Home .International Trade The Tale of Trade
The Tale of Trade
Saturday, 13 March 2010 04:19

 

Today, people are still debating the merits of international trade.  But humankind has always traded.  According to none other than Adam Smith, humans and humans alone have an intrinsic “propensity to truck, barter and exchange one thing for another”, and that this happy tendency was nothing more than human nature “of which no further account can be given”.  It's part of our DNA.

 

What’s more, for most of human history, the notion of international trade had no meaning because nations as we know them today did not exist.  Trade meant just transacting, buying and selling.

 

Let’s go over some of the tale of trade, drawing on William Bernstein’s excellent book “A Splendid Exchange: How Trade Shaped the World”.

 

 

Trade has always depended on technology and infrastructure.  Back in history, travel by boat was always more efficient than by land.  Then came road transport, and after that again, air cargo.  Today, electronic delivery of traded services is increasingly the case.  A country’s capacity to trade depends on its access to such technology and infrastructure.

 

Thousands of years ago, only the most prized goods travelled between continents, goods like silk, gold and silver, spices, jewels, porcelains and medicines.  And while today, not all goods and services are tradable, technology and human travel are enabling more and more tradability.  Students are now travelling overseas to do their studies, thereby importing education services.

 

Trade also relies on the security of trade routes.  Again in history, trade was often a treacherous adventure.  You could be attacked by brigands etc (indeed, raiding was a form of one way trade).  Even today, pirates lurk, not only off the coast of Somalia off, but also in the seas of South East Asia.  Assuring the safety of trade routes is a regional or global public good, and requires intergovernmental cooperation.

 

Openness of markets if necessary for trade.  The first half of the 20th century was a period of protectionism.  Now markets for manufactured goods are fairly open.  However, protectionism is quite prevalent for trade in agriculture and services.

 

Trade is beneficial, but changes in the nature and pattern of trade create winners and losers.  The rise of air cargo, for example, must of resulted in suffering for some ship owners.

 

An interesting early example of trade is that of Mesopotamia in the third millennium BC.  Mesopotamia was an advanced farming community which yielded an abundance of barley, wheat, fish and wool thanks to fertile soil and water from the Tigris and Euphates rivers. But it was devoid of strategic materials like metals, large timber and even stone which it imported.

 

The very prosperity of Mesopotamia hinged on trade in these goods which reflected the unequal distribution of natural resources on the planet (human skills and talent are also unequally distributed).  This example reminds is of Western countries dependence on oil from the Middle East.

 

Ancient Greece is another interesting case with its population clustered on the coast on poor, thin limestone soil.  While it could not produce much grain, it produced plenty of wine and olive oil, providing the basis for trade.  This also stimulated the production of pottery.  This reminds us of many East Asian countries like Hong Kong and Singapore which are only able to feed their populations thanks to imports financed by the export of manufactured goods.

 

But the Greeks did not just stick to trade.  They also colonized Sicily to take advantage of its rich volcanic soils.  This could remind us of China’s resource investments in Africa, Latin America and South East Asia where it is securing resource supplies.

 

The Roman Empire, and the Muslim Umayyad and Abbasid empires functioned very much as regional free trade areas in a similar way to the European Union, NAFTA and the many regional free trade agreements in Asia.

 

One of history's great tragedies is the slave trade in which many parties were involved.  The slave trade was of course not confined to the Americas, but took place all over the world.  Another scar is Britain’s opium trade with China.  Today, there are many dark sides to international trade today like the trade in drugs, counterfeit goods and arms, and also human trafficking.

 

Another unfortunate point is that trade can be a carrier of diseases.  The plague, “black death”, came to Europe from Asia and wiped out one-third of Europe’s population.  Today, while we have greater capacities to control the spread of infectious diseases, like SARS, avian flu etc, modern transport means that they can spread more quickly than ever before and have more sudden effects.

 

Opening to trade, and the prosperity this brings, can upset the balance of global economic and political power.  About two millennia ago, China and the Roman Empire were major world powers, although in reality they knew little of each other.  One thousand years later, the West was a poor cousin of China.  And then progressively the tables were turned as the West went through the Renaissance and the Age of Exploration.

