TC

VISION

V/O

SYNC

00.31

Salt traders/ markets/ camel trains/ fishermen

International trade is the exchange of goods and services between nations. Societies have traded for thousands of years, but the last 35 years have seen an explosion in international trade. In 1970, the value of world exports of goods and services amounted to $0.4 trillion, around a tenth of world output. In 2004, world exports swelled to $10.8 trillion, a quarter of world output. This is due to the success of recent multinational trade agreements and technological advances reducing the time and cost of transportation.

01.22

SYNC Dr. Anthony Venables, London School of Economics

Trade is an absolutely essential vehicle for economic development, the success of a lot of Asian countries has been driven by very large exports of manufactured goods.

01.36

Glove factory

But how has the increase in global economic integration affected the world economy and individual nations? If there are overall gains from trade, then how are they distributed?

Fade to black & SUPER

The pattern of trade

01.57

GRAPHIC pattern of trade

To examine the impact of international trade, we need to understand the pattern of trade, or who sells what to whom. About half of world trade flows between developed countries, one-third between developed and developing countries (so-called North-South trade) and the rest, approximately 15%, flows between developing countries. Developed countries in North America, Europe and East Asia tend to export high-tech goods such as computers, automobiles, and airplanes while developing countries in Africa, South Asia, and Latin America export basic staples, such as rice, wheat, and sugar, but also textiles.

02.44

SYNC Dr. Anthony Venables, London School of Economics

First is what's called intra-industry trade - within Europe, between Europe & America a lot of trade in similar products - cars being shipped in one direction and in the other direction - so that's one aspect. The second aspect is trade in primary commodities, the trade in natural resources, historically that's been north-south trade.

03.07

Ships

Some countries are more open to trade than others. For example, the value of Taiwan's exports is around 50% of its Gross Domestic Product (the value of all goods and services produced in the country) while the same measure for Uganda is only 12%. Taiwan views its openness as essential for economic growth, while Uganda has traditionally been loath to open up domestic markets to foreign competition.

03.36

SYNC Dr. Wilhelmus Spanjers, Kingston University

Russia would be an example of a country that's opening up its trade. It's trying to become a member of the World Trade Organization & in doing so it has to make sure it fulfils all kind of criteria. And of course upon entering the World Trade Organization, it would open up its markets quite a bit.

03.52

text -"import-substituting industrialization"

Attitudes towards trade have also varied drastically over time. After WWII, Latin American countries as well as South Asian countries, such as India and Pakistan, imposed heavy restrictions on manufacturing imports. This approach, known as import-substituting industrialization, almost completely closed these economies to the rest of the world. As recently as 1999, Brazil's exports were a mere 7% of output. But many Latin American countries are now pro-trade.

04.31

SYNC Dr. Colin Lewis, London School of Economics

Drawing in capital, drawing in technology, making local firms more competitive, more able to compete in the international setting, Brazil and Mexico - key examples of that.

04.44

text -"export-oriented industrialization"

East Asia took a different approach and engaged in export-oriented industrialization.  In 2003, South Korea's value of merchandise trade was equivalent to 35% of GDP, compared with 10% of GDP in the early 1970s. So why restrict or liberalize trade?

Fade to black & SUPER

Arguments for free trade

05.19

text: "Comparative advantage /economies of scale"

Image David Ricardo

There are two main reasons why specialization and trade is considered beneficial for a country. The first reason is based on the concept of comparative advantage. Comparative advantage was first introduced by the nineteenth century economist David Ricardo, and emphasizes differences in countries' resources and productivity levels. The second reason is based on economies of scale, which says that a greater scale of production makes production more efficient, or lowers the cost per unit of output.

06.03

Swedish forests/ Pakistani farmers

To understand comparative advantage, consider Pakistan and Sweden. Unlike warm Pakistan, Sweden could not produce rice or grow mangos without costly greenhouses. But Sweden's forests and iron make it relatively less costly for Sweden to produce paper and steel products. Since both countries want to consume all products, the most efficient production scheme would be for Sweden to produce and export steel and paper and for Pakistan to produce and export rice and mangos. This is known as inter-industry trade. So a nation should export the goods for which it enjoys a comparative advantage and should import goods that would be relatively costly for the country to produce. But what do we really mean by a country's comparative advantage?

