Current World Trade

Patterns and Value Chains

International Political Economy - 6225

MASTERS IN INTERNATIONAL RELATIONS –UNIVERSITY OF

COLOMBO

Student Name : Shyami Jayawickrama

Student Number : 2019/MAIR/42

Subject : International Political Economy

Submission Date : 15th February 2020

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 Contents

1. Introduction .............................................................................................................................. 3
1.1 World Trade ....................................................................................................................... 3
1.2 The patterns of world trade ............................................................................................... 3
1.3 Impact of world trade patterns .......................................................................................... 4
1.4 What is Global Value Chain?............................................................................................... 4
1.5 Current World Trade Patterns and Value Chains ................................................................. 4
2. Literature Review .......................................................................................................................... 5
2.1 The pattern of trade ................................................................................................................ 5
2.2 Geographical patterns of World Trade ..................................................................................... 6
2.3 Global Trade Patterns and Relationships .................................................................................. 6
2.4 Changes in the global economy ................................................................................................ 7
2.5 What are the Current World Trade Patterns? ........................................................................... 8
2.6 Comparison between current and world Trade Patterns with past decades ............................. 8
2.7 Global Value Chains and World Trade ...................................................................................... 9
2.8 Relation between World Trade and Global GDP ....................................................................... 9
2.9 Realism about World Trade and Global Value Chains ............................................................. 10
2.10 Globalization and World Trade ............................................................................................. 10
2.11 Relation between Global Value Chains and International Trade Patterns.............................. 11
2.12 Benefits of Global Value Chain in the world Trade patterns .................................................. 12
Conclusion ...................................................................................................................................... 13
Bibliography .................................................................................................................................... 14
Current World Trade Patterns and Value Chains

1. Introduction

1.1 World Trade

Developed countries have a greater share of global trade than developing countries. Usually
they export valuable manufactured goods, while developing countries export cheaper raw
materials. The global economy has grown continuously since the Second World War. Global
growth has been accompanied by a change in the pattern of trade, which reflects on going
changes in structure of the global economy. These changes include the rise of regional
trading blocs, deindustrialisation in many advanced economies, the increased participation of
former communist countries, and the emergence of China and India.( Baldwin, R. 2012)

1.2 The patterns of world trade

Over the last two decades, world trade and production have become increasingly organized
around global value chains (GVC). The rise of global value chains (GVCs) in the past two
decades has dramatically altered the world economy. Trade is the exchange of goods and
services between countries. Goods bought into a country are called imports, and those sold to
another country are called exports. Developed countries have a greater share of global trade
than developing countries. Usually developed countries export valuable manufactured goods
such as electronics and cars and import cheaper primary products such as tea and coffee.
Trading blocks, such as the European Union, dominate world exports. The greatest volume of
trade occurs between the developed, rich countries, especially between industrial leaders such
as Germany, Japan, the United Kingdom and the United States. The result of the pattern of
world trade is that the producers of primary products in developing countries lose out with
low wages and poor standards of living (European central bank, 2008)
 1.3 Impact of world trade patterns

Usually developed countries export valuable manufactured goods and developing countries
export cheaper raw materials. This leads to inequality in trade. This inequality has many
impacts. The result of the pattern of world trade is that the producers of primary products in
developing countries lose out with low wages and poor standards of living. (Hoover, 2001)

1.4 What is Global Value Chain?

In recent years, fragmentation of production processes and the international dispersion of

tasks and activities within them have led to the emergence of borderless production systems
for products, both goods and services. These products might be created through sequential
chains or complex networks globally, regionally or between just two countries. These
systems are commonly referred to as Global Value Chains. A Global Value Chains includes
the full range of activities that firms undertake to bring a product or service from its
conception to its end-use by final consumers. These activities include design, production and
manufacturing, marketing as well as pre-sale and post-sale support. GVCs locate the
production of goods and services where it is most advantageous to do so. Therefore, every
country or firm that „adds-value‟ through intermediate inputs to a final good or service is
considered to be part of the GVC. With the offshoring of some of these production activities,
coupled with trade in intermediate inputs, production is increasingly spread over different
countries, such that the value chains become global. Nowadays, close to 65% of global trade
(which amounts to more than US$ 20 trillion) consists of trade in intermediate goods and
services that are incorporated at various stages into the production process of goods and
services for final consumption. This makes the global economy one of intertwined GVCs.
(Mattoo, 2012)

