What factors

affect global
trade?
OBJECTIVES:
T O I D E N T I F Y T H E M A I N FA C T O R S A F F E C T I N G A C O U N T RY ’ S
BALANCE OF TRADE

T O U N D E R S TA N D T H E I M P O RTA N C E O F L O C AT I O N
A D VA N TA G E I N E X P L A I N I N G T H E G L O B A L T R A D E  

T O U S E C A S E S P E C I F I C K N O W L E D G E T O S U P P O RT A N
ARGUMENT
Essay question examples:
 What factors affect a
country’s balance of
trade?
Eg
Locational advantage
 How much it costs to produce a good in the importing country
Environmental, health and safety standards compared with the exporting country

Availability of foreign exchange to

How good are the transport links pay for imports

Resource endowment
What factors affect a
Currency exchange rates
country’s balance of
trade?
Eg
Locational advantage
Trade agreements and tariff barriers

Government influence Historical factors e.g. colonial ties

 Adam Smith
1723- 1790

Scottish social philosopher and political economist who wrote the famous book- The Wealth of
Nations, considered to be the bible of capitalism and the foundational work of classical
economics.

Comparative advantage

According to the economics Adam Smith- if a foreign country can supply a product cheaper than another country, then the second
country should buy it off them with part of the profits made from their own products.

The theory is that if each country specialises in what it does best, and exports, it can buy a greater and wider variety of goods from th
rest of the world with the income it has made, compared with what it could produce.

David Ricardo- another economist refined this idea and he developed the idea of comparative advantage. 

It seems to make sense for country to specialise in what they are better at than other countries.
 Factors affecting global trade: Locational Advantage
Location is very important.

Closeness to the markets for its products. Ports with a large hinterland.

This reduces transport costs along with many other advantages from spatial proximity. Eg Rotterdam in Netherlands is located near the mouth of the
River Rhine. Many goods brought in by large ocean carriers are
Eg Tourist industry in France benefits from large populations of neighbouring countries that trans-shipped onto smaller river vessels to Rotterdam. Rail gives
can reach quickly and cheaply. access to Belgium, Luxembourg, Germany and France.

Eg Canada’s manufacturing industry benefits from proximity of the huge American market.

Strategic positions on trade routes.

Eg Singapore on the Malay peninsula is situated at

the strategic location along the main trade route
between the Indian and Pacific Oceans.
Locational Advantage: Example, Brugge
Locational Advantage: Example, Brugge
 Locational Advantage: Example, Brugge
Bruge ( in the country of Belgium today) grew from the 10th Century as a wealthy trading town- it was the centre of
manufacturing clothing.

Ships sailed up the Zwin river to trade clothing for wool, Spanish wine, Russian furs, silks and spices from the Middle East

Bruge remained wealthy for 250 years and developed new industries including cutting diamonds from India. It had a
population twice the size of London

15th Century the Zwin started to silt up and ships could no longer reach
the docks of Bruge

Traders moved up the coast to Antwerp and Bruge became a backwater

Antwerp was connected to the rest of the world via the Scheldt River
and took over as the greatest economic power in Western Europe

Antwerp
Complex: Locational advantage can change over time and physical geography is important!
 Locational Advantage: Example, Rotterdam
Rotterdam- locational advantage in the Netherlands in Western Europe.
It is located near the mouth of river Rhine.

• Largest port in Europe and overall 11 th largest worldwide

• Rotterdam is highly connected within Europe- by sea, rail, roads and air
•
Its main competitive advantage is the direct access to the sea without locks or
bridges and deep waterways that can handle the world’s largest vessels
•
Rotterdam, in particular, is strategically located in close proximity to the North
Sea, which is one of the reasons why it is often referred to as the ‘Gateway to
Europe’.
•
In the port, goods from all over the world are imported, processed further and
transported to the hinterland
•
Goods brought in on large ocean carriers are trans-shipped onto smaller river
vessel or other modes of transport or refined/manufactured in the ports industrial
area
Antwerp
 Example: Singapore

Arguably, not all counties experiencing economic development have been resource rich

Singapore:
The country is small and it has a lack of land available. It also is not rich in natural resources, yet it achieved rapid economic
development as an Asian Tiger. https://www.economist.com/blogs/economist-explains/201
economist-explains-23
      
