The Geography of Transport Systems
Jean-Paul Rodrigue (2017), New York: Routledge, 440 pages.
ISBN 978-1138669574
Globalization and International Trade
Author: Dr. Jean-Paul Rodrigue
1. The Flows of Globalization
In a global economy, no nation is self-sufficient. Each is involved at different levels in trade to sell what it produces, to acquire what it lacks and also to produce more efficiently in some economic sectors than its trade partners.
International Trade. An exchange of goods or services across national jurisdictions. Inbound trade is defined as imports and outbound trade is defined as exports. Subject to the regulatory oversight and taxation of the involved nations, namely through customs.
As supported by conventional economic theory, trade promotes economic efficiency by providing a wider variety of goods, often at lower costs, notably because of specialization, economies of scale and the related comparative advantages. The main theoretical foundations of international trade include:
  • Mercantilism. A trade system where a nation tried to impose a positive trade balance (more exports than imports, particularly value-wise) on other nations to favor the accumulation of wealth. This system was prevalent during the colonial era and often undertaken by charter companies receiving a monopoly on trade. Mercantilism represents the antithesis of free trade since trade relations are controlled and aligned to benefit one partner at the expense of the other. Still, mercantilism established the foundations of a global trading system, albeit an unequal one.
  • Neomercantilism. A more recent trade system, which like mercantilism leans on establishing a positive trade balance to meet economic development goals. Export-oriented strategies can be considered a form of neomercantilism, particularly if a government establish an incentive and subsidy system (e.g. free trade zones), which confers additional advantages to the factors of production. Neomercantilism can also be a response by some governments to the competitive and disruptive consequences of free trade, particularly if the trade partners are engaged in neomercantilist strategies. The outcome is tariff and non-tariff measures regulating trade and protecting national commercial sectors that are perceived to be subject to unfair competition. Therefore, neomercantilist strategies can be controversial and subject to contention.
  • Absolute advantages. Based on a nation (or a firm) able to produce more effectively in an economic sector while using less resources (e.g. capital, labor) than any other potential competitors. It therefore has an absolute advantage. Global efficiency can thus be improved with trade as a nation can focus on its absolute advantages, trade its surplus and import what it lacks. The drawback of this perspective is that in theory nations having no absolute advantages should not be involved in trade since they may have little to gain from it. Absolute advantages tend to be an enduring characteristic, particularly for resources.
  • Comparative advantages. Even if a nation (or a firm) has absolute advantages over a wide array of economic sectors, it can focus on the sectors it has the highest comparative advantages (the difference of its production costs and those of its competitors) and import goods in sectors it has less comparative advantages. The comparative productivity increases the total production level since that even if a nation (or a firm) has no absolute advantages, it can focus on sectors where the total productivity gains are the most significant. Comparative advantages tend to be a temporary characteristic, that can change with the evolution of labor costs.
  • Factor endowments. Expands the comparative advantages perspective by underlining that trade is related to the factors endowments of a nation. The most basic endowments are capital, land and labor. A nation will export goods to which it has notable factor endowments and imports goods in which it has scarce factor endowments. As such, nations that have low cost labor available will focus in labor intensive activities while nations having high capital endowments will focus in capital intensive activities. Factor endowments can be improved through capital and human resources investments.
The globalization of production is concomitant to the globalization of trade as one cannot function without the other. Even if international trade (or long distance trade since there were no nations in the modern sense) has taken place centuries, as ancient trade routes such as the Silk Road can testify, trade occurred at an ever increasing scale over the last 600 years to play an even more active part in the economic life of nations and regions. This process has been facilitated by significant technical changes in the transport sector. The scale, volume and efficiency of international trade have all continued to increase since the 1970s. As such, space / time convergence was an ongoing process that implied a more extensive market coverage that could be accessed with a lower amount of time. It has become increasingly possible to trade between parts of the world that previously had limited access to international transportation systems. Further, the division and the fragmentation of production that went along with these processes also expanded trade. Trade thus contributes to lower manufacturing costs.
Without international trade, few nations could maintain an adequate standard of living, particularly those of smaller size. With only domestic resources being available, each country could only produce a limited number of products and shortages would be prevalent. Global trade allows for an enormous variety of resources – from Persian Gulf oil, Brazilian coffee to Chinese labor – to be made more widely accessible. It also facilitates the distribution of a wide range of manufactured goods that are produced in different parts of the world to global markets. Wealth becomes increasingly derived through the regional specialization of economic activities. This way, production costs are lowered, productivity rises and surpluses are generated, which can be transferred or traded for commodities that would be too expensive to produce domestically or would simply not be available. As a result, international trade decreases the overall costs of production worldwide. Consumers can buy more goods from the wages they earn, and standards of living should, in theory, increase.