1.5 Current World Trade Patterns and Value Chains

Experts believe that rapid growth markets will become an even more dominant force in
global trade over the coming decade, with the Asia-Pacific region set to experience the fastest
growth in global trade to 2020.Trade will also be increasingly focused around Asia, the
Middle East and Africa, suggesting that the key geographical location for companies will
change. Europe‟s exports to Africa and the Middle East by 2020 are forecast to be almost
twice as large as Europe‟s exports to the US. China‟s dominance in low cost manufactured
goods will come under pressure from countries such as Bangladesh, Vietnam and parts of
Africa. The fastest-growing trade route will be between India and China. Some experts
believe trade between China and India alone will account for almost one-fifth of global trade
flows by 2020.There is a huge amount of trade across borders. This however, may reflect
trade within and between companies, rather than flows to final consumers. Many companies
export finished goods across borders within their own organisation.( Rodríguez ,2013)

2. Literature Review
2.1 The pattern of trade

The global economy has grown continuously since the Second World War. Global growth
has been accompanied by a change in the pattern of trade, which reflects ongoing changes in
structure of the global economy. These changes include the rise of regional trading blocs,
deindustrialization in many advanced economies, the increased participation of former
communist countries, and the emergence of China and India. (Baldwin, R. 2012)

Figure2.1:[WorldBankhttps://www.weforum.org/agenda/2017/12/most-read-world-economic-
forum-articles-of-2017].
2.2 Geographical patterns of World Trade

Trade is the exchange of goods and services between countries. Goods bought into a country
are called imports, and those sold to another country are called exports. Developed countries
have a greater share of global trade than developing countries.

Geographical patterns of World Trade can categorize as follows:

 This concerns the business and consumers in other countries with whom business and
people trade
 Intra-regional trade is trade between countries in the same region. European Union,
Africa, Asia
 Countries tend to trade most with other nations in closest proximity. This known as
gravity theory.

Figure2.2: [Eurostat, United Nations (Comtrade) and International Monetary Fund (Direction
of Trade Statistics)]

Patterns of international trade in goods have seen wide-ranging changes in recent decades
reflecting, among others: trade liberalization, the introduction of new technologies, different
methods of industrial organization and the development of global production chains. The
relocation of some manufacturing activities has led to a shift in the composition of
international trade, reflected in a higher share of total trade for intermediate goods (processed
materials, parts and components), and lower shares for final consumer goods. (CINDE, 2012)

2.3 Global Trade Patterns and Relationships

Ten nations, including China, the USA, Germany and Japan, account for more than half of all
global trade. The value of world trade and global GDP has risen by around 2 per cent
annually since 1945 with the exception of 2008-09 when the Global Financial Crisis (GFC)
led to a brief fall in activity more than half of all trade originating in developed countries
takes place with other developed countries. This is because of the large numbers of affluent
consumers and markets found in the world‟s wealthiest countries. The importance of China‟s
rise as both a major exporter and importer of goods cannot be overstated. Since the early
1980s, China has emerged as the dominant influence on world trade. Indeed, a slowdown in
the rate of Chinese growth since 2010 has been responsible for a “cooling off” of the global
economy as a whole. In particular, falling Chinese demand for imports of natural resources
and oil has been financially harmful for many African exporters selling raw materials to
China. (OECD ,2012)

2.4 Changes in the global economy

The emergence of regional trading blocs, where members freely trade with each other, but
erect barriers to trade with non-members, has had a significant impact on the pattern of global
trade. While the formation of blocs, such as the European Union and NAFTA, has led to
trade creation between members, countries outside the bloc have suffered from trade
diversion. Like several advanced economies, the UK‟s trade in manufactured goods has fallen
relative to its trade in commercial and financial services. Many advanced economies have
experienced deindustrialization, with less national output generated by their manufacturing
sectors. The collapse of communism led to the opening-up of many former-communist
countries. These countries have increased their share of world trade by taking advantage of
their low production costs, especially their low wage levels.

Newly industrialized countries like India and China have dramatically increased their share of
world trade and their share of manufacturing exports. China, in particular, has emerged as an
economic super-power. China‟s share of world trade has increased in all areas, and not just in
clothing and low-tech goods. For example, in 1995, the US had captured nearly 25% of
global trade in hi-tech goods, while China had only 3%. By 2005, the US share had fallen to
15%, while China‟s share had risen to 15%. (European central bank, 2008)
Major Economies share of Global GDP

Figure2.4: [Eslake, 2005 Major Economies share of Global GDP]

2.5 What are the Current World Trade Patterns?

The geographical fragmentation of production has created a new trade reality. Often referred
to as global value chains or vertical specialization, this fragmentation deepens the
interdependency of trade relations and has many implications for how we understand trade
policy. The emergence of regional trading blocs, where members freely trade with each other,
but erect barriers to trade with non-members, has had a significant impact on the pattern of
global trade. While the formation of blocs, such as the European Union and NAFTA, has led
to trade creation between members, countries outside the bloc have suffered from trade
diversion. Like several advanced economies, the UK's trade in manufactured goods has fallen
relative to its trade in commercial and financial services. Many advanced economies have
experienced deindustrialisation, with less national output generated by their manufacturing
sectors. The collapse of communism led to the opening-up of many former-communist
countries. These countries have increased their share of world trade by taking advantage of
their low production costs, especially their low wage levels.(Mattoo, 2012)

