What is the importance of international trade
International financial and economic relations
Professor Dr. Heribert Dieter studied political science and economics at the Free University of Berlin and received her doctorate there with a thesis on Australian foreign trade policy. In 2005 he published his habilitation thesis on "The Future of Globalization".
Dieter works as a scientist in the Global Issues Research Group of the Science and Politics Foundation (Berlin) and is an adjunct professor at the University of Potsdam and visiting professor for international political economy at the Zeppelin University in Friedrichshafen.
Look into history
Cross-border trade is not really a new phenomenon. People from different economies have been trading with one another for centuries, and the closer they are geographically and culturally, the more so. Since the revival of the Silk Road by the Mongol rulers from the 12./13. In the 19th century there were repeated phases of intensive trade relations, but states have often turned away from cross-border trade and focused on domestic economic development. The history of the Hanseatic League in the North and Baltic Sea region in the early Middle Ages also shows these different phases. A major turning point was the Great Depression in the early 1930s, when trade fell by a full two-thirds. The history of trade policy shows no linear development towards an open world economy in which borders and barriers between states have largely been dismantled and free trade prevails.
Competition and competitiveness
At the beginning there is a seemingly trivial question: Why do people exchange goods and services with people from other economies at all? There is often the assumption that international trade is different from the trade in goods within a state, or even the view that international trade endangers the prosperity of national economies. The idea that international trade is a necessary evil, but does not increase the prosperity of a society, stems from phases of state delimitation. This is not the case: trade is carried out by individuals and, fundamentally speaking, increases prosperity. The motives of buyers and sellers do not differ - regardless of whether they trade with one another within a country or across borders.
There have been repeated political currents that rely on the production of almost all goods domestically. In the US election campaign in 2016, there was heated debate about the effects of the US's open trade policy. The election winner Donald Trump promised the Americans that he would ensure that they would have to accept fewer disadvantages from cross-border trade in the future, and in this context criticized Germany's high export surpluses, among other things. This raises the question of competitiveness, which can be achieved in different ways.
International division of labor and the theory of comparative cost advantages
The underlying assumption is quite simple: in economies everyone benefits from division of labor and specialization. The idea is that the benefits are greater for everyone when people and companies concentrate in their economic activities on what they do best. It is assumed that everyone has a limited amount of time available and should use this time most effectively.
An example: We consider a lawyer and her clerk. Both have legal knowledge. The lawyer drafts legal pleadings, for which she needs an average of 60 minutes per pleading. It takes them another ten minutes to type a pleading.
It takes the clerk about 180 minutes to formulate a pleading and 20 minutes to type a pleading. The assistant needs three times as long to write a pleading as the lawyer, and only twice as long to type it in, so he is comparatively good at it.
In absolute terms, it would be most efficient if the lawyer took over both activities. She can do this in 70 minutes, while the assistant needs 200 minutes for both activities. However, the lawyer can increase her efficiency if she concentrates on what she can do best in comparison to her clerk and refrains from doing both work steps herself.
She agrees with the assistant on a division of labor, limits herself to legal activities and buys the services of the typist. Both benefit from the division of labor: the lawyer, since she has an even greater advantage when writing briefs than when typing; the assistant, in that he also does what he can do comparatively well.
The English economist David Ricardo (1772-1823) applied this · basic principle of division of labor · to trade between. Transferring economies. Economies should focus on what they do best because, Ricardo said, they both benefit from it.
Ricardo showed that the division of labor and specialization also has advantages for both economies if one of them can offer all products more cheaply than the other. Ricardo suggested that the more expensive producing country concentrate on the product where it has the lower cost disadvantages; because it has a "comparative advantage" there.
Ricardo's considerations represented a radical break with the foreign trade model of mercantilism, which was still represented in absolutist France until the middle of the 18th century: There it was considered worthwhile to import as little as possible and to generate large surpluses of gold and silver.
