Observing Trade: Overview of Changes

Observing Trade: Overview of Changes 198-21 Miguel A. Centeno Princeton University To be presented at the conference Observing Trade: Revealing International Trade Networks and Their Impacts Princeton Institute for International and Regional Studies Thursday, 9 th March 26 DRAFT

Anyone on the plus side of 4 can easily remember a time when travel abroad came with shopping lists. A tourist had to bring American goods to friends abroad, and then ferry the equivalent imports back. My personal favorites were English Muffins to Europe and Toblerone back. It is difficult to imagine now in 26 how location would make any difference in consumption at least of packaged goods. The world (or, as we will see, the rich part of it) is a single brand market. Citizens of the wealthy countries can purchase each others products and eat a global mosaic of cuisines. It is likely that we consume and use products from a least a dozen countries on a daily basis. Even if one tried to be a jingoistic consumer, the complexities of the global assembly line are such that national products may be a thing of the past. It is important to realize how new this global supermarket really is. The first takeoff began in the 196s, but the acceleration (notice the slope in Figure I) really occurred in the 199s. A myriad of factors may account for this (e.g. the internet, the collapse of the Communist Block, etc.). This conference is not so concerned with exploring those factors as with analyzing the development of a global web of trade. Figure I WORLD TRADE (Billions 2 US $) 18. 16. 14. 12. Imports Exports 1. 8. Source: WTO 6. 4. 2.. 1948 1953 1963 1973 1983 1993 23 24 Why is this significant? If we think of trade as a network, the importance of knowing its various routes and connections becomes obvious. Networks are

arrangements of connections into nets, or permeable systems linking groups of points and intersecting lines. Obvious examples are the body s circulatory system, a network of veins and arteries, or a country s transportation network of roads, railways, rivers, and canals. Global interregional networks are defined by a complex series of interactions, such as trade and communications that can span wide geographical areas. Consider then the state of medicine without awareness of the circulatory system, or attempting to travel without any sense of roads and connections. The structure of global trade is critical because our daily life increasingly depends on its proper functioning. A few examples should suffice. Price disputes between Ukraine and Russia in late 25 led to lowering of gas supplies in countries downstream the pipeline towards the West. The SARS epidemic and its focal points in Hong Kong and Toronto created transport and logistical headaches for firms and consumers not directly connected to either site. The rapid contagion of financial crises in the 199s also demonstrated that no bourse was an island. Figure II WORLD TRADE 2 18 16 14 Trade Value Index Trade Volume Index GDP Index 12 1 8 6 Source: WTO 4 2 195 1952 1954 1956 1958 196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 Countries can also use their relative position in the network to great advantage. A significant part of the Dutch GDP originates in that country s position astride the industrial network along the Rhine valley. Similar

advantages have accrued to Singapore and Bahrain. Globalization runs on networks and it is critical that we map them. In order to appreciate the complexity of the structure we will be analyzing, let us begin with some indicators of the size of the global trade network. Unless otherwise specified, we will be discussing only merchandise trade that is, trades in goods. A discussion of the service trade will follow. Figure III CHANGES IN WORLD TRADE 25. 2. Change in Global Trade (Value) Change in GDP Change in Global Trade (Vol) 15. Source: World Economic Aggregates 1. 5.. 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24-5. -1. Figures I and II give a clear idea of how dramatic the changes in trade have been over the past few decades. Note that in Figure I, the data has been adjusted for dollar inflation. In the space of a single decade, (1993-23) total global trade practically doubled. Figure II shows that this was not a function of more expensive goods, but reflected a real increase in the sheer volume of things being transported. That same figure as well as Figure III also indicates the turning point of the late 198s and 199s when trade began to increase even faster than the base economies. Obviously, trade did not increase uniformly. Prices changed as did global demand and supply. One of the industries most affected by increase in trade was clothing. The last 25 years have seen a clear and dramatic move away from production in the OECD and growing exports from developing countries (Figure IV). Other manufactured goods including automobiles also rose reflecting both consumer preferences in major markets and the global distribution of

