International economics: Lect 1 part 2 (Borders and trade agreements (1.…
International economics: Lect 1 part 2
The gravity model
simple, but fairly well in predicting actual trade flows
Estimates of the effect of distance (c: )
a 1% increase in the distance
between countries is typically associated with a
decrease in the volume of trade of 0.7% to 1%
Estimates of the effect of countries’ size (a and b): a
1% increase in a country’s economic size
is typically associated with and
increase in the volume of trade of about 1%
Borders and trade agreements
Does a border lead to significantly less trade
than expected based on countries’ GDPs and distance from another?
Does a trade agreement lead to significantly more trade among its partners
than expected based on their GDPs and distances from one another?
The gravity model can also be used to assess the effect of trade impediments other than distance on trade flows: e.g. borders and trade agreements
The border between the US and Canada (one of the more open borders in the world) still seems to be associated with a reduction in trade!
Canadian province of British Columbia trades significantly more with other Canadian provinces than with US states at similar distance (borders matter!)
2. Trade agreements
The U.S. signed a free trade agreement with Mexico and Canada in 1994, the North American Free Trade Agreement (NAFTA)
NAFTA members trade more with the US than expected when only considering their economic size! […NAFTA or distance??]
Globalization: then and now
True, many technologies have increased trade and globalization by reducing trade impediments:
Wheels, sails, compasses, railroads, telegraph, steam power, automobiles,
telephones, airplanes, computers, containers, Internet, GPS satellites, etc
The negative effect of distance on trade has become smaller over time, it is still far from being insignificant according to estimates of the gravity model:
the world is not (yet) flat!
The world economy is more integrated than ever, but is the world really becoming “flat” (is distance no longer important in determining (economic) interactions?)
A country’s location on the globe is still very relevant in determining your ease of access to markets !
Globalization: then and now cont.
More recent examples:
end of Soviet Union and the decision of China’s leaders to open up to world markets
(wars, tariffs or free trade negotiations), can change trade patterns much more than innovations in transportation and communication
Then it suffered a sharp decline due to WWI, the
(followed by increase in protectionism) and
Only around 1970 (!) were trade levels back at their
World trade grew rapidly from 1870 to 1913
Since 1970, world trade has only become ever more important, big reduction in trade barriers by developing countries