Taken in isolation, the absolute wage level says very little about the competitiveness of companies in the individual countries. Switzerland has extremely high wages, but the Swiss economy still manages to export a lot. In 2015, the value of Swiss goods and services exports was 50,400 US dollars per capita, while the comparable value for Germany of 19,500 US dollars was less than half. (Value of exports in current US dollars in relation to the number of inhabitants. World Bank data)
The decisive factor for a country's competitiveness is the wage level in relation to productivity. Unit labor costs express how much wages or salaries, including non-wage labor costs, have to be paid for a product or a service unit. The absolute wage level is therefore not decisive for the competitiveness of a company or an economy, but the ratio of wage level to productivity. This shows that unit labor costs in Germany have fallen since 1998, while they rose sharply in China, for example. Translated into the language of exchange rates, this means that Germany has devalued in real terms and China has appreciated in value, because the real exchange rate is measured by the price development of the immovable (remaining in the country) factor, and that is the labor factor.
The sharp rise in wages in China could prove particularly useful for workers in the US in the coming years. Because if it is no longer so attractive to produce in China for the US market because of the higher wage costs, companies could be inclined to relocate production lines back to the USA (re-industrialization). The prerequisite for this, however, is a stable exchange rate. If, on the other hand, the dollar appreciates against the Chinese currency and a US dollar could be exchanged for relatively more renminbi, this would not have any effect.
Trade as a factor of prosperityThe beneficiaries of international trade are by no means only the manufacturers of goods. Consumers also have a great advantage from international trade.
On closer inspection, the picture looks like this: The deepening of the international division of labor benefits domestic companies and employees who produce for export. Domestic companies who import preliminary products from abroad at low cost and can thus increase the competitiveness of the end product benefit from it, as do foreign companies and their employees who manufacture goods for export to Germany.
After all, domestic consumers represent a large group of beneficiaries because they encounter a diverse range of products. Imported and domestic goods enter into competition, which is also reflected in lower prices.
Those domestically who lose their jobs because foreign suppliers are offering the same product for less are negatively affected. In return, this also affects foreign workers who lose their jobs because German suppliers offer higher quality or cheaper products.
A few examples illustrate the chains of effects. The economic benefits of today's liberal trade regime for shareholders and employees in the German automotive industry are obvious: Production for export creates jobs in Germany and generates profits for shareholders. It is also clear that the South Korean electronics company Samsung and the employees there have an economic benefit from exporting to Germany.
Effects on Purchasing Power
The benefits for domestic consumers are a little more complex. Importing inexpensive goods from abroad does not increase the income of citizens, but their purchasing power. With the same income, they can, for example, afford to buy a television set that would be much more expensive from a German production. As a result, people can consume more with the same income through inexpensive imports. The perspective of the disadvantaged is examined in detail from page 16 onwards.
Rise of emerging Asian countries
The remarkable rise of some countries from extreme poverty to relative prosperity is also due to the fact that they had access to the markets of other countries where they could sell their products.
China is probably the best-known example of this. From 1949 to the end of the 1970s, the communist country was a strictly planned economy with few international economic ties. Industrial production and the export of industrially manufactured goods were hardly developed. For example, when the country first opened in 1980, China was producing just 220,000 vehicles a year.
In 2015, China was already the country with the largest automobile production in the world, producing 24.5 million vehicles, 110 times the production in 1980. The people of China have benefited enormously from this boom. They are wealthier and they live longer. Worldwide, life expectancy has increased by an average of 19 years since 1960, but life expectancy in China has even increased by 30 to 75 years today (Sharma 2016, p. 38 f).
Another country that has achieved prosperity thanks to trade with the world is South Korea. From 1910 to 1945 Korea was a Japanese colony and emerged from the Korean War (1950-1953) as a divided country. At the beginning of its development, Korea's economy was geared towards the interests of the Japanese colonial rulers.
Despite this poor starting position, South Korea has risen to become one of the world's leading industrial nations. According to the World Bank (gross domestic product 2016), the country's economic output was 1,411 billion US dollars in 2016, which is above that of Russia, Spain or Turkey. Per capita, the economic output in South Korea was according to data from CIA factbook in 2016 at $ 37,700, only slightly below the average for the European Union, which was $ 39,200 in the same year.
In South Korea, too, automobile production rose sharply, rising from 123,000 vehicles in 1980 to 4.5 million vehicles in 2015. No country in Europe, with the exception of Germany, produced as many vehicles in 2015 as the former developing country South Korea.