Example: Singapore

Singapore- its one distinct economic advantage is its

location
Its strategic importance has also made it a source of
international friction from the 15th century to today

The 190 kilometers of coastline features natural deep-water

ports, and the island is situated along important shipping
routes

The Strait of Malacca is the shortest sea route between

India and China and hence is one of the most heavily
traveled shipping channels in the world.
Straits of Malacca
is the world’s second-busiest waterway 
Singapore is the most important location on the Strait of
Malacca. Measured in terms of container transshipments,
Singapore is the second-largest port in the world.
Singapore has few natural resources (resource endowment)
but its locational advantage has been key to its economic
development
Example: Burkina Faso
What trading issues do you think the country of Burkina Faso might have
based on its location?

The country has limited natural resources- arable land for

growing crops such as cotton and sorghum ( type of
cereal) and mineral deposits such as gold are the major
natural resources of Burkina Faso. The Burkinabe
economy faces numerous challenges with the most
significant one being the lack of sufficient infrastructure.
 What is the world’s newest country?
South Sudan- became independent from the Republic of Sudan on the 9 th July 2011 after fighting a 20 year civil war.

What locational disadvantage does

South Sudan have?
  South Sudan
South Sudan
According to World Bank (WB) economists, being landlocked is a major reason
why 16 of the world’s 31 landlocked LIC’s are among the poorest in the world.

Without a port these countries will have to pay more and wait longer for
imported oil, food, and other goods. 

Other problems include border delays, multiple clearance processes, and bribe-
taking, all of which keep transport costs artificially high.
 Example: Switzerland

Like Burkina Faso and South Sudan, Switzerland is

land locked. Switzerland is also mountainous which is
an additional geographical disadvantage.

Switzerland is a HIC with high GDP and one of the

world’s wealthiest countries- why does it not face the
face issues that BF and South Sudan face in over
coming this geographical disadvantage?

Switzerland specialises in financial service which do not require transportation to customers and specialises in
producing high value small products, such as watches.
Summary points:

It can be strongly argued locational advantage is an important factor in explaining inequalities in global trade.

It is advantageous for exporting countries to be close to markets to reduce transport costs.

We can support this argument using examples such as Rotterdam and Singapore. These examples highlight the importance of
location on strategically important trading routes.

It can further be argued that  countries which are landlocked face challenges trading and are at a significant geographical
disadvantage.

We can support this argument  using examples such as Burkina Faso and South Sudan. 

However,  South Sudan also highlights the complexities of understanding inequality in global trade and draws attention to
additional factors such as conflict and political instability. 

Switzerland is an excellent example of a country which despite being landlocked has overcome its locational disadvantage to
become one of the world’s wealthiest countries and also illustrates the importance of other factors, such as political stability,
infrastructure and strong trading relationships with its neighbours. 
 What Factors Affect Global Trade?

TASK:

Use the information

sheets around the room to
complete the 6 sections
on your worksheets
 Resource Endowment
Examples:

Middle East, Nigeria and Venezuela- Oil

Resource Endowment is a significant UAE (OIL)
factor in world trade.
Canada, Australia have built wealth from export of raw
Natural resource endowment offer great materials on the world market.
opportunities for achieving high levels
of growth and development if properly
managed.

Developed countries endowed with

natural resources were able to grow by
diversifying their economies using
proceeds from their natural resources.

This illustrates the principle of

comparative advantage where countries
specialise in producing the commodities
for which they are best endowed and
trade these for other goods and services.
 Historical Factors
The link between European countries and
their former colonies was almost ended by
a wave of independence agreements
between 1945 and 1970.
Before this, trade was dominated by a flow
of primary goods from the colonies and
manufactures goods from the colonial
power.
This relationship is often seen as
exploitative and is claimed that this is the
reason for the very low share of world trade
that many poor African countries have
today.
UK trade with the Commonwealth was
Trading links between the former heavily focused on five countries –
colonial powers and former Australia, Canada, India, Singapore and
colonies often remain strong. South Africa; combined these countries
accounted for 72% of UK exports to the
E.g. UK and the commonwealth Commonwealth and 73% of UK imports
countries are still significant. from the Commonwealth.
Dec 2, 2563 BE
E.g. France has stronger links to
its former colonies
(Francafrique). The colonies were
considered to be overseas
departements of France. Upon
independence many was tied to
the French Franc and since 1999
the Euro.
Francophone Africa
 Comparative Advantage
This states that different countries will specialise in producing those goods and
services for which each is best endowed.