06.54

SYNC Dr. Wilhelmus Spanjers, Kingston University

Even though a country may be at a disadvantage in producing any single good with respect to another country, in at least one commodity it will have a relative advantage.

07.06

For a country to have a comparative advantage in the production of a good it must be able to produce that good at a lower opportunity cost relative to another country. The opportunity cost is the forgone opportunity to produce some other good.

07.21

SYNC Dr. Timothy Leunig, London School of Economics

The opportunity cost of a CD is what you would have been able to do with the $10 had you not spent it on a CD, so the cost of a CD is not being able to go out to dinner, not being able to buy a shirt.

07.32

Graphic opportunity cost

Suppose an American worker can produce 10 pairs of jeans or 20 cars per day, while a Chinese worker can only produce 6 pairs of jeans or 6 cars per day. Clearly an American worker is more productive overall. But in terms of comparative advantage, the Chinese worker is relatively more productive in producing jeans than the American worker, as the opportunity cost of producing a pair of jeans in China is only one car, while the corresponding opportunity cost in the US is two cars. It would therefore be cost efficient if the US produced automobiles and China produced jeans.

08.19

Economists Eli Heckscher and Bertil Ohlin looked at what determines relative labor productivity and thus the pattern of trade.

08.28

SYNC Dr. Timothy Leunig, London School of Economics

The 3 important determinants of labor productivity in a modern economy are the skills of the workforce, the machinery the workers have to use and the organisation of the firm. A well-organised firm gets far more out of its people.

08.43

The more machines and tools, or capital, that each worker has access to, the more productive he is. So workers in industrialized countries are more productive than in less industrialized countries. And a worker endowed with plenty of capital would be more productive in an industry that uses capital intensively, such as automobiles and high-tech products. Countries abundant in labor, tend to export goods such as textiles and basic staples that are produced with a high labor content.

09.31

SYNC Dr. Anthony Venables, London School of Economics

Hecksher Ohlin trade theory suggests that developing countries will have a comparative advantage in unskilled labor intensive products, and indeed so it turns out to have been.

09.43

SYNC Dr. Ali Shamsavari, London School of Economics

China now is a major exporter of low cost labor intensive manufactured products and that's their comparative advantage but may change.

10.00

text : "Economies of scale and product differentiation"

North-South trade only accounts for a third of world trade while half of world trade occurs between developed countries. The theory of comparative advantage only works when countries have different resource endowments. Developed countries are similar in this respect, so what drives trade between the US and the European Union? The answer is economies of scale and product differentiation.

10.30

SYNC Dr. Timothy Leunig, London School of Economics

One example of economies of scale is the Ford motor company. When the number of cars they produced increased, they were able to invest in production lines, and the number of hours that it took to produce each car fell from 12 to 2 within one year.

10.45

Product differentiation refers to products that are produced within the same industry, but are slightly differentiated.

10.53

SYNC Dr. Ali Shamsavari, London School of Economics

Imagine Ford or Toyota producing only red or yellow cars in one model. Obviously it's not going to be very attractive so product differentiation makes products attractive.

11.09

Cars

To understand the potential gains from trade due to economies of scale, consider that Japan, the US and several European countries all produce cars. So consumers can choose between a fast Ferrari, a stately Bentley, a family Ford, or an off-road Jeep. The scale of production for each car type is increased by access to foreign markets, leading to lower cost of production and so lower retail prices.

11.38

SYNC Dr. Wilhelmus Spanjers, Kingston University

If you're looking at modern industries you'll find that a large part of the costs are fixed costs, setting up a factory, buying very expensive machinery and having them run. Under such circumstances, it's very important that you have a large scale of production only then you can profit from the set-up costs.

11.58

But without international trade the variety of cars available to the domestic consumer would be restricted and since the scale of production would be low, the cars would be expensive to buy. Clearly, trade within industries, so-called intra-industry trade, is welfare improving since the cost of production is lower and the product variety greater. Developed countries, with large high-tech manufacturing sectors which give rise to more differentiated goods, reap greater gains from intra-industry trade than developing countries' whose exports such as staple foods are less differentiated.

