade between high income economies.



share and importance of developing countries increases, the share of world trade
occurring among developing countries will continue to rise. This increased trade
benefits to both producers as well as consumers in developing and high income


Similar to merchandise trade, world trade incommercial services grew by 12

per cent in 2012,according to preliminary estimates by UNCTAD/WTO. Within this

broad category, internationaltourism grew by 4 per cent in 2012, both in termsof
receipts in real terms (i.e. adjusting for exchangerate fluctuations and inflation) and
the number ofarrivals. Tourism roughly accountsfor 30 per cent ofworld exports
ofservices and for 6 per cent of overallexports of goods and services. It also ranks
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fifth asa worldwide export category after fuels, chemicals,food and automotive
products, and even first in manydeveloping countries. The Americas recorded
thelargest increase in receiptsfrom tourism (7 per cent),followed by Asia and the
Pacific (6 per cent), Africa(5 per cent) and Europe (2 per cent). By contrast,receipts in
West Asia were again down by 2 per cent(World Tourism Organization, 2013).
Trade in services makes up 22 percent of world trade in 2010, up from 20
percent in 2000. In developing economies the nominal value of trade in services grew
16 percent a year over 2000-09, doubling the rate of growth over 1990-2000. It was
more than that of high income economies, which grew at 11 percent a year over 200009.
World trade in services has been severely hit by the financial and economic
crisis. It is presumed to have recovered during 2010. UNCTAD data indicated that
the value of international trade in services fell by 12 percent in 2009. But it was less
than decline in the merchandise trading during the same year. The weaker downturn
in services trade during the global crisis was due to a lesser dependence on
intermediate inputs as much as a lesser reliance on trade finance of certain services
sectors like communications.
Tourism which an important part of travel and transportation services provides
an important source of income in many of the developing countries. International
tourism declined in 2009 but picked up again in 2010. The leading exporters in world
trade in commercial services in 2010 are US, Germany, UK and China. The leading
importers in world trade in services in 2010 are US followed by Germany, China and
UK. India ranks tenth in exports and seventh in imports.


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Primary commodity prices have fluctuated strongly compared with prices of
manufacturers in 2009 and 2010. As a result, countries specializing in exports of
primary commodities and those with high shares of import of energy, food and
industrial raw materials have large swings in their terms of trade. During 2010, the
terms of trade of the fuel exporters and exporters of minerals and mining products
improved significantly along with rebounding commodity prices, but remained below
the peaks reached in 2008 and 2007, respectively. On the other side, exporters of
manufactures saw part of the gains in their terms of trade dissipate.

In 2010,

exporters of agricultural products experienced an increase in the unit prices of both

their exports and imports but, saw a modest improvement in their terms of trade. The
countries that are net food importers and that do not export oil or mining products on
a significant scale suffered a slight deterioration in their terms of trade during 2010,
continuing a longer trend.
The economies in transition, Africa, Western Asia and Latin America and the
Caribbean saw a significant rebound in their terms of trade in 2010. They had suffered
important losses in 2009 following trends in primary commodity prices.


predominantly manufactured exports in East and South Asia, in contrast, saw stagnant
or slightly declining terms of trade in 2010. They had a modest improvement during
the global recession in 2009. Similarly, developed countries saw little movement, on
average, in their terms of trade.


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Trade imbalances of leading economies widened in 2010, as exports and imports

bounced back from their depressed levels of 2009. However, for most countries the
gap between exports and imports was smaller after the crisis than before. The trade
deficit of US for the year 2010 increased 26 percent compared with 2009. However,
the deficit of roughly US $690 billion was 22 percent less than the corresponding
deficit of US $ 882 billion in 2008.
Chinas merchandise trade surplus for 2010 totalled US $ 183 billion, roughly 7
percent less than the US $ 196 billion recorded in 2009, and 39 percent less than the
nearly US $ 300 billion surplus of 2008. The European Union had a trade deficit with
the rest of the world of US $ 190 billion in 2010, which was up 26 percent from 2009
but down 49 percent from the US $ 375 billion it recorded in 2008.
Japan was an exception to the trend towards smaller trade deficit/surpluses after the
financial crisis. In 2008 the country recorded a US $ 19 billion surplus of exports over
imports, but this nearly quadrupled to US $ 77 billion in 2010.


Growth in world trade has been due to three main factors:

Changes in transportation and telecommunications which have facilitated the

international transfer of goods and services;

Increased flows of foreign investment and changes in the nature of

business location decisions with a greater dispersion of functions;
The promotion of trade liberalization (through the reduction of tariff costs and


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physical obstacles to trade between countries) both at national level and in

termsof international treaties, most notably the General Agreement on Tariff
and Trade(GATT). However, elements of discrimination against developing
countries stillremain in the current trade regulations.