Each country will then trade a proportion of these goods and services with other
nations to obtain goods and services that is needs and not favourably endowed.

Easy to understand with regards to raw materials, but this also

applies to manufactured goods and services.

Here, countries tend to concentrate on the goods and services

they are best at producing. This results in specialisation of
production and employment.

Eg German cars, Japanese high tech, Scotch Whiskey, Belgian

Chocolate, Swiss watches
 Investment
Investment in a country is the key to its
increasing its trade.
Some MICs such as South Africa and Brazil
have increased trade sustainably due to
attracting the bulk of FDI.
Low income globalisers countries such as
China, Brazil, India and Mexico have
increased their trade to GDP ratios.
On the other hand, hundreds of millions of
people live in countries that have become less
rather than more globalised (in an economic
sense) as trade has fallen in relation to
national income.
In the poorest LICs, business frequently
operate in investment climates that
undermine their incentive to invest and
grow. Here, economic, social and
political instability deters investment by
making future benefits more uncertain or
undermining the value of assets.
Studies show, the greater level of
instability, the lower the rate of private
investment and growth.
Bangkok Po Crime and corruption also play
substantial risk to investment and
st Link increase the cost of doing business in
countries where there is a substantial
problem.

Export commodities at
a low price
The terms of trade (TOT) is defined as
Poor nations are primary-product dependent , which means they rely on one or a small
the ratio of export prices to import prices.
It can be interpreted as the amount of
import goods an economy can purchase
per unit of export goods.
The terms of trade
Means that you have to
Import items at a
export high volumes of
relatively high price The most vital element in the trade of any
the commodity country is the terms on which it takes
place. If countries rely on the export of
commodities at low prices and need to
import items at high prices, they need to
export in large quantities to be able to
number of primary products to obtain foreign currency through exports. afford a low volume of imports.
The world market price for primary products has been generally low compared to
manufactured goods and services.

The price of primary products is prone to variation from year to year making economic and
An improvement of a nation's terms of social planning extremely difficult. LIC’s can be • Generally low in
trade benefits that country in the sense price
PRIMARY • Significant variation
that it can buy more imports for any given In contrast, the manufacturing and service exports of HICs generally rise in price at a PRODUCT in price (see
level of exports. The terms of trade may reasonably predicted rate, resulting in regular income and less uncertainty. DEPENDE Fairtrade later)
be influenced by the exchange rate NT
because a rise in the value of a country's The terms of trade for many LICs are now worse than two decades ago and therefore isn’t
surprising why so many nations are struggling to get out of poverty. Many LICs have high
currency lowers the domestic prices of its trade deficits. LIC’s then
imports but may not directly affect the • Leading to high trade
find it
prices of the commodities it exports. It isn’t just poor countries that suffer the terms of trade. difficult to
deficits, so may have
to borrow money =
December 2014, Australia was in the grip of the biggest fall in terms of trade since records get out of debt
began in 1959, due to a huge fall in commodity prices. poverty (the • LIC’s stay dependent
poverty
trap)
• Resource Endowment
70% Of the
Countries
Some MICs will such
Australia,
specialise
The amountin
Canada,
producing
of
• Comparative as
India,UAE
South
those goods
Africa
Singapore
and and
Advantage import
and Brazilgoods have an 
economy
South
Ports
services
with
Africa;
fora which
large
combined
each
• Locational Advantage economy can
increased
these
hinterland.
is bestcountries
endowed.tradeThis
• Historical factors comes from
accounted
results in specialisation
sustainably
purchase for 72%
due
per of
to
unit
• Investment UK
of production
exports toand the
• Terms of trade
of non oil
attracting
export
Commonwealth
employment. the bulk
goods.
of FDI.
sectors
Practise Questions
This map sums up the Economy of the Middle East

What