A2 CAMBRIDGE GEOGRAPHY: GLOBAL INTERDEPENDENCE - TRADE FLOWS AND TRADING PATTERNS.

1. A2GEOGRAPHY
GLOBALINTERDEPENDENCE
13.1 TRADEFLOWSAND
TRADINGPATTERNS

2. INTRODUCTION
Global trade of goods and services are worth trillions of dollars each year.
Global trade, also known as international trade, is simply the import and
export of goods and services across international boundaries.
Goods and services that enter into a country for sale are called imports.
Goods and services that leave a country for sale in another country are
called exports.
For example, a country may import wheat because it doesn't have much
arable land, but export oil because it has oil in abundance.

4. GLOSSARY
So, trade refers to the exchange of goods and services for money.
World trade now accounts for 25% of GDP, double its share in 1970.
Goods and services purchased from other countries are termed imports.
In contrast, goods and services sold to other countries are called exports.
The difference between the two is known as the balance of trade.
Visible trade involves items that have a physical existence and can actually
be seen, such as oil and manufactured goods.
Invisible trade is trade in services, which include travel and tourism, and
business and financial services.

6. COMPARATIVE ADVANTAGE
A fundamental concept underlying global trade is the concept
of comparative advantage, developed by David Ricardo in the 19th century.
In a nutshell, the doctrine of comparative advantage states that a country
can produce some goods or services more cheaply than other countries.
In technical terms, the country is able to produce a specific good or service at
a lower opportunity cost than others.

8. DAVID RICCARDO
David Ricardo was a British political economist, one of the most influential of
the classical economists along with:
- Thomas Malthus (English cleric and scholar, influential in the fields of
political economy and demography)
- Adam Smith (Scottish economist, philosopher and author as well as a moral
philosopher, a pioneer of political economy; who laid the foundations of
classical free market economic theory)
- James Mill (Scottish historian, economist, political theorist, and philosopher,
one of the founders of the Ricardian school of economics).

9. OPPORTUNITY COST
An opportunity cost is the benefit one gives up in making an economic
choice.
The classic example is guns and butter - domestic investment over defence
spending.
The more guns you produce, the less funds are available to invest in public
schools and infrastructure, for example.
The more you invest in the domestic economy, the less you can spend on
defence.

10. GLOBAL INEQUALITIES IN TRADE FLOWS
Europe, Asia and North America dominate global trade (see next slide, table
13.1).
Germany was the largest exporter of merchandise in 2008 with 9.1% of the
global share, followed by China and the USA.
The top 10 countries accounted for 50.7% of world exports.
USA dominates imports by a huge margin – over 13% of the world total,
followed by Germany and China.
The share of developing economies in world merchandise trade set new
records in 2008.
The emergence of different generations of newly industrialised countries since
the 1960s has radically altered the trade pattern that existed in the previous
period.

12. TRENDS
In recent decades trade in
commercial services has
increased considerably.
In terms of total value it is still
less than a quarter of that of
merchandise trade.

13. FACTORS AFFECTRING GLOBAL TRADE
Resource endowment
Natural resource endowment offer great 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.
According to the Business Dictionary, endowment can be:
- A gift of money or income producing property to a public organization (such
as a hospital or university) for a specific purpose (such as research or
scholarships). Generally, the endowed asset is kept intact and only the
income generated by it is consumed.
- Aggregate of all positives (assets, abilities, capacities, qualities) that an
individual starts out with.

14. LOCATIONAL ADVANTAGE
The location of market demand influences trade patterns.
It is advantageous for an exporting country to be close to the markets for its
products; for example, it reduces transport costs.
Manufacturing industry in Canada benefits from the proximity of the huge US
market.
Some countries and cities are strategically located along important trade
routes, giving them significant advantages in international trade.
For example, Singapore, at the southern tip of the Malay peninsula is situated
at a strategic location along the main trade route between the Indian and
Pacific Oceans.

16. INVESTMENT
Investment in a country is the key to increasing trade.
Some developing countries such as India and Mexico have increased their
trade substantially.
These countries have attracted high levels of foreign direct investment.
Two billion people live in countries that have become less, rather than more,
globalised as trade has fallen in relation to national income. This group
includes many African countries.

17. HISTORICAL FACTORS - EXAMPLES
Historical relationships, often based on colonial ties, remain an important factor
in global trade patterns.
For example, the UK still maintains significant trading links with Commonwealth
countries. Other European countries such as France and Spain also established
colonial networks overseas and have maintained such ties to varying degrees.
Colonial expansion heralded a trading relationship dictated by the European
countries mainly for their own benefit.
The colonies played a subordinate role, which brought them only very limited
benefits at the expense of distortion of their economies.
The historical legacy of this trade dependency is one of the reasons why poorer
tropical countries have such a limited share of world trade according to
development economists.

18. GLOSSARY
Trade dependency is when a developing country is so reliant on its advanced
trading partner(s) that any changes in their economic policy or economic
condition could have a severe effect on the developing country’s economy.

19. THE TERMS OF TRADE
The most vital element in the trade of any country is the terms on which it takes
place.
If countries rely on the export of commodities that are low in price and need to
import items that are relatively high in price they need to export in large
quantities to be able to afford a relatively low volume of imports.
Many poor nations are primary product dependent.
The world market price of primary products is in general very low compared with
manufactured goods and services.
The terms of trade for many developing countries are worse now than they were
two decades ago. Because the terms of trade are generally disadvantageous to
the poor countries of the South, many developing countries have very high trade
deficits (see next slide, figure 13.1).

21. GLOSSARY
Primary product dependence is when countries rely on one or a small number
of primary products for the bulk of their export earnings.
The terms of trade refer to the price of a country’s exports relative to the price
of its imports, and the changes that take place over time.

