2.2. Patterns and Trends in International Trade and Capital Flows

The importance of trade in absolute and relative terms (trade-to-GDP ratio) is illustrated in Exhibits 3 through 5. Exhibit 3 shows that trade as a percentage of regional GDP increased in all regions of the world during 1970–2006. Developing countries in Asia had the fastest growth in trade, increasing from less than 20 percent of GDP in 1970 to more than 90 percent of GDP in 2006.

Exhibit 3. Trade in Goods and Services (Percent of Regional GDP)

Note: CEE = Central and Eastern Europe; CIS = Commonwealth of Independent States

Source: IMF Issues Brief “Globalization: A Brief Overview,” 2008.

Exhibit 4 indicates that trade as a percentage of GDP and the GDP growth rate have increased in most regions of the world during 1990–2006. However, data for 2008 (not shown) indicates a decline that, although consistent with the worldwide economic downturn, varied across country groups. High-income countries that are members of the Organisation for Economic Co-Operation and Development (OECD) experienced a growth rate of 2.4 percent during 2000–2006, but had a growth rate of only 0.3 percent in 2008. The corresponding numbers for growth in non-OECD high-income countries are 5.0 percent and 3.2 percent, respectively; for lower-middle-income countries, they are 7.7 percent and 7.5 percent, respectively. The 2009 World Development Report affirmed the link between trade and growth and noted evidence that all rich and emerging economies are oriented to being open to trade. More specifically, the report indicated:

…When exports are concentrated in labor-intensive manufacturing, trade increases the wages for unskilled workers, benefiting poor people. It also encourages macroeconomic stability, again benefiting the poor, who are more likely to be hurt by inflation. And through innovation and factor accumulation, it enhances productivity and thus growth. There may be some empirical uncertainty about the strength of trade’s relationship with growth. But essentially all rich and emerging economies have a strong trade orientation. (World Bank 2009)

Of course, trade is not the only factor that influences economic growth. Research has also identified such factors as the quality of institutions, infrastructure, and education; economic systems; the degree of development; and global market conditions (World Trade Organization 2008).

Exhibit 4. Trade Openness and GDP Growth

	Trade as Percent of GDP (averaged over the period)				Average GDP growth (%)
Country Group	1980–1989	1990–1999	2000–2006		1980–1989	1990–1999	2000–2006
World	37.2	41.0	50.7		3.1	2.7	3.2
High income:
All	38.1	40.3	49.5		3.1	2.6	2.5
OECD	35.3	37.2	44.7		3.1	2.5	2.4
Non-OECD	120.0	128.1	172.5		3.9	4.5	5.0
Low and middle income:
All	32.4	44.4	56.9		3.4	3.5	5.8
Middle	32.4	44.5	57.1		3.4	3.5	5.8
Upper middle	33.4	44.3	53.5		2.1	1.7	4.1
Lower middle	31.4	44.8	61.4		6.0	6.1	7.7
Low	32.5	39.9	51.7		2.6	2.7	4.8

Note: Averages indicate the average of the annual data for the period covered.

Source: World Bank.

Exhibit 5 presents trade and foreign direct investment as a percentage of GDP for select countries for 1980–2007. Foreign direct investment (FDI) refers to direct investment by a firm in one country (the source country) in productive assets in a foreign country (the host country). When a firm engages in FDI, it becomes a multinational corporation (MNC) operating in more than one country or having subsidiary firms in more than one country. It is important to distinguish FDI from foreign portfolio investment (FPI), which refers to shorter-term investment by individuals, firms, and institutional investors (e.g., pension funds) in such foreign financial instruments as foreign stocks and foreign government bonds. Exhibit 5 shows that trade as a percentage of GDP for the world as a whole increased from 38 percent in 1980 to 57 percent in 2007. In Argentina, trade as a percentage of GDP increased from 12 percent in 1980 to 45 percent in 2007, while in India during this same period it increased from 15.5 percent to 45 percent. Among the more advanced economies, trade expanded sharply in Germany (from 45 percent to 87 percent), but in the United States trade expanded more modestly (from 21 percent to 29 percent).

Exhibit 5. Increasing Global Interdependence
FDI and Trade as a percentage of GDP

Country	Type of Flow	1980	1990	2000	2007
World	Trade	38.4	38.0	48.8	57.3
	FDI: Net Inflows	0.6	1.0	5.1	4.3
	FDI: Net Outflows	0.6	1.1	3.6	4.5
Argentina	Trade	11.5	15.0	22.4	45.0
	FDI: Net Inflows	–0.1	0.0	0.3	0.6
	FDI: Net Outflows	0.9	1.3	3.7	2.5
Germany	Trade	45.3	49.7	66.4	86.7
	FDI: Net Inflows	0.5	1.4	3.1	4.9
	FDI: Net Outflows	0.0	0.2	11.1	2.3
India	Trade	15.6	15.7	27.4	45.2
	FDI: Net Inflows	0.0	0.0	0.1	1.4
	FDI: Net Outflows	0.0	0.1	0.8	2.0
United States	Trade	20.8	20.5	25.9	28.7
	FDI: Net Inflows	0.7	0.6	1.6	2.9
	FDI: Net Outflows	0.6	0.8	3.2	1.9

Source: World Development Indicators, World Bank.

The increasing importance of multinational corporations is also apparent in Exhibit 5. Net FDI inflows and outflows increased as a percentage of GDP between 1980 and 2000 for each of the countries shown. Trade between multinational firms and their subsidiaries (i.e., intra-firm trade) has become an important part of world trade. For example, 46 percent of US imports occur between related parties (Bernard, Jensen, Redding, and Schott 2010). Globalization of production has increased the productive efficiency of manufacturing firms because they are able to decompose their value chain into individual components or parts, and then outsource their production to different countries where these components can be produced most efficiently.4 For example, Nintendo’s Wii remote is manufactured with components sourced from several countries in the world: the accelerometer is manufactured in the United States; the base memory chip in Italy; the data converter in the United States, Thailand, and India; the plastic casing is assembled in China and designed in Japan; the Bluetooth chip is manufactured in Taiwan and designed in California (US); and the rumble pack is manufactured in various countries in Asia.5 Foreign direct investment and outsourcing have increased business investment in these countries and provided smaller and less developed countries the opportunity to participate in international trade. For example, the World Investment Report (2002) indicates that in January 2002 Intel had 13 fabrication plants and 11 assembly and testing sites in 7 countries. It was the leading national exporter from Ireland, Philippines, and Costa Rica, and 17th among foreign exporters from China. These trends indicate the increasing global interdependence of economies, although the degree of interdependence varies among regions and countries. Greater interdependence also means that countries are now more exposed to global competition. As a result they must be more flexible in their production structure in order to respond effectively to changes in global demand and supply.

The complexity of trading relationships has also increased with the development of sophisticated global supply chains that include not only final goods but also intermediate goods and services. Increased global interdependence has changed the risk and return profiles of many countries. Countries that have greater international links are more exposed to, and affected by, economic downturns and crises occurring in other parts of the world. The contagion effect of the Asian financial crisis, which began in Thailand in July 1997, spread to many other markets, such as Indonesia, Malaysia, South Korea, Philippines, Hong Kong, Singapore, and Taiwan. It even affected Brazil and Russia to some degree, although there is less clarity about the mechanisms by which the crisis spread beyond Asia. Among the outward symptoms of the crisis were exchange rate problems, such as currency speculation and large depreciation of currencies, capital flight, and financial and industrial sector bankruptcies. However, recovery was surprisingly swift and all these countries exhibited positive growth by the second quarter of 1999 (Gerber 2010).