A. The Diffusion of Key Players in Global Trade
Emerging market economies have moved from peripheral players to
majorcenters of global trade. In the early 1970s, trade was largely confinedto a
handful of advanced economies, notably the United States, Germany,and Japan, which
together accounted for more than a third of global trade.
By 1990, the global trading landscape had become more diversified to include
severalEMEs, especially in East Asia. By 2010, China became the secondlargest
trading partner after the United States, overtaking Germany and Japan. Chinas
emergence reflects its rapid industrialization and growing tradeopennesstrade was
57 percent of GDP in 2008 in China, almost triple theratio of the United
States.Growth in trade was strongest for Europe and Asia. The expansion in
globaltrade took place against growing regional concentration. The contribution of
high-technology andmedium-high-technology exports such as machinery and
transport equipmentincreased, whereas that of lower-technology products such as






betterprospects for future economic growth. Trade in high-technology productstends

to grow faster than average, and has larger spillover effects on skills andknowledgeintensive activities. The process of technological absorption is not
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passive but rather capability driven and depends more on the national abilityto
harness and adapt technologies rather than on factor endowments.
In this setting, country-specific policies for technology learning andtechnology
import, including those aimed at attracting foreign directinvestment (FDI), can create
a comparative advantage between countries withotherwise similar endowments of
labor, capital, or skills.
The changes in global and regional trade patterns were driven first by trade
liberalization, then by vertical specialization and income convergence.

Trade liberalization
A key factor has been the multilateral and bilateraltrade liberalization since
World War II, which resulted in a significantdecline in trade barriers. Among major
westernEuropean and North American countries, average tariffs fell from15 percent to
4 percent during 19522005, with the bulk of this declineoccurring during the 1950s
and 1960s. Tariffs increased or remained very high until the 1980s inmany major
developing countries but have since come down sharply aswell.
Increase in vertical specialization in production
Along with lower trade barriers,technology-led declines in transportation and
communication costsalso allowed fragmentation of production processes along
trading networks that stretch across several countries. Technologicaladvancement in
communications reduces the cost of oversight andcoordination, making it easier to
separate different stages of productionacross countries. In addition, lower tariffs and
transportation costs facilitate the flow of intermediate goods across countries in the
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supply chain, as each country specializes in particular stages of a goodsproduction

Convergence in income levels
As countries converged in income levels andin the composition of their factor
endowments, the volume of trade inrelation to GDP increased and took the form of
intraindustry trade, as firms produceddifferentiated goods with increasing returns-toscale technology. Intraindustry trade as a share of overall tradehas increased steadily
over time and is highest for products such asmachinery, chemicals, and manufactures.
Countries that experiencedhigher changes in intraindustry trade between 1985 and
2009 are thoseintegrated in a supply chain, such as China, Thailand, and Mexico.


Growth in trade interconnectedness has increased the cross-bordertransmission of
shocks through the trade channel.

There has been a marked shift in the

relativerankings of individual jurisdictions, with China moving to first place in

2009up from ninth in 1999. Second, China has emerged as a major
systemicallyimportant trading center along with the United States, gaining
prominencenot only in terms of size but also by increasing the number of its
significanttrading partners. Third, there has been a marked shift in the roles of
Chinaand Japan as strategic export destinations, with China surpassing Japan as a
more significant regional and global consumer.European countries have retained their
importance as central in the global tradenetwork, owing more to their
interconnectedness than size. There is strong overlap between countries with trade and
financial sectors ofsystemic importance. Comparing the findings on trade
interconnectedness with those on financial interconnectedness using the same
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methodologysuggests an almost perfect overlap between the top 25 jurisdictions with

systemic financial sectors and the top 25 jurisdictions with systemic tradesectors in
2009. The only exceptions are Luxembourg and Ireland,whose systemic importance is
limited only to the financial sector, andMalaysia and Thailand, whose systemic
importance is limited only to thetrade sector.Jurisdictions hosting both systemic trade
and financial sectors would seem to be the natural focus of risk-based surveillance on
cross-border spillovers and contagion. The analysis underscores that these
jurisdictions display the strongest inter-sectoral interconnectedness to theglobal
economy. As such, they have the highest potential for transmittingdisturbances to
other jurisdictions or to systemic stability via either thetrade or financial channel or
indeed both channels simultaneously. Thesejurisdictions would thus seem to warrant
particular attention and furtheranalysis on the risks associated with their activities,
especially when carriedout through systemically important financial institutions and