Fade to black & SUPER

Arguments against free trade

12.49

text: "income distribution and increased unemployment"

Over time both rich and poor countries have found arguments why too much trade is detrimental to the domestic economy and why it is beneficial to put up trade barriers. Let's consider the two major arguments against free trade, starting with the concerns of developed countries.

13.08

NATSOT low-paid workers strike

Staunch opponents of free trade in developed countries are typically unions, representing low-skilled labor, and interest groups representing import competing industries. Unions worry that low-skilled jobs are being exported abroad, leaving their members unemployed. In addition, they claim that wage inequality between blue and white collar jobs is widening due to the removal of trade barriers.

13.37

Textile workers

When barriers to trade are reduced, the prices of textile and agricultural products in developed countries decrease in response to competition from developing countries. Meanwhile prices of manufactured exports increase due to a greater foreign demand. The lower prices on imports put downward pressure on wages paid to low-skilled workers, while the higher prices on exports puts upward pressure on wages paid to high-skilled workers. So the prediction of increased trade for workers in developed countries is a widening of wage inequality. 

Silicon Valley

Wage inequality between skilled and unskilled workers can be seen throughout Silicon Valley.

14.22

SYNC Maury Kendall, Emergency Housing Trust

The growing disparity of wealth that is happening in the Valley leads the rest of America, and America leads the rest of the world, and these problems are going to start happening increasingly around the world.

14.31

Call centre workers

Proponents of free trade say there are always losers and winners when products are allowed to flow freely across borders, but that the overall welfare in a country increases. It is up to the government to reallocate these gains so that everybody gains from free trade.

14.48

SYNC Robert Lawrence, Harvard University

Let's remember that in 1950 the most wealthy country was the United States, the Canadians were behind them, the Europeans were at half that level and the Japanese are the sixth. We adopted open policies and what were saw was convergence. Today our wage levels are pretty similar all around the developed world.

15.10

agriculture

text: "protection of import competing industries"

1545 factories

The shift away from agricultural and textile production towards industries using high-skilled labor more intensively increases unemployment as low-skilled workers lose their jobs. But this hike in unemployment is only temporary as workers move from agriculture and textiles to new jobs created in the export competing industries. So should policymakers simply discard these concerns as minor bumps in the road to greater prosperity? In the US, Japan and the EU governments grant a high degree of protection to industries threatened by increased international competition.

15.52

SYNC James Wolfensohn, Former President World Bank

The developed countries spend on subsidies for agriculture 350 billion dollars a year - that's a billion dollars a day - and the amount of money put into overseas development assistance is 50 billion dollars a year. So you've got seven times the amount of money that is going for development going into just one aspect of inhibition of trade.

16.15

White House

This protectionism is mainly due to the strength of well-organized interest groups who can easily convince politicians to protect their interests. A congressman may collect more votes if he saves 2000 sugar industry jobs by voting for protection, than by voting against it and reducing the price of sugar - despite the fact that cheaper sugar would benefit more people.

16.41

SYNC Dr. Timothy Leunig, London School of Economics

Politicians take the easy route & they continue with protection, even though it reduces overall GDP and the overall standard of living.

16.49

text: "Industrialization and the infant industry argument"

archive Industrial Revolution

Developing countries look at rich countries to examine how to industrialize and climb in the global income distribution. Perhaps the main reason why European and North American countries are affluent societies today is because of the industrial revolution, which transformed these countries from agricultural to manufacturing societies. Many believe this transformation took place under the protective umbrella of trade restriction. This claim has not been lost on policymakers in developing countries, particularly in Latin America, who have argued that industrialization requires protection from foreign competition. 

17.34

SYNC Dr. Colin Lewis, London School of Economics

Lets bring government in to protect local manufacturing, lets bring government in to provide credit for local manufacturing, lets bring government in to adapt the wage and salary strategy, that creates or deepens local markets, so that we can become industrialized economies.

17.57

Industrial revolution archive

The industrial revolution gave rise to new products and industries, so European companies enjoyed a certain degree of natural monopoly. Initially the scale of production was small and the cost of production high, but due to limited competition and some trade protection these industries survived.