Germany as a beneficiary of globalization
Germany is also one of the beneficiaries of globalization. Even if one looks at just one dimension of trade, namely exports of goods and services, the dynamism of development becomes clear. Germany's exports totaled almost 1,573 billion US dollars in 2015 and were thus at a record level. In this century, the intensity of German foreign trade has increased significantly. In 2000, Germany's total exports of 600 billion US dollars were less than half the value of 2015. Another 15 years ago, in 1985, Germany exported goods worth 207.3 billion US dollars.
The benefits of exports also depend on funding
Most observers assume that exports will increase Germany's prosperity. That can be, but does not have to be the case. Because that depends on the financing of the exports.
In a simple case, a car manufacturer sells a car to a customer abroad, who pays for the car from existing assets. The automaker is paid, as are its employees.
The case is different if, for example, a car is sold in the USA and the customer there takes out a loan from his bank to pay for the car.This bank passes the loan on to an investment bank. Thousands of loans are bundled into one security, a "asset backed securitySuch securities, unlike a single loan, can be traded on stock exchanges.
In the present fictitious case, the paper created by the investment bank is sold to a German bank, which transfers the purchase price for the security to the USA. On balance, the capital to finance the car flows from Germany to the USA. If the investment bank goes bankrupt, the claims of the German bank lose a lot of their value. The bank goes bankrupt and has to be bailed out with taxpayers' money.
From an economic point of view, the car was given away because it was paid for with worthless paper. From a business point of view, things look different: the automaker's shareholders and employees are nevertheless satisfied because they have received a payment from the American customer's bank. The disadvantage is the taxpayer, at whose expense the insolvent German bank had to be rescued. The same applies to domestic trade: if a borrower does not pay his debts, payment defaults are recorded. It is noteworthy, however, that the German economy has had to make high write-downs on claims on foreign countries in recent years, i.e. have had to post losses. As a result, this means that not all German residents always benefit from exports, but sometimes only a few.
Reasons for the export surplus
competitiveness: [...] That Germany is strong in the international competition is shown by indicators such as the Global Competitiveness Index of the World Economic Forum, in which Germany ranks fifth; 140 countries are compared. Hard location factors such as the qualification of the workforce, the quality of the infrastructure and the innovative strength of the company play an important role in this context. [...]
World economy: For a long time, the weak global economy was a brake on German exporters. They suffered from the fact that large emerging countries such as China and Brazil did not demand as many goods "made in Germany" as they had hoped. But […] the IMF […] raised its forecast for the growth of the world economy  […] to 3.5 percent, after an increase of 3.1 percent in 2016. For 2018, the fund's experts expect an increase of 3 percent , 6 percent. German exporters also benefit from this.
You should also be happy about the monetary policy-stimulated economic recovery in the euro area, which has contributed to increasing demand from this region. However, this also increases the share of the euro countries in the German current account surplus. In other words: the euro members' deficit in trade with Germany is growing.
Commodity prices: The sharp drop in raw material prices since mid-2014 also helped the German current account surplus to hit a new record last year. [...] Because less money had to be spent on imports. Since Germany itself has hardly any natural resources, the industrial nation is dependent on the import of raw materials.
Wages: The relatively weak rise in wages in Germany has resulted in the share of household income in the overall economic income falling continuously in recent years. This was reflected in a noticeably lower consumption rate. [...] This is another reason for the rising German current account surplus, because weak consumption also means weak imports. [...]
Investments: "The current account surplus also reflects the weak investment activity in Germany," says Carsten Hefeker, Professor of Economics at the University of Siegen. Many companies prefer to invest abroad because they are closer to their customers there and often find lower wage costs than in Germany.
Catherine Hoffmann, "Reasons for the Surplus", in: Süddeutsche Zeitung of April 20, 2017
Considerations for Containment
The […] economist [Gustav] Horn [director of the trade union-related IMK institute] contradicts this. [...] "Increasing wages can reduce inequality in Germany without jeopardizing growth and employment," he says. Both even increase slightly. Remarkably, Horn agrees with Fuest on one thing: higher wages only help to a limited extent to reduce the current account surplus. Because competitiveness is not that decisive for Germany to become the export champion. If unit labor costs rise by one percent, the export volume only falls by a fifth. At the same time, exporters earn more when they make their goods more expensive because of the higher wages. This even partially compensates for the lower sales. The surpluses remain high.