C. The Growing Role of Global Supply Chains

Vertical specialization has increased since the mid-1990s. The increase hasbeen
particularly pronounced for China (where the share of imported contentincreased by
12 percentage points) and for Germany and Japan (7 percentagepoints), with the
emergence of global supply chains contributing significantly to their rise as major
exporting countries. In comparison, theincrease in imported content has been smaller
for the United States. Amongthe group of advanced economies, the share of foreign
content in grossexports is lowest for the United States, even if foreign content in
Germanysexports from the euro area is treated as part of DVA.
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specialization has been associated with regional concentration oftrade. The significant
increase in FVA content of exports between 1995 and2005 suggests that both China
and Germanys exports have gained fromintegration within their regional supply
chains. Both countries play very
different roles thoughthe former as a downstream assembly center andthe latter as
an upstream hub. Chinas exports have high content of FVAthat is from Asia: more
than half of FVA is from the region, including othereast Asian (OEA) economies. In
Germany, most of the FVA is comingfrom other EU countries, including EU accession
countries. About70 percent of FVA in exports of EU accession countries is from the
advanced euro area countries, Russia, or European Free Trade Association(EFTA)
Advanced economies tend to be upstream in the global supply chain, whereasEMEs
tend to be further downstream. Estimates from Koopman and others(2010) provide a
comprehensive picture of global supply chains at the aggregate level and highlight
two interesting features. First, compared toadvanced economies, EMEs have
relatively large imported contents in theirexports. Second, EMEs tend to have a
smaller share of indirectexports that are sent to third countries. The ratio of these two
measuresprovides a useful summary of a countrys position in the global supply
chain,confirming the downstream position of EMEs in supply chains.
The relative downstream position of some EMEs, including China, reflects
animportant role of processing trade. Exports of many EMEs stem from lowervalue
added production processes that largely use imported intermediates to assemble final
goods for exports. Such processing trade accounts for asignificant share of exports
from China, which, together with many otherAsian EMEs, serves as a downstream
hub in the Asian supply chain. Mexico has a somewhat similar role, owing to
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specialized duty freeassembly plants that use imported intermediates and re-export
final goodsback to the United States. The accession of Eastern European countries
withlower production costs in the European Union has also resulted in
increasedoutsourcing of production away from the advanced EU countries.
Regional supply chains in Asia, NAFTA, and Europe can be distinguished along two
key features. The first is the extent of dependence on a regional powerhouse. The
Asian supply chain extends across several countries, with goods-in-process crossing
borders several times, including through the hub(Japan), before reaching their final
destination. For instance, about15 percent of Japanese value added embodied in
Chinese products goes throughother countries in Asia before reaching China. In
contrast, almost all the
FVA in other regions is imported directly from the hubthe United Statesin NAFTA
and EU15 in Europe. The second feature relates to the extent ofprocessed value added
flowing back to the hub. A significant amount of U.S.value-added (and EU15 value
added to a lesser extent) returns home afterfurther processing abroad, which is not
necessarily the case for Japan. Processingtrade in Asia therefore relies heavily on the
region as a whole. This finding isconsistent with unique features outlined in Box 2 on
Asian regional integration.
Sectoral evidence of global supply chains
The role of global supply chains for trade in high-technology goods hasincreased over
time, especially in China. As Figure 10 illustrates, the shareof imported content in
exports of high-technology goods has increased forChina, Japan, the United States,
and the European advanced economiessince the mid-1990s. Theincrease is
particularly pronounced for Chinaimported content of Chinese largest imported
content in its high technology exports. Japan and the United
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States make significantly less use of imported intermediates in their productionof

high-technology exports.

In Germany, if imports from euro area countries are

considered art of DVA, the share of FVA in high-technology exportsbecomes

comparable to that of Japan and the United States (about 19 percent).Notwithstanding
Chinas downstream position in the supply chain, itsexports of intermediate products
in the high-technology sector areincreasingly contributing to advanced countries
high-technology exports.
Together with other Asian countries, China increasingly plays a dual rolein the global
supply chain for high-technology products, as an assemblycountry and exporter of
intermediate inputs to other countries hightechnologyexports. Imports of services
also contribute to advanced countries growth inexports. Though the focus of this
paper has been on trade in manufacturedgoods, it is worth noting that trade in services
has become an importantcontributor to advanced countries growth in exports.
Services imports arenot decomposed by country of origin due to lack of data on
bilateral tradein services. Evidence on service imports by advanced countries shows









