Trade and Globalization

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Trade and Globalization

Over the last two centuries trade has grown remarkably, completely transforming the global economy. Today about one fourth of total global production is exported. Understanding this transformative process is important because trade has generated gains, but it has also had important distributional consequences.

From a historical perspective, there have been two waves of globalization. The first wave started in the 19th century, and came to an end with the beginning of the First World War. The second wave started after the Second World War, and is still continuing.

Trade transactions include both goods (tangible products that are physically shipped) and services (intangible commodities, such as tourism and financial services). The production chains for these goods and services are becoming increasingly complex and global. According to recent estimates, about 30% of the value of global exports comes from foreign inputs.

Most trade theories in the economics literature focus on sources of comparative advantage. These theories postulate that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, based on their strengths. The empirical evidence shows that comparative advantage is indeed relevant; but it is not the only force driving incentives to specialization and trade.

Today trade is a fundamental part of economic activity everywhere.

In today’s global economic system, countries exchange not only final products, but also intermediate inputs. This creates an intricate network of economic interactions that cover the whole world.

The following interactive data visualization, created by the London-based data visualization studio Kiln and the UCL Energy Institute, gives us an insight into the complex nature of trade. It plots the position of cargo ships across the oceans.

Trade has changed the world economy

Trade has grown remarkably over the last century. The integration of national economies into a global economic system has been one of the most important developments of the last century. This process of integration, often called Globalization, has materialized in a remarkable growth in trade between countries.

The following chart shows the value of world exports over the period 1800-2014. These estimates are in constant prices (i.e. have been adjusted to account for inflation) and are indexed at 1913 values.

This chart shows an extraordinary growth in international trade over the last couple of centuries: Exports today are more than 40 times larger than in 1913.