manufacturing. Primary products did not experience as much growth. In some cases this may be a product of lower prices (thus even larger volumes would still show no growth in trade) or simply flat demand. The trade in electronic data processing and other office machinery (with available figures only beginning in 2) appear flat largely because of decreasing unit costs. Figure IV Trade by Commodiy 7 Index 198=1 6 5 4 3 Agricultural Fuels and Minerals Manufactures Machinery and Transport Data Processing Automotive Textile Clothing Source: WTO 2 1 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 The increasing volume of trade led to a massive increase in the infrastructure required to manage it and deal with its logistical challenges. In Hong Kong alone, the capacity for loading and unloading shipping containers grew more than threefold. But even in older market entry points such as Rotterdam and New York, the volume almost doubled. The 199s also witnessed a dramatic increase in the volume and value of trade shipped by air due to the combination of global supply chains and just-in-time inventories (Figures V-VI).

Figure V CARRYING GOODS 3.5 3 2.5 World Air Freight NY/NJ Martime cargo NY/NJ TEUs Hong Kong TEUs Rotterdam TEUs Index 1991=1 2 1.5 1.5 Source: For NY/NJ, NY/NJ P.A.; for Air Freight, Boeing; for HK and Rotterdam, HK Marine Dept. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 Figure VI US Air Freight 35 18 3 16 14 25 Available ton-miles Revenue ton-miles 12 Billion Ton Miles 2 15 Source: BTS 1 8 S per ton-mile 6 1 4 5 2 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 The increase in trade has also seen a general decline in prices for goods across the board. While the 197s and early 8s saw dramatic spikes (largely due to the oil shocks), the 199s have seen cheaper goods flowing from one end of the world to the other. The decline in the prices for computers is perhaps the most dramatic example of this trend. Increases in the price of energy beginning in 21 may lead to higher transport costs and rises in associated products (e.g. fertilizer) (Figures VII-IX).

Figure VII World Prices 35 3 25 2 All Fuels (SITC 3) Computer (SITC 752) Source: BLS, prices for US imports 15 1 5 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 Figure VIII World Prices (1985=1) 25 2 Total Index Constant $ Food Agri Raw Mat Mineral and Metals Crude Petr Source: UNCTAD 15 1 5 196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 Figure IX Commodity Prices (1995=1) 3 25 Food and beverages Minerals (excluding crude petroleum) Energy 2 Source: WTO 15 1 5 Source: WTO 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 Q1 25 Q2 Despite all of these changes, some aspects of the global economy remain the same. The most prominent example is the fact that over ¾ of global trade

occurs among the wealthiest industrialized countries. No matter what classification used (in the first figure UNCTAD Developed Economy, in the second, OECD with membership in 2), Northwest Europe, North America, and Northeast Asia account for the most significant global transactions. Two other trends include the rise and subsequent fall (with perhaps another rise after 21) of trade accounted for by OPEC members (Figure XI) and the rise to global importance of the Chinese economy (Figure X). Figure X Structure of World Trade 9 7 8 6 7 5 Share of World Total 6 5 4 3 Developed Econ Exports Developed Econ Imports Developing w/o China Exports Developing w/o China Imports China Exports China Imports Source: UNCTAD 4 3 Share of World Trade for China 2 2 1 1 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 Figure XI Structure of World Trade 8% 7% 6% 198 199 21 5% 4% 3% 2% 1% % OECD Exports OECD Imports OPEC Exports OPEC Imports Other Export Other Import