22. CHANGES IN THE GLOBAL MARKET - EXAMPLES
The rapid growth of newly industrialised countries has brought about major
changes in the economic balance of power.
The substantial growth rates of the BRIC countries (Brazil, Russia, India, China) in
particular are very much a threat to the established economic order.
These four countries, along with other high growth nations outside of the
established core group of nations, are known as emerging markets.
While the developed world (the core) grew by an average of 2.1% a year in the
first decade of the century, the emerging markets expanded by 4.2%.
In 1990 the developed world controlled about 64% of the global economy; this
fell to 52% by 2009 – one of the most rapid economic changes in history.
The West no longer dominates the world’s savings and as a result no longer
dominates global investment and finance.

23. TRADE AGREEMENTS
A trade bloc is a group of countries that share trade agreements between each
other.
Since the Second World War there have been many examples of groups of
countries joining together to stimulate trade between themselves and to obtain
other benefits from economic cooperation. Regional trade agreements have
proliferated in the last two decades. In 1990 there were fewer than 25; by 1998
there were more than 90.
The most notable of these are:
- European Union (a political and economic union of 28 member states that are
located primarily in Europe, area of 4,475,757 km2, population of 510 million)
- NAFTA (North American Free Trade Agreement, an agreement signed by
Canada, Mexico, and the United States, creating a trilateral trade bloc in North
America)

24. TRADE AGREEMENTS cont.
- ASEAN (Association of Southeast Asian Nations, regional intergovernmental
organization comprising ten Southeast Asian countries that promotes
intergovernmental cooperation and facilitates economic, political, security,
military, educational, and sociocultural integration amongst its members) in
Asia
- Mercosur (South American trade bloc established by the Treaty of Asunción in
1991 and Protocol of Ouro Preto in 1994, full members are Argentina, Brazil,
Paraguay and Uruguay. Venezuela was suspended since December 1, 2016.
Associate countries are Bolivia, Chile, Colombia, Ecuador, Guyana, Peru and
Suriname. Observer countries are New Zealand and Mexico).

25. GLOSSARY
Trade blocs have varying levels of economic integration from free trade areas
such as NAFTA to the much higher level of integration of an economic union, as
illustrated by the EU.

26. TRADE AND DEVELOPMENT
There is a strong relationship between trade and economic development.
In general, countries which have a high level of trade are richer than those which
have lower levels of trade.
Countries which can produce goods and services in demand elsewhere in the
world will benefit from strong inflows of foreign currency and from the
employment its industries provide.
Foreign currency allows a country to purchase abroad goods and services it does
not produce itself or produce in large enough quantities.
An Oxfam report published in April 2002 stated that if Africa increased its share
of world trade by just 1% it would earn an additional £49 billion a year – five
times the amount it receives in aid.

27. THE WORLD TRADE ORGANISATION
The World Trade Organization (WTO) was established in 1995.
Unlike its predecessor, the loosely organised GATT, the WTO was set up as a
permanent organisation with far greater powers to arbitrate trade disputes.
Today average tariffs are only a tenth of what they were when GATT came into
force and world trade has been increasing at a much faster rate than GDP.
In some areas protectionism is still alive and well, particularly in clothing, textiles
and agriculture. In principle, every nation has an equal vote in the WTO.
In practice, the rich world shuts the poor world out in key negotiations.
In recent years agreements have become more and more difficult to reach.

28. PROTECTIONISM
Protectionism is the institution of policies (tariffs, quotas, regulations) that
protect a country’s industries against competition from cheap imports.

29. FREE TRADE
The WTO exists to promote free trade.
Most countries in the world are members and most who are not want to join.
The fundamental issue is: does free trade benefit all those concerned or is it a
subtle way in which the rich nations exploit their poorer counterparts?
Most critics of free trade accept that it does generate wealth but they deny that
all countries benefit from it.

30. GLOSSARY
Free trade is a hypothetical situation whereby producers have free and
unhindered access to markets everywhere.
While trade is more free today than in the past, governments still impose
significant barriers to trade and often subsidise their own industries in order to
give them a competitive advantage.

31. CRITICS OF THE WTO
- say that the WTO should be paying more attention to the needs of poor
countries, making it easier for them to gain tangible benefits from the global
economic system
- ask why it is that MEDCs have been given decades to adjust their economies to
imports of textiles and agricultural products from LEDCs, when the latter are
pressurised to open their borders immediately to MEDCs banks,
telecommunications companies and other components of the service sector

33. THE NATURE AND ROLE OF FAIR TRADE
Many supermarkets and other large stores in Britain and other MEDCs now stock
some fairly traded products.
Most are agricultural products such as bananas and tea, but the market in non-
food goods such as textiles and handicrafts is also increasing.

34. THE FAIR TRADE SYSTEM
The fair trade system operates as follows:
• Small-scale producers group together to form a cooperative with high social
and environmental standards.
• These cooperatives deal directly with companies such as Tesco in MEDCs.
• MEDC companies pay significantly over the world market price for the products
traded.
• The higher price achieved by the LEDC cooperatives provides both a better
standard of living and some money to reinvest in their farms.

35. GLOSSARY
Fair trade is a movement that aims to create direct, long-term trading links with
producers in developing countries, and to ensure that they receive a guaranteed
price for their products, on favourable financial terms.

36. POSITIVES
Advocates of the fair trade system argue that it is a model of how world trade
can and should be organised to tackle global poverty.
It began in the 1960s with Dutch consumers supporting Nicaraguan farmers.
It is now a global market worth £315 million a year, involving over 400 MEDC
companies and an estimated 500,000 small farmers and their families in the
world’s poorest countries.