FVA in

advancedcountries manufacturing exports in 2005. The greater regional dispersion

in the Asian supply chain has importantpolicy implications. Any disruption of trade
flows, particularly in intraregionaltrade flows in Asia, could have large negative
spillover effects on domesticproduction in partner countries. Protecting the free flow
of inputs andoutputs should therefore be a top priority. This could be done by
bindingthe regions unilateral tariff cuts under the Doha Round or including all thekey
players in regional FTAs such as the Trans-Pacific Partnership (TPP). Anexclusion of
a key player such as China in regional FTAs could create bilateral
tensions that could prove potentially disruptive to supply chain trade flows.
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D. The Diffusion of High-Technology Exporters

Changes in the technology composition of exports confirm the rise ofemerging
markets in global trade in high-technology products. Between 1995and 2008, the
contribution of high-technology exports to overall exportgrowth was more than 30
percent for China, compared with 26 percent forthe United States, 17 percent for
Germany, and only 11 percent for Japan. Adjusting exports, however, to exclude
foreign contentand show more clearly the domestic content of exports yields a
somewhatdifferent picture: the contribution of high-technology exports to
overallexport growth is now much lower in China (24 percent), whereas that of
theUnited States rises to 29 percent and Germany to 20 percent. Of note is the
increase in Mexicos contribution of high-technologyexports when only DVA is
considered, suggesting a more broad-basedupgrading of the technology content of its
export basket.
FDI has an important role in the diffusion of technology, especially acrossglobal
supply chains. Evidence suggests that, whereas U.S. FDI is generallydriven by market
access considerations, FDI by Japanese multinationals ismotivated by factor-price
differentials across borders arising from relativeabundance of unskilled labor in Asia
(Tanaka, 2009; Wakasugi, Ito, andTomiura, 2008). In this setting, labor-intensive
stages of production suchas final assembly are moved to a host country with lower
cost of unskilledlabor, whereas activities that are relatively intensive in skilled labor,
such asmarketing, patenting, and innovation, are retained in headquarters. Eventhough
the share of Japans high-technology exports has declined due tooutsourcing to other
countries, it has retained those aspects of productionwith the highest value
added.Several factors have allowed EMEs to upgrade the technology content oftheir


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exports. These include geographical proximity to advanced countries, theexistence of

an educated workforce, and a favorable business environment.
Indeed, countries that gained most in exports of high-technology productsover
the last decade were those whose initial conditions in 1995 featured anintermediate
level of development and some presence in high-technology These include countries
such as China, Malaysia, andThailand in Asia, and the Czech Republic, Poland, and
Turkey in Europe.Although many low-income countries (LICs) have not yet fulfilled
theseconditions, there has been some upgrade in the technology content of
theirexports as well. Exports of medium-high- and hightechnologyproducts have
increased for LICs in all major regions, albeitfrom a very low level. Increased trade
with dynamic EMEs such as Chinahas provided an important impetus, although
traditional partners such as the
United States and Japan remain important destinations for higher-technologyexports.
This suggests that LICs in Asia and the Western Hemisphere couldbe benefiting from
greater integration in global supply chains.

E. Rising Export Similarity

Export structures of EMEs are becoming increasingly similar to those ofadvanced
economies, in part reflecting the growth of global supply chains.With China and other
EMEs increasing their presence in sectors traditionallydominated by advanced
countries, the similarity in export structures hasincreased and so has competitive
pressure. A common indicator to gaugeexport competitiveness is the export similarity
index (ESI), which takeshigher values for country pairs with similar shares of each
product (six-digit)


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category in overall exports. Japan competes mostwith Korea, the United States, and
European countries, whereas the U.S.export structure continues to be similar to other
advanced economies. Chinahas traditionally competed with other Asian countries, and
although large differences still remain, its export structure has been converging with
that ofadvanced economies such as Germany and the United States.Rising export








complementarity, as well as competition. The observed shift intechnology content and

corresponding convergence in export structures mayreflect higher complementarity
arising from the increased outsourcing oflabor-intensive production to low-wage
countries in the region. For instance,whereas transport equipment exports go directly
to advanced countries and
have held their share over time, a growing proportion of Japanese machineryexports
are now assembled in China, showing up as increased Japaneseexports to Asia (and,
in turn, higher exports from China to the United States).This has more to do with
Japans upstream role in the Asian production chainrather than a sign of growing
competitive pressure. Similarly, in Europe,technological intensity of exports has
shifted from western to eastern Europeand particularly the Czech Republic, Hungary,
and Poland. In North America,the United States has outsourced some high-technology
activities to itsNAFTA partners, especially Mexico, and to Central America.Gross
exports data would not adequately capture quality differences withinthe same product
category. Whereas EMEs could be exporting products incategories similar to those of
advanced countries, these can still be differentiatedalong quality and price
dimensions. In the particular case of China, theimportant role of processing trade in
high-technology exports may affect