The other clear structural change in the global system has been the rise of regional networks. Intra-Asian trade, as well as that within NAFTA and Europe, have increased in sheer volume as well as market share. The two stars in this process have been NAFTA and the NE Asian and ASEAN corridor. Trade between these regions has also increased dramatically, particularly along the Pacific Rim. The share of world trade handled by the remaining outsiders has declined from one third of the total to less than a fifth (Figures XII-XIV). Figure XII INTRA-REGIONAL TRADE VALUE 1.E+9 9.E+8 8.E+8 7.E+8 6.E+8 198 5.E+8 199 21 4.E+8 3.E+8 2.E+8 1.E+8.E+ NAFTA Other Americas Euro-12 Other Europe CIS MENA SSA Asia- Pacific Figure XIII More Intraregional Trade 5.% 45.% 4.% Perc of Total World Trade 35.% 3.% 25.% 2.% 15.% Total Intraregional NAFTA Euro-12 Asia 1.% 5.%.% 198 199 21

Figure XIV Trade Axes 4 35 3 Intra NAFTA Intra Asia Intra-Europe NAFTA-Pacific NAFTA-Europe Europe-Pacific Rest Share Wotrld Trade 25 2 15 1 5 198 199 21 The different regions have taken very different routes to their entry into the new global trade. One obvious trend is the collapse of the oil market leading to much smaller surpluses in MENA (but again, that may be changing in the 21 st century). The most obvious contrast is between NAFTA s massive deficit and the huge surpluses for the Asian economies. These are two trends that appear to be accelerating after 21, especially with the spectacular rise of China (Figure XV). Figure XV Regional Trade Balance 3.E+8 2.E+8 198 199 21 1.E+8.E+ -1.E+8-2.E+8-3.E+8-4.E+8 NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific Figure XVI illustrates the rise of both intra-regional trade and that between the Big 3 regions. We can identify three major zones of growth: trade

across the Pacific, trade within Europe, and most spectacularly, trade within Asia. Note also how other regions and their trade with each other and even the Big 3 has barely changed over the 2 year period. Figure XVI Change 198-21 Constant 2 $ 7.E+8 6.E+8 5.E+8 NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific 4.E+8 3.E+8 2.E+8 1.E+8 NAFTA Americas Euro-12 Europe.E+ CIS MENA Importer NAFTA Americas Euro-12 Europe Exporter CIS MENA SSA Asia-Pacific SSA Asia-Pacific The next two figures (XVII-XVIII), focus on the situation in 21 and support the general model of regionalization and increasing contact between the most developed parts of the world.

Figure XVII NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific % 5% 1% 15% 2% Importer Exporter REGIONAL TRADE 21 Share NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific Figure XVIII NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific.E+ 1.E+8 2.E+8 3.E+8 4.E+8 5.E+8 6.E+8 7.E+8 8.E+8 9.E+8 1.E+9 Importer Exporter REGIONAL TRADE 21 Dollar Value NAFTA Americas Euro-12 Europe CIS MENA SSA Asia-Pacific

Looking at relationships between individual countries (Figure XIX and XX), it is clear that the triadic structure holds. In 198 the U.S. and Euro-12 1 (and the U.K. to a lesser extent) have a huge amount of trade with each other, and the U.S. and Japan have a large amount of trade, but the link between Europe and Japan is not particularly strong. As well we see that Euro-12 also has a significant tie to Saudi Arabia (and other MENA countries). By 21, there are some significant changes. The European-Saudi tie has diminished enough to no longer meet the.3% threshold 2. In intra-regional trade, the U.S.-Canada tie and the Euro-12-U.K. tie remain among the largest, while the value of the U.S.-Mexico tie and the number of European partners of the Euro-12 grow. Three other significant changes in world structure include the growth of Asia (in relative value of trade links, the number of inter-regional trade partners and the amount of intra-regional trade), the disappearance of any African nation trading at this threshold by 21, and the appearance of Brazil and Venezuela by 21. 1 Euro-12 is an aggregate area of the twelve countries that share the Euro currency: Austria, Belgium, Germany, Spain, Finland, France, Greece, Ireland, Italy, Luxembourg, The Netherlands and Portugal. 2 The.3% threshold represents trade links (exports or imports) that are greater than or equal to the value of.3% of the total trade in that commodity. This is adjusted for inflation.