Horn therefore suggests that Germany should combine higher wages with additional government spending on roads, schools and housing. His calculations suggest that higher wages increase growth and employment and thus taxes. If the state invests this additional income, there is a double effect on the current account. Both higher wages and higher investments reduce the surplus.
However, that is not enough to reduce the current account surplus from the current almost nine percent to six percent, as the EU Commission is calling for in order to avoid imbalances between the EU countries. To do that, the German state would have to spend even more. Ifo President Fuest fears waste in this case. Germany needs investments in infrastructure, but less than is sometimes assumed. "We're talking about ten billion euros in transport. The current account surplus would only decrease slightly through public investment that makes sense."
Fuest therefore favors that the state create the framework for more private investments - through market opening for services, accelerated depreciation or credits for companies that do more research. His conclusion: the surpluses in the current account are a problem that Germans cannot solve on their own. "Why can foreign households borrow a lot of money to buy German products? If the financial markets were regulated in such a way that debt is less easy, the surplus would be lower," he says.
Alexander Hagelüken, "Simply raise wages? That alone does not help", in, Süddeutsche Zeitung from April 20, 2017
Within 30 years, exports of goods and services from Germany have increased almost eightfold. The trade of all economies in goods and services grew even more dynamically. World trade rose by 930 percent from 1985 to 2015, from $ 2,310 billion to $ 21,447 billion. (Own calculations based on data from the World Bank)
In 2016, however, world trade grew more slowly than world production. There were signs of a turnaround as early as 2015, when the share of world trade in world production fell slightly for the first time (see chart).
Contribution of world trade to poverty reduction
Not only the proportion of very poor people in the world population, but also their absolute number fell: from 1,926 million in 1990 to 836 million in 2015. This is an enormous success, but it is often met with ignorance. In a 2016 survey, 26,000 people in 24 countries were asked about poverty reduction. Few of them realized that global poverty had been reduced by more than half in the last 20 years. Only one percent of the respondents knew the correct answer, while 87 percent of the respondents believed that poverty had either increased (69 percent) or stayed the same (18 percent). Another twelve percent believed that global poverty had fallen somewhat. However, around half of those surveyed in China said that extreme poverty had decreased in the last 20 years, while only eight percent believed this in Germany or the USA. (Glocalities: Global poverty survey, on the Internet at http://www.glocalities.com/news/poverty.html) International trade costs
It is undisputed that international trade is more expensive than trade within an economy. There are costly geographic, cultural, and currency barriers. Import duties, i.e. state taxes on imports from other countries, are by no means the most important cost factor. A large-scale study of so-called trading costs has shown that they make up an average of 74 percent of the value of the goods. This value is divided into transport costs (21 percent) and a further 44 percent, which arise when the border of an economy is crossed and goods or services are sold abroad. Of this 44 percent, customs duties and other restrictions make up eight percent, the overcoming of language barriers at least seven percent and currency transactions 14 percent. Six percent are used to overcome information barriers and three percent have to be used for contract costs. As a result, the study found that the costs of cross-border trade are significantly higher than those of domestic trade and that tariffs only play a subordinate role today. (Harms 2016, p. 160).
Starting points for intensifying the international division of labor can be derived from these research results. A significant factor in trading costs is transportation costs. In order to lower them and integrate successfully into the global economy, many developing countries are making efforts to improve their transport infrastructure. Without efficient ports and airports and their connection to the international shipping and air transport routes, it is difficult to participate successfully in world trade.
Poorer countries suffer from this structural problem, which also includes inefficient border clearance of goods.
The result of good infrastructure and efficient administration can be measured: The World Bank has calculated how long it takes before goods that have already been manufactured can be exported. Very efficient countries like Singapore or Estonia can do this in six days, while the same process can take a long time in poorer countries without efficient infrastructure and administration: 80 days in Iraq, 56 days in Niger and 71 days in Tajikistan. Germany is in the top group with nine days. The World Trade Organization (World Trade Organization, WTO) is addressing this problem with a global agreement on so-called trade facilitation, which is intended to overcome the infrastructural and institutional bottlenecks in the ports of these countries.
Disadvantages of the worldwide division of labor in industrialized countriesThe deepening of the international division of labor creates benefits for many people, but also causes losses for others. If, for example, a factory for the production of mobile phones is relocated from Germany to Romania, two groups benefit: firstly, the workers who get a job in Romania and previously had none, and secondly, the consumers who are offered cheaper mobile phones.