18.17

Textile factories

Today it may be impossible for developing countries to compete with these well-established industries in Europe, which already benefit from economies of scale. But with initial protection, industries can survive until production levels are high enough and the cost of production has come down. This approach has been labelled the infant industry argument. The problem is that it is difficult to identify industries with a potential comparative advantage. If the wrong industry is protected it may never be able to compete on the world market.

18.50

SYNC Dr. Wilhelmus Spanjers, Kingston University

Developing countries can build up competitive manufacturing industries by trying to make sure they are getting access to markets, perhaps to world markets to some extent perhaps by subsidizing until they get there.

19.07

text: "import-substituting industrialization"

Developing countries can also build up their capital stock by substituting imports with domestically produced manufactures. This approach has been labelled import-substituting industrialization and is closely related to the infant industry argument. The government could encourage banks to channel funds into manufacturing by guaranteeing loans. The capital accumulation would eventually generate a natural comparative advantage in manufactures. But the scale of production would be limited to domestic demand and the work force may lack the necessary skills. So there is a risk that the manufacturing industry may never become cost-efficient or competitive in the world market.

19.49

SYNC Dr. Colin Lewis, London School of Economics

Import substituting industrialization in Latin America starts from the premise that the Latin American economies were trapped into the global system as exporters of primary commodities - they had to break out of that in inverted commas "trap" because the terms of trade were moving against primary exporting economies.

20.23

Banana workers

The desire of poor countries to industrialize is understandable. They view their comparative advantage in basic staples as a recipe for remaining at the bottom of the income distribution, particularly since rich countries subsidize domestic agricultural and textile industries so heavily. Even if subsidies were eliminated, a competitive manufacturing sector would still be desirable for more product differentiation and intra-industry trade, which currently elude developing countries.

Fade to black & SUPER

Evolution of international trade policy

21.15

The history of international trade policy in the last hundred years has been a rocky road reflecting various attitudes towards free trade.

21.23

Map First Age of Globalization

steam train

Argentina cattle farms

In the late nineteenth and early twentieth century, world trade was extensive and vibrant. Northern Europe, with its comparative advantage in manufacturing, demanded raw materials and agricultural commodities. Developing countries in Latin America and South Asia supplied these goods in exchange for manufacturing products to improve their infrastructure. A large part of this trade took place under the protection of colonialism. Nonetheless, between 1870 and 1913, Argentina became one of the wealthiest countries through its export of raw materials and staples such as meat, India doubled its export share of output, while it increased three-fold in China. At the outbreak of WWI, the world economy collapsed and did not fully recover until after WWII.

22.25

Archive agriculture/ industry

After WWI many developing countries again emerged as large producers of agricultural commodities, and world prices of these dropped. Developing countries saw falling export prices as a strong reason for developing manufacturing, providing the rationale behind the infant industry argument. In developed countries low commodity prices threatened domestic agriculture and political pressure mounted to impose import tariffs.

22.57

Great Depression archive

The US passed the infamous Smoot-Hawley Tariff Act in 1930, raising import tariffs significantly and arguably prolonging the Great Depression. The world-wide economic slowdown in the 1930s and the reversal in attitudes towards free trade caused world trade to shrink by 66% between 1929 and 1934. Although the US changed its view on free trade in late 1930s, the comeback of economic globalization had to wait until after WWII.

23.33

Archive industry/ S. American unemployed

text: "Import substitution versus export-oriented growth"

After the World War II, many primarily rural nations who had just rid themselves of their colonial masters were eager to develop their own manufacturing industries, by imposing heavy restrictions on imports. This tendency was particularly strong in Latin America and South Asia where import-substituting industrialization was pursued for almost 30 years. It was not until the end of the 1970s that the approach was abandoned, due to the poor results in terms of real growth and the consequent debt crisis in 1982.

24.12

Asia gvs

But perhaps the most convincing argument against the infant industry argument was the remarkable success of East Asian economies. Hong Kong, Thailand, Singapore and other East Asian countries had pursued a quite different trade policy of export-oriented industrialization. It was similar to import-substituting industrialization in that the government encouraged capital to flow into manufacturing. But the difference was that this was not done through a wall of protection leading to artificially high domestic prices, but through subsidies.  This forced the companies to compete in the world market and export their product.