Figure XIX 198 Figure XX 21

The increasing concentration of trade among a small number of actors is also evident in the next two images showing the links between countries accounting for the top 25% 3 of global trade (Figures XXI-XXII). Figure XXI 198 Figure XXII 21 Another finding is what we might call the Empire Effect. In the case of the Americas (Figure XXIII), the centrality of the U.S. is obvious, as is that of the 3 The top 25% of trade represents the largest trade links (exports or imports) that cumulatively account for 25% of the total value of world trade.

Euro-12 in the case of Africa (Figure XIV). Notice that we also find countries in a classic semi-peripheral status (e.g. Brazil and South Africa). Figure XXIII Americas 21 Figure XXIV Africa 21

Asia is the exception to this pattern. It has become a much more complex exchange network in the intervening 2 years and Japan s centrality has been seriously challenged (Figures XXV-XXVI). Figure XXV Asia 198

Figure XXVI Asia 21 Mapping Global Merchandise Trade Major trends include: Massive increase in global trade over and above economic growth. Uneven distribution across different commodities and with different price tendencies (but within a general cheapening of price). Creation of new transport infrastructure. Most of trade continues to be between a small number of players. The position of energy exporting economies obviously depends on the rpice of oil and gas. China has entered into the major leagues of global trade networks. Much of the trade increasingly occurs within regions and between 3 major economic areas: NAFTA, Asia, and Europe. The triad effect is clear even at the level of individual countries. Among newly developing regions, Asia stands apart from Latin America and Africa in its:

o Sheer growth o Development of a regional trade network o Movement from unipolar network. Global Service Trade While much of the developed world has made a transition to a postindustrial economy where services can account for the vast share of the economy, global trade has been less affected by this transformation. There has been growth in the sheer volume of services exchanged internationally and the forms of services have been transformed, particularly in the past 2 years (Figure XXVII) But while there was some decline in the ratio of goods to services as part of global trade, this seems to have been reversed by the early 199s and we find a fairly consistent ratio of 4:1 in goods to services (Figure XXVIII). There are significant differences between countries: the relative importance of services to goods in trade can range from over half to practically nothing. Figure XXVII 5.E+6 Service Trade Million 2 Dollars 4.E+6 4.E+6 Exports Imports 3.E+6 3.E+6 2.E+6 2.E+6 1.E+6 5.E+5.E+ 1994 1995 1996 1997 1998 1999 2 21 22 23 24

Figure XXVIII Goods vs. Services 6 5 Ratio Goods/Services 4 3 2 Export Import Source: WTO 1 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 The data for services is much thinner than for merchandise goods. We have, for example, extremely limited information on country to country flows. We can, however, see some patterns in the data available for the last decade. The division between the haves and the have-nots remains the general trend in the service industry. The concentration of global shares among a small group of rich countries is even more pronounced (Figures XXIX and XXX). Overall, the leading position of the United States in the general services category may be under strain. Not only has that country s share of the global exports declined, but is consumption of non-domestic services has risen, eroding the long standing and significant service trade surplus which that country has enjoyed. Note that in this instance, however, the major competition comes from Germany and the U.K. and that Japan has not had significant success in expanding its service export sector.

Figure XXIX Imports of Commercial Services Share 16% 5% Top 5 14% 12% 1% 8% 6% 4% 2% 45% 4% 35% 3% 25% 2% 15% 1% 5% Rest of World % 1994 1995 1996 1997 1998 1999 2 21 22 23 24 USA Germany UK Japan France Rest of World % Figure XXX Export of Commercial Services World Share 2% 45% 18% 4% 16% 14% 35% 3% Top 5 12% 1% 8% 6% 4% 25% 2% 15% 1% Rest of World 2% 5% % 1994 1995 1996 1997 1998 1999 2 21 22 23 24 USA UK Germany Japan France Rest of World % Financial services may be one of the most visible aspects of globalization and these have seen dramatic growth in past decade totaling $84 billion in 24 (Figure XXXI). The relative standing of the leading countries has been fairly stable. However, note the continual rise of Ireland after its appearance in the late

