Talkin go money

Renewal of chains: what international trade will be like after the crisis

International Trade - Igor Makarov (February)

If you walk into a supermarket and can buy South American bananas, Brazilian coffee and a bottle of South African wine, you are experiencing the effects of international trade.

International trade allows us to expand our markets for both goods and services that might otherwise not be available to us. It is for this reason that you can choose between a Japanese, German or American car. As a result of international trade, the market contains more competition and therefore more competitive prices, which brings the consumer a cheaper product.

What is International Trade?

International trade is the exchange of goods and services between countries. This type of trade gives rise to a global economy in which prices, supply and demand are influenced and influenced by global events. For example, political changes in Asia could lead to higher labor costs, resulting in higher production costs for an American sneaker company based in Malaysia, resulting in an increase in the price you have to pay to buy tennis shoes at your local mall. On the other hand, lower labor costs will result in you having to pay less for new boots.

Trade globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every type of product can be found on the international market: food, clothing, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold on the world market is an export, and a product that is bought on a world market is an import. Imports and exports are recorded in the country's current account in the balance of payments.

Improving Trade Efficiency Worldwide

Global trade enables rich countries to use their resources - be it labor, technology or capital - more efficiently. Since countries are endowed with different assets and natural resources (land, labor, capital and technology), some countries can produce the same efficiency more efficiently and therefore sell it cheaper than other countries. If a country cannot efficiently produce a product, it can obtain the product by trading in another country that can. This is known as specialization in international trade.

Let's look at a simple example. Country A and Country B produce cotton sweaters and wine. Country A produces ten sweaters and six bottles of wine a year, while country B produces six sweaters and ten bottles of wine a year. Both can produce a total of 16 units. Country A, however, takes three hours to produce ten sweaters and two hours to produce six bottles of wine (five hours in total). Trana B, on the other hand, takes one hour to produce ten sweaters and three hours to produce six bottles of wine (four hours in total).

But these two countries understand that they can produce more by focusing on those products with which they have a comparative advantage. Then Country A starts producing only wine, while Country B produces only cotton sweaters. Each country can now create specialized products of 20 units per year and trade in equal proportions of both products. Thus, each country now has access to 20 units of both products.

We can see that for both countries the opportunity cost of producing both products is higher than the cost of specialization. Specifically, for each country, the opportunity cost of producing 16 units of both sweaters and wine is 20 units of both products (after trade). Specialization lowers their opportunity costs and therefore maximizes their efficiency in purchasing the goods they need. With high demand, the price of each product will decrease, which gives an advantage to the end consumer.

Note that in the example above, country B could produce both wine and cotton more efficiently than country A (less time). This is called an absolute advantage, and country B may have it due to the higher level of technology. However, according to the theory of international trade, even if a country has an absolute advantage over another, it can still benefit from specialization.

Behind the epic negotiations to cut oil production, news from the World Trade Organization, which issued a forecast of the state of international trade in 2020-2021, went almost unnoticed. As often happens, it consisted of both optimistic and pessimistic scenarios, but its boundaries - a drop in world trade this year from 13% to 32% - are impressive. In other words, even in the best case scenario, the decline will exceed the 2009 figure.

Trade acceleration

In recent decades, international trade has been seen as the undisputed driver of economic growth. Between 1980 and 2011, merchandise trade turnover at current prices increased almost nine times, while the global gross product increased 3.42 times; the average annual growth rate of the volume of international merchandise transactions reached 7.3%, while the global gross product was only 3.9%. Involvement in the international division of labor turned out to be especially important for the newly industrialized countries, which could not ensure the rapid growth of their economies, focusing only on the domestic market. In the 1980s and the first half of the 1990s, up to 60% of GDP growth in countries such as South Korea or Taiwan was driven by an increase in their exports; at the same time, in the largest economies of the world - the USA and Japan - dependence on exports has been and remains insignificant.