2.6 Comparison between current and world Trade Patterns with past
decades

Newly industrialised countries like India and China have dramatically increased their share of
world trade and their share of manufacturing exports. China, in particular, has emerged as an
economic super-power. China's share of world trade has increased in all areas, and not just in
clothing and low-tech goods. For example, in 1995, the US had captured nearly 25% of
global trade in hi-tech goods, while China had only 3%. By 2005, the US share had fallen to
15%, while China's share had risen to 15 %.( IMF, 2013)
 2.7 Global Value Chains and World Trade

As shown in the Figure2.4, the rise of global value chains results from the conjunction of
several factors. It started with a change in the consumption models of industrialized
economies, which found a supply potential in some developing countries. The book also
shows how this development approach, initially cantered on a few leading economies that had
adopted an export-led industrialization strategy, enabled a larger number of regional partners
to embark on an industrialization path that had deep implications for their domestic
economies. This structural shift in the functioning of international trade requires, in turn, that
the tools used to analyse its evolution, in particular trade statistics, be adapted . As shown in
the diagram, the rise of global value chains results from the conjunction of several factors. It
started with a change in the consumption models of industrialized economies, which found a
supply potential in some developing countries. (Batshur ,2012)

International Demand [Type a quote from the

document or the summary

Development of
Global Value Chains
infrastructure and trade [Type a quote from the
(GVCs) and world
document or the summary
Trade
Industrial processing of an interesting point. You
zones
[Type a quote from the
document or the summary
Offshoring-outsourcing
strategies and FDI

Figure2.7 [World Economic Forum, 2011]

2.8 Relation between World Trade and Global GDP

During a long period after World War II, global trade grew several times faster than global
GDP. Since 2012, however, the world may have entered a period of trade growth that is
almost in line with GDP growth. The past few decades have seen important shifts that have
reshaped the global trade landscape. As a share of global output, trade is now at almost three
times the level in the early 1950s, in large part driven by the integration of rapidly growing
emerging market economies (EMEs). The expansion in trade is mostly accounted for by
growth in non-commodity exports, especially of high-technology products such as computers
and electronics. It is also characterized by growing regional concentration and an ongoing
shift of technology content toward emerging market economies (EMEs). These developments
in global trade have important implications for trade patterns, in particular in response to
relative price changes. (World Economic Forum, 2011)

2.9 Realism about World Trade and Global Value Chains

The idea should not be that economics deals with things of which can have direct sense
perception. The preferences and expectations of economic agents are unobservable in the
sense of being inaccessible directly by senses. The multinational companies and the revenues
they make and the institutional constraints they face. But they, just as money and prices,
salaries and taxes, are familiar parts of our common sense view of the social world within
which people live their daily lives.

Goods exchanged in markets may become perfectly divisible in theoretical models. The
messy local preferences familiar to us become transformed into the transitive and complete
preferences of expected utility theory. Our local and flawed expectations become transformed
into comprehensive rational expectations. Ordinary mortal people become infinitely lived
agents in some models. Time-consuming and otherwise costly transactions become free and
instantaneous. Internally structured business organizations with multiple goals become
modelled as devoid of internal structure and pursuing nothing but maximum profits. Strategic
rivalry between powerful price-making firms becomes non-strategic perfect competition
among powerless price-taking firms. The (institutionally, culturally, politically and
otherwise) complex structures of international trade of multiple goods between multiple
countries become modeled as perfectly free trade of two goods between two countries with
same technologies and same consumer tastes. (Hoover, 2001)

2.10 Globalization and World Trade

Globalization has gone through several phases; as a matter of fact, the history of mankind is
often closely related to the evolution of trade. In former times, when transportation was
difficult, international trade was limited to the most expensive items. With the industrial
revolution in the 19th century, mass production and improved transportation made
international trade much easier, and most goods became tradable. More recently, a new
phenomenon, “global manufacturing”, is again boosting the volume and diversity of products
being exchanged. But it is also changing the very nature of international trade. Global
manufacturing is characterized by the geographical fragmentation of productive processes
and the offshoring of industrial tasks. (The World Bank, 2013)