24.53

SYNC Dr. Ali Shamsavari, Kingston University

It allows you to grow faster because you are more efficient. If you are serving a world market you have to try harder, you have to use your resources more economically more efficiently.

25.06

SYNC Dr. Wilhelmus Spanjers, London School of Economics

Those who were following this strategy - the Tiger economies - have been vastly successful, whereas you look at other countries which followed the opposite strategy of import substitution, as perhaps in Latin America, you would see they were quite unsuccessful.

25.25

GRAPHIC Asian/ Latin American growth

Unlike the inward oriented policies in Latin America, Asian manufacturers could take advantage of economies of scale in production since they had a much larger market. The result was staggering in comparison to Latin America. The annual growth rate in manufacturing in East Asia between 1965 and 1989 was above 11%, while it was about 5% in Latin America.

25.53

SYNC Dr. Colin Lewis, London School of Economics

Industries in Latin America were not internationally competitive, they had been over protected for too long. What we see in the case of Brazil and Mexico in particular is that from the 1980s onwards government policy changes, the economies are less protected, they're more open to trade and indeed capital flows, and local industry is made to grow up.

26.20

GATT/ WTO archive

After WWII industrialized countries looked at trade very differently from the many protectionist developing countries.  In 1947, 23 countries signed the General Agreement on Tariffs and Trade (GATT), which became the World Trade Organization in 1995. The purpose of GATT was to develop rules under which countries would negotiate lower tariffs on eachother's goods. These bilateral negotiations expanded into multilateral negotiations in the form of trade rounds. Today most developing countries are members of the WTO, take part in negotiations and agree to abide by WTO rules.

27.03

SYNC Renato Ruggiero, Former Director General WTO

The main challenge is to build a universal system, a system which includes all the nations of the world inside a rule-based system, not a power system - where their relation will be made because of the rules that they have agreed together and not because of their power relations.

27.29

Agriculture/ Blue and white collar workers

Governments in industrialized countries continuously pushed for free trade, despite their own reluctance to reduce domestic textile and agricultural subsidies. But there has been growing resistance to trade liberalization amongst low-skilled labor. In the 1980s, the main concern was the fierce competition from the newly industrialized countries in East Asia, and its effect on domestic manufacturing jobs. In the 1990s, the argument was that international trade increased the wage gap between blue and white collar workers.

28.10

SYNC Dr. Tim Leunig, London School of Economics

Opponents of free trade believe that if for example we are importing goods from China that means less jobs in the United States and in particular it means less jobs for the people doing the things that can now be done in China - mass produced low-skill work, and therefore they argue that free trade increases inequality by making the poor poorer, or making the poor unemployed.

28.31

Factory/ Mexican builders

In fact the evidence suggests the increase in the wage gap between blue and white collar workers is most likely due to technological advances in high-skilled labor industries. But the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the US was particularly controversial and was barely passed by the House of Representatives in 1993. Its strongest opponents were the labor unions who argued that low-skilled US workers would lose their jobs to cheap Mexican labor.

29.12

SYNC Jim Miller, factory worker

There's no doubt in my mind that NAFTA cost me my job, and cost the people that I worked with for the last 28 years their jobs.

Fade to black

29.25

Today, there is little doubt amongst economists that free trade is welfare improving.

29.35

SYNC Paul Krugman, Princeton University

I remember the utter hopelessness that we used to feel about developing countries. We used to say that "developing countries" was - you know, that was a joke because developing countries meant that countries that don't develop. But we've had some successes- not across the board, not everywhere, not everything you want - but we've had some successes and all of the successes are associated with freer trade, with growing exports.

30.02

Textile factory

But the problem of unequal distribution of the gains from free trade remains an issue. Governments must better reallocate these benefits. The most incisive arguments against free trade today are not economic ones, but emphasize the impact of international trade on labor standards in developing countries, the destruction of cultural identity, and the World Trade Organization's violations of national independence.

ENDS