Return to localization

The inevitable global trade disaster in 2020 will set two important trends for the coming years. The first is to reduce dependence on monopoly suppliers. World trade in the past few decades has evolved (apart from oil trading) not as an intercountry, but rather as an intracorporate business. According to various estimates, from 35 to 50% of the commodity mass that crossed national borders did not leave the area of ​​responsibility of a particular corporation. As transport and logistics costs decreased, the flexibility of the global division of labor increased - and gradually developed countries began to realize the risks associated with the impact of the possible loss of one supplier on the entire production chain. This understanding emerged in 2017-2018, as trade tensions between the United States and China intensified, and became universal with the onset of the COVID-19 pandemic. It quickly became clear that not only 30% of masks and other medical protective equipment sold in the United States were made in China, but the dependence of manufacturers of sophisticated medical equipment on Chinese suppliers was critical.

It is also worth noting that already at the end of the 2010s, the growth rate of international trade began to decline, and in 2019 its volumes fell by 0.1% at all, while the global gross product grew by 2.9%. I think that the trend towards a return to the localization of the production of particularly important goods will accelerate in the coming years. In trade, the importance of what is usually called intra-sector trade will increase, when similar goods, such as cars, are both imported and exported by a country. Such flows of goods are driven mainly by consumers' desire for diversity, not by the complementarity of economies. This shift will deal a significant blow to Asian economies, which have always taken an alternative approach; we therefore venture to assume that Asia's share of global merchandise trade turnover will decline to 25-27% by 2030 from 31.5% in 2017. The same trend with a high degree of probability will determine both the diversification of energy and raw materials supplies, and the orientation towards self-sufficiency in raw materials in the United States or towards the use of renewable energy sources in Europe and Japan.

Strength test

The second important trend in global trade may be its concentration in the circle of countries that make up the strongest integration associations with a common monetary system. The EU is likely to suffer minor losses in trade in goods and services between its members (although its external trade could be significantly reduced). The fact is that the share of intra-sector trade in the EU has historically been the highest in the world, reaching 60% of all foreign trade operations. In other words, the union has long been essentially a single economy. On the other hand, sustaining demand for end products and helping individual players are critical to sustaining international trade. In the EU, with its unified financial system and huge stimulus programs of the ECB, such a task is easier to solve than in other regions of the world.

And those integration projects where the leading regional economies are relatively self-sufficient and there is no single currency and tax policy will face great difficulties. South America, with its link to Brazil, and the post-Soviet space, with Russia dominating it, may face this risk. We already see in the EAEU countries the first measures to restrict access to national markets - so far limited to food, but with a chance to spread.

Another feature of the new crisis may be a stronger blow to trade in services compared to trade in goods. Of the global trade in services, 42.4% is accounted for by tourism and international passenger transport - the sectors most affected by now. Again, if in the EU movement between countries is likely to recover fully in 2021 due to both holiday traditions and the interdependence of countries on each other's workforce and the presence of a significant number of transnational families, then the blow to the tourism sector of such countries like Turkey, Thailand, UAE, Vietnam or Mexico will be quite serious. The problems of large airlines focused on transit traffic (Turkish, Emirates, Etihad, Singapore Airlines, etc.) will not be resolved soon.

New trends

Finally, if we assess the overall crisis of 2020–2021 and its impact on the entire world economy, I would draw attention to the high probability of the emergence of new growth points and new specializations, both within individual countries and globally. level. Looking back at the crises of 1997-1998 and 2008-2009, it becomes obvious that they did not lead to significant changes in the world division of labor. The main trends laid down earlier are the technological domination of developed countries; the spread of information and communication technologies that emerged at the turn of the 1980s and 1990s, the most significant globalization trends remained unchanged. Now, after three decades of fairly unidirectional development, new trends may await us: an increase in the gap between developed and developing countries, due to the new financial capabilities of states that issue reserve currencies; another round of geopolitical rivalry and protectionism; transformation of biotechnology into the main driver of economic growth. They will also leave their mark on the development of world trade in the coming years.

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