199s and the drop in the relative share held by the non leading countries. As in the case of merchandise trade, leadership is exclusively held among a group of rich countries (as even the PRC s position is largely due to the wealthy Hong Kong). Figure XXXI Financial Services Exports Millions Current $ 4.E+4 3.5E+4 3.E+4 2.5E+4 2.E+4 1.5E+4 UNITED KINGDOM UNITED STATES LUXEMBOURG SWITZERLAND GERMANY IRELAND CHINA,P.R.:HONG KONG JAPAN REST OF WORLD Source WTO 1.E+4 5.E+3.E+ 1996 1997 1998 1999 2 21 22 23 24 American leadership in the $96 billion (24) Communication Services is not surprising, and note that its relative share has been relatively stable over the past decade. The UK has made significant strides in this area. Here we see an exception to the OECD domination with the recent entry of India as a leading exporter (Figure XXXII). Figure XXXII UNITED STATES UNITED KINGDOM GERMANY NETHERLANDS FRANCE ITALY 7.E+3 BELGIUM CANADA INDIA SPAIN REST OF WORLD 6.E+3 COMMUNICATION SERVICES 2.E+4 1.8E+4 1.6E+4 Million Current $ Top 1 5.E+3 4.E+3 3.E+3 2.E+3 1.E+3 Source: IMF 1.4E+4 1.2E+4 1.E+4 8.E+3 6.E+3 4.E+3 2.E+3 Million Current $ Rest of World.E+ 1996 1997 1998 1999 2 21 22 23 24.E+

The Computer Services industry has witnessed the greatest change (Figure XXXIII). First, its growth has been phenomenal with a more than five fold increase since 1996 for a 24 total of $75 billion. The leading role of two new entrants into the major leagues of global trade, Ireland and India, also differentiates this sector from other parts of global business. Figure XXXIII Computer and Information Services (millions of US$) 18, 16, 14, 12, 1, 8, IRELAND INDIA UNITED KINGDOM GERMANY UNITED STATES ISRAEL SPAIN NETHERLANDS CANADA BELGIUM Rest of World 6, 4, 2, 1996 1997 1998 1999 2 21 22 23 We do not possess longitudinal data on the two largest sectors of the service industry: travel (including tourism receipts) accounting for $75 billion in 24 and the category including a wide assortment of services including advertising, consulting, etc., totaling $1 trillion in 24 (Figure XXXIV). There are few surprises in the makeup of the leading countries in the travel category, but note the significance of the September 11, 21 attacks on travel receipts for the United States. In the broader category (Figure XXXV), the possibly declining position of the United States is also worthy of note given that country s long standing leadership in this sector. 23

Figure XXXIV Travel Service Exports Share of Global Market 4. 35. 3. 25. 2 24 2. 15. 1. 5.. United States Spain France Italy Germany United Kingdom China Turkey Austria Greece Australia Canada Japan a Mexico Switzerland Rest of the world Figure XXXV 35. Other Services Share of World Trade 3. 2 24 25. 2. 15. 1. 5.. United States United Kingdom Germany Japan France Ireland Netherlands Italy India Belgium Hong Kong, China Luxembourg Spain Canada China Rest of the World Conclusions on Service Trade Despite its critical importance of the domestic economies of most nations, the service sector remains a fraction of the dollar volume generated by merchandise trade. In the case of services, we also see an even more extreme version of the concentration among a few global leaders. The United States remains the leading power in this area, but its position may be slipping.

In the service industry, the Asian challenge to the traditional global order has not been as strong. General Conclusions Globalization is not a global phenomenon only part of the world is flat. Its growth has been largely restricted to a few set of countries. This pattern is likely to be supported by the regional effect. Asia is unique in the creation of an independent regional network over the past 2 years, but the traditional powers that arose from the 19 th century retain their leadership in the service industry.