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aggregateIndicators of export similarity. To take this into account, we furthermodify

the ESI to distinguish products by destination market, assuming thathigh-income
countries are likely to demand higher quality varieties of the same product. The
increase in overlap in export structures of emerging marketeconomies, notably China,
Indonesia, and Vietnam in Asia, and Poland andTurkey in Europe and those of
advanced countries persists , albeit toa lesser extent compared to the unadjusted









qualitycharacteristics. An alternative indicator due to Hausmann, Hwang, andRodrik

(2007) measuring the income level embodied in a countrys exports(EXPY) is useful
in gauging the extent of export sophistication. The EXPYassigns to each six-digit
product category a (weighted) average income level
of those countries producing the same product. Thus, a product exclusivelyproduced
by industrialized countries, and likely embodying high quality/value added, would be
assigned a higher value. Based on this indicator, Japanhas consistently outperformed
the G-7 countries in increasing the value of its exports. Despite their substantial catchup, the income levelembodied in EMEs exports still remains below those for
advanced countries.In other words, EMEs exports are still skewed toward lowerincome productcategories. This is true even for China which has strongly
outperformed otherlarge emerging markets according to this metric.
Export structures sug gest that dynamic EMEs can expect another growth push.In a
given year a countrys EXPY can deviate considerably from the value thatmay be
predicted based on its income level. Given ongoing product and qualityupgrading, the
quality level of exports in several EMEs is higher than expectedbased on GDP per
capita. As shown in Figure 16, countries with higher-thanexpectedEXPYs tend to
grow more in subsequent years (see also Hausmann,Hwang, and Rodrik, 2007). The
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growth push is expected to be most pronouncedfor some Asian countries such as

China, India, and Thailand, and somewhat lesspronounced but still positive for most
eastern European countries.
F. Past Trends and Implications for Trade Outlook
The integration of rapidly growing EMEs is likely to induce a gradual shiftin the
sources of global demand away from advanced economies. WithChina overtaking
Japan as the second largest economy in the world in 2010,East Asian countries are
likely to emerge as the largest trading bloc by 2015,surpassing NAFTA and the euro
area. Global supply chains have been an important factor in this trend and a countrys
position along the supplychain could have important implications for trading patterns
in the future.The emergence of global supply chains may have also changed the way
traderesponds to relative price changes. Higher imported content in exports is likelyto
lower the sensitivity of trade to changes in the exchange rate. For instancean
appreciation of the domestic currency against all trading partners impliesthat while
exports become more expensive, imported intermediates alsobecome cheaper,
mitigating the impact of relative price changes on trade flows(Koopman, Wang, and
Wei, 2008). Advanced countries whose exports tendto be concentrated in mediumhigh-technology goods are therefore likely to bemore sensitive to relative price
changes because of higher DVA, whereas thoseof EMEs are likely to be less sensitive
given higher FVA in their exports. The simulation results in the next chapter are
consistent with these predictions.Global supply chains may also result in closer
relationships between producers indifferent countries and higher adjustment costs.
Although this may further dampenthe impact of (small) relative price changes on
trade flows, it may also representa source of vulnerability. The recent earthquake in
Japan provides for a real lifetest of the resilience of supply chains to disruptions in
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production, especially inan upstream country (see Box 6 for details). And although the
disruption is likelyto prove temporary, it may nonetheless lead to a rethink of the
just-in-timeproduction framework underlying global supply chains, especially the
Asian one.


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The global trade landscape has changed over the past few decades. This has lead to
increased interconnectedness and strengthened trade spillover channels.


expansion in global trade has been supported by a diffusion of key systematic players,
both in size and in links. Not only the number of key players has increased, but there
has been a shift in their relative importance. The relative importance has changed
from large advanced economies such as Japan and the United Kingdom to EMEs such
as China and India. Importantly, China is now on par with United States ranking
first in systematic importance not only in terms of size but also in terms of significant
bilateral trade relations. This has important implications on trade spillovers as the
sources of demand shift from advanced countries to EMEs.
The growing role of global supply chains is associated with increased trade

There is also strong interconnectedness between trade and

financial centers. These countries could be constitute a natural focus for risk based
surveillance on cross borders spillovers and contagion. The growing importance of
global supply chains further increases the international transmission of shocks,
including policy induced ones.


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