2.11 Relation between Global Value Chains and International Trade

Patterns

The increasing fragmentation of value chains has led to an increase of trade flows in
intermediate goods, especially in the manufacturing sector. In 2009, trade in intermediate
goods was the most dynamic sector of international trade, representing more than 50 per cent
of non-fuel world merchandise trade. This trade in parts, components and accessories
encourages the specialization of different economies, leading to a “trade in tasks” that adds
value along the production chain. Specialization is no longer based on the overall balance of
comparative advantage of countries in producing a final good, but on the comparative
advantage of “tasks” that these countries complete at a specific step along the global value
chain. (World Economic Forum, 2013)

The process of outsourcing and offshoring, showing the special importance of export
processing zones (EPZ) in the international fragmentation of global manufacturing networks.
Many developing countries have based their export-led strategies on the creation of these
dedicated industrial zones. As a result, EPZs account for more than 20 per cent of total
exports of developing economies. But manufacturing is only a part of the global supply chain
story, and services, including transport, communications and other business services, are also
key components of these global production networks.( COMEX ,2013)

In addition to rebalancing effects, changes in relative prices result in important adjustments in

sectorial trade patterns. A partial equilibrium approach is used to examine the impact of
relative price changes on trade structures of four key players in global trade, namely China
(downstream country), the Euro Area, Japan, and the United States (upstream countries).
First, a downstream (as opposed to upstream) position in a supply chain cushions the impact
of a relative price change on both exports and imports. This reflects the higher foreign
content in the downstream country‟s exports which mitigates the impact of exchange rate
changes. Second, sectors that respond the most to the exchange rate changes are different for
different countries: an appreciation induces an increase in the share of high-technology
exports in China and (to a lesser extent) the Euro Area while a depreciation results in an
increase in the share of medium-high technology exports in Japan and the United States,
largely driven by changes in the auto sector. Finally, adjustment in the trade balance takes
place mainly outside of the supply chain, as exports to supply chain partners are more
resilient to relative price changes. (Shapiro, 2011)

The diversity and complementarity of the regional production system also fosters
specialization when it comes to trade in tasks. Reflecting their particular roles in global value
chains, some countries, like Japan or the Republic of Korea, specialize in the export of
products involving high- or medium-skilled labour, while others, such as China or Viet Nam,
and focus on low-skilled, labour-intensive activities. When considering the totality of the
value chain, from conception to production and consumption, developed economies like the
United States tend to create employment at both ends of the qualification spectrum, from
highly-skilled engineers and professionals to low-skilled retail workers; however, low-skilled
manufacturing tasks are outsourced. The net balance of employment is also clearly influenced
by the overall macroeconomic situation of each economy; net job creation attributable to
trade is much higher in export-led surplus countries than in inward-oriented ones, especially
when the latter run structural trade deficits.( Rodríguez ,2013)

Using the value added approach to evaluate bilateral trade balances In addition to providing
another angle for trade analysis the value added approach raises questions about the
relevancy of bilateral trade balances evaluated through traditional statistics. Bilateral trade
balances, and more especially bilateral deficits, are given a prominent role in trade policy.
The bilateral trade balance is expressed as the difference between an economy‟s exports and
its imports with another economy. However, the goods exchanged between the two parties,
particularly the manufactured ones, may result from international production chains and may
have multiple geographical origins. Thus attributing the entire export or import value to the
referred partner country is inadequate and affects the analytical relevance of the trade surplus
or deficit observed between the two countries. (Tanner, 2012)

2.12 Benefits of Global Value Chain in the world Trade patterns

Poverty provided developing countries implement deeper reforms and industrial countries
pursue open, predictable policies. The technological change is likely to be more a boon than a
curse for trade and GVCs. The benefits of GVC participation can be widely shared and
sustainable if all countries enhance social and environmental protection.
GVCs have contributed to growth, jobs, and reduced poverty and also to inequality and
environmental degradation. It spells out how national polices can reignite trade growth and
ensure that GVCs are a force for sustainable development rather than divergence. Finally, it
identifies inadequacies in the international trade systems that have fomented disagreements
among nations, and provides a roadmap to resolve them through greater international
cooperation. (World Economic Forum 2015).

Conclusion

This paper discussed that participation in GVCs in services enhances trade and economic
growth for emerging economies. By focusing on Relation between Global Value Chains and
International Trade Patterns, the analysis shows how a small developing economy has
transformed its industry and become one of the main actors in 21st century trade and
investment patterns. As conclusion many small developing countries, for which GVCs have
redefined trade and enabled the identification of possibilities to attract investment and create
their own specialized industry within value chains. Large firms that used to be predominantly
located in developed countries are increasingly offshoring part of their production and import
intermediate inputs, spreading production over different countries and in so doing have made
value chains global. Countries that accept this reality can achieve „economic upgrading‟ or
„climb the value added ladder.‟ Climbing the GVC development ladder can be done by
improving current processes, increasing the services content of domestic value added in
exports and also by diversifying into activities that can involve more sophisticated production
processes.
Bibliography

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