 

Vasco Da Gama opened the way for ultimate Western colonization of much of Asia, and for much of the 19th and 20th centuries China suffered from instability, conflict and poverty.  China’s opening to trade in 1978 paved the way for the reemergence of China as a major economic and political power.  China is today the world’s leading exporter.

 

The age of discovery, colonization and the trade that went with it created the first “age of globalization”.  The whole planet was linked up.  Trade is invariably not an isolated phenomenon, but takes place together with investment, finance and migration.

 

Multinational corporations appeared on the scene in the 16th century in the form of the VOC and the English India Company.  These corporations were in fact national corporations which operated globally.  They did more than just trade, as they represented their governments.  But multinational corporations have changed a lot since then.  Today, we are increasingly seeing the emergence of globally integrated enterprises which are almost “nation-less”, and operate as if the world had no borders.

 

Trade imbalances have often been with us.  One of the origins of Britain’s opium trade with China was to extinguish China’s trade surplus.  Today of course, once again, China has a big trade surplus.  But to date, it has been able to resist Western pressure to correct this by revaluing its exchange rate.

 

As nations were created, and national governments became stronger, trade was often seen through the lens of nationalism.  There came the habit of blaming trade with countries for our economic problems -- Rome's textile merchants complained about the arrival of Chinese silk.  There came the practice whereby producers of certain good and services lobbied their government to protect their industry against foreign producers.

 

But there came also the dramatic adverse effects of protectionism when the US “Smoot-Hawley” initiative and the consequent spread of protectionism exacerbated the Great Depression in the 1930s and paved the way for World War 2.  The close trade relations which were fostered in the European Union after the war created the foundations for peace.

 

One key thing that was lacking was an international organization, like the World Trade Organization, that might help the world keep markets open.  Fortunately, thanks to the lessons of the Great Depression, and the existence of the WTO, world leaders have been able to successfully forestall protectionist pressures during the present global financial crisis.  This has been one factor that has facilitated the quick recovery in the world economy.

 

In short, trade has always existed.  It has usually been beneficial.  And most features of today’s trade were present in the trade of yesteryear.  But trade is also now different in many ways:

 

(i) Trade used to be led by Western countries.  This is less and less the case.  Emerging and developing countries are increasingly important trading nations in their own right.  But in many such cases, state-owned enterprises from these countries are key actors, often adding a political dimension to trade.

 

(ii) Manufactured goods trade used to be trade in products which were produced in the home country.  Today, the manufacturing production process is increasingly broken up and fragmented such that different parts and components are traded and then finally assembled.  Such trade is often referred as global production systems.  It can involve foreign investment from home, export of equipment and product design, outsourcing of component and part production to various countries, and perhaps final assembly in a third country.

 

(iii) The progressive decline in transport costs (refridgeration and containerization etc) and the Internet mean that more and more goods and especially services can be traded.  The outsourcing of call centres, back office services and so on to India are the classic example of the new services trade.

 

(iv) Multinational enterprises are increasingly becoming “globally integrated enterprises”, operating as if the world had no borders, using international best practices, and employing international staff.

 

(v) Citizens, societies and therefore governments are increasingly concerned about the environmental (trade in whale meat, effect on climate change) and ethical dimensions of trade. (including bribery in international trade).

 

(vi)  We have a World Trade Organization to promote trade liberalization and solve trade disputes.  But trade policy is increasing conducted at the regional level (EU, NAFTA, Mercosur and ASEAN) and through regional and bilateral free trade agreements.

 

(vii) There is a growing dark side of international trade through trade in drugs, counterfeited goods, arms, etc.

 

If Adam Smith were still with us today, he would be very happy to see that we are trucking, bartering and exchanging more than ever before.

 

References:

“A Splendid Exchange: How Trade Shaped the World”, by William Bernstein.  Atlantic Books, London.  2008.

http://www.amazon.com/Splendid-Exchange-Trade-Shaped-World/dp/0871139790

 


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