In the niche of globalization
As in other disadvantaged regions, people tried for a long time to keep themselves afloat with the production of textiles. […] In the decades after the war, large suppliers such as Karstadt, Schiesser or Schickedanz were supplied from the region.
[The company from Treffelstein] Tavo produced terry toweling on a large scale. […] Around 160 people were employed in the company. But then globalization broke in. In the textile industry in particular, a trek began that has not come to a standstill to this day. His previous positions: cheap, even cheaper and obscenely cheap.
Hans-Werner Voith [the former head of the company] remembers how this development picked up speed in the 1980s. "It all started when Turkey got good machines with the support of the World Bank." At the beginning of the nineties the industry moved to Asia. And because wages are now rising in Asia, production is increasingly being relocated to Africa, reports Voith. [...]
Tavo stayed in Bavaria. Radical job cuts were inevitable, however. The company still has 32 employees in Treffelstein and another ten in the nearby Czech Republic. Small remnants of a once important industry in the region. [...]
Since the big slump, Tavo has been trying to find products that are still worth making. It was early on in Treffelstein that people were willing to spend more money, especially on baby equipment, than on their own clothes. Hans-Werner Voith primarily relied on high-quality down sleeping bags for newborns, which the company [...] has been selling since then.
[...] Today the company is managed by Elfi and Genoveva Burwinkel, a mother-daughter team. They have to assert themselves in a now almost completely globalized business field that is constantly changing and in which there is tough battle. [...] Globalization and technical progress have led to an enormous acceleration. [Genoveva] Burwinkel reports that some large textile suppliers have swarmed dozen of design scouts in Europe: "They come into the store, take a photo and send it to the head office. It is then manufactured in the Far East and is on the market at lightning speed . " [...]
But even Tavo cannot completely escape globalization. The eco-fabrics used by the company are woven in Austria, Switzerland and Portugal, explains Genoveva Burwinkel. A freelance Italian is employed for the design. The company from Treffelstein is also trying its own sales channels and looking for a direct route to end customers. […] [There] is now also a small shop on the Internet. The company from the furthest corner of Germany seems to have found its niche in globalization.
Reinhard Bingener, "Made in Treffelstein", in: Frankfurter Allgemeine Woche 22/2017, p. 20 ff.
All rights reserved. Frankfurter Allgemeine Zeitung GmbH, Frankfurt.
Provided by the Frankfurter Allgemeine Archiv
This shows the problem for politics very clearly: the relocation of production is economically efficient and generates an increase in economic prosperity, but not all people in the affected countries participate in it. In this case, the advantages for Romania can be clearly identified, but the benefits in Germany are only noticeable indirectly, as the imported cell phones become cheaper.
The social costs in Germany, on the other hand, can be clearly quantified: Those previously employed in the factory have become unemployed and receive unemployment benefits if they cannot find a subsequent job. In this case, in addition to the purely material consequences, they also lose participation in working life, with potentially negative consequences for their self-esteem.
Prices don't always go down
Three British economists investigated this question and, in one specific case, followed the price development after the closure of a factory.
In 2002, jeans manufacturer Levi Strauss closed its last two factories in Scotland on the grounds that production costs there were 60 percent higher than in other European countries.
After the relocation of production, prices should have fallen, but they stayed at the old level and only increased Levi Strauss' profits. In addition, the European Court of Justice prohibited the British retail chain Tesco from importing Levi's jeans made in the USA or Mexico, thereby undercutting the high prices on the British market. This would have required the approval of Levi Strauss, which, however, was not granted.
This case shows that trade liberalization does not always have to be beneficial for the citizens concerned. The prices for jeans remained at the high British level - also because consumers continued to prefer Levi's clothing over cheaper competing products - and did not fall to the lower level of the world market. Some Brits lost their jobs, but the clothing that Levi Strauss now produced and imported abroad did not get any cheaper.
after Kevin Albertson et al. 2015
There are numerous indications that the benefits of deepening the international division of labor are distributed quite unevenly. In a study of 25 industrialized countries, the research institute of the management consultancy McKinsey found in 2016 that two thirds of all households in these countries recorded stagnating or falling market incomes between 2005 and 2014.
Market Concentration and Its Contribution to Growing Inequality
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