International trade demonstrates the extent of globalization with increased spatial interdependencies between elements of the global economy and their level of integration. These interdependencies imply numerous relationships where flows of capital, goods, raw materials and services are established between regions of the world. International trade is also subject to much contention since it can at time be a disruptive economic and social force as it changes the conditions in which wealth is distributed within a national economy, particularly due to changes in prices and wages. One particular challenge concerns the substitution of labor and capital. While in a simple economy labor and capital (infrastructures) can be reconverted to other uses, in complex economies labor and capital cannot be easily reallocated. Therefore, trade can at the same time lead to more goods being available at a lower price, but with enduring unemployment and decaying infrastructures (unused factories).
2. The Setting of the Contemporary Global Trade System
International trade, both in terms of value and tonnage, has been a growing trend in the global economy. It is important to underline when looking at the structure of global trade that it is not nations that are trading, but mostly corporations with the end products consumed in majority by individuals. The nation is simply a regulatory unit where data is collected since freight movements crossing boundaries are subject to customs oversight and tabulated as trade flows. Inter and intra corporate trade is taking place across national jurisdictions is accounted as international trade. The emergence of the current structure of global trade can mainly be articulated within three major phases:
  • First phase (immobile factors of production). Concerns a conventional perspective on international trade that prevailed until the 1970s where factors of production were much less mobile. Prior to the end of World War I, global trade was mainly structured by colonial relations, but was fairly unregulated. There was a limited level of mobility of raw materials, parts and finished products. After World War I international trade became fairly regulated with impediments such tariffs, quotas and limitations to foreign ownership. Trade mainly concerned a range of specific products, namely commodities, (and very few services) that were not readily available in regional economies. Due to regulations, protectionism and fairly high transportation costs, trade remained limited and delayed by inefficient freight distribution. In this context, trade was more an exercise to cope with scarcity than to promote economic efficiency.
  • Second phase (mobility of factors of production). From the 1980s, the mobility of factors of production, particularly capital, became possible. The legal and physical environment in which international trade was taking place lead to a better realization of the comparative advantages of specific locations. Concomitantly, regional trade agreements emerged and the global trade framework was strengthened from a legal and transactional standpoint (GATT/WTO). In addition, containerization provided the capabilities to support more complex and long distance trade flows, as did the growing air traffic. Due to high production (legacy) costs in old industrial regions, activities that were labor intensive were gradually relocated to lower costs locations. The process began as a national one, then went to nearby countries when possible and afterwards became a truly global phenomenon. Thus, foreign direct investments surged, particularly towards new manufacturing regions as multinational corporations became increasingly flexible in the global positioning of their assets.
  • Third phase (global production networks). There is a growth in international trade, now including a wide variety of services that were previously fixed to regional markets and a surge in the mobility of the factors of production. Since these trends are well established, the priority is now shifting to the geographical and functional integration of production, distribution and consumption with the emergence of global production networks. Complex networks involving flows of information, commodities, parts and finished goods have been set, which in turn demands a high level of command of logistics and freight distribution (see concept 3). In such an environment, powerful actors have emerged which are not directly involved in the function of production and retailing, but mainly taking the responsibility of managing the web of flows.
The global economic system is thus characterized by a growing level of integrated services, finance, retail, manufacturing and nonetheless distribution, which in turn is mainly the outcome of improved transport and logistics, a more efficient exploitation of regional comparative advantages and a transactional environment supportive of the legal and financial complexities of global trade. The volume of exchanged goods and services between nations is taking a growing share of the generation of wealth, mainly by offering economic growth opportunities in new regions and by reducing the costs of a wide array of manufacturing goods. By 2007, international trade surpassed for the first time 50% of global GDP, a twofold increase in its share since 1950.
3. Trade Costs and Facilitation
The facilitation of trade involves how the procedures regulating the international movements of goods can be improved so that actors involved in international trade have move efficient formalities. For regulatory authorities, trade facilitation improves their effectiveness as well as reducing the risk of custom duty evasion. It depends on the reduction of the general costs of trade, which considers transaction, tariff, transport and time costs, often labeled as the "Four Ts" of international trade. These trade costs are derived from two main sources:
  • Separation factors. These are usually exogenous factors separating two trade partners such as distance, transportation costs, travel time, as well as common attributes shared by trade partners. These usually involves being part of an economic agreement (e.g. a free trade zone), which is facilitated when partners have a common boundary.
  • Country specific factors. Relates endogenous to factors that are either related to the origin or the destination of trade. This usually involves customs procedures (tariffs and non-tariffs), the overall performance of the national transport and logistic sector and how well an economy is connected to the international transport system through its gateways (mostly ports and airports).
United Nations estimates have underlined that for developing countries a 10% reduction in transportation cost could be accompanied with a growth of about 20% in international and domestic trade. Thus, the ability to compete in a global economy is dependent on the transport system as well as a trade facilitation framework:
  • Distribution-based. A multimodal and intermodal freight transport system composed of modes, infrastructures and terminals that spans across the globe. It insures a physical capacity and connectivity to support trade and its underlying supply chains.
  • Integration-based. Customs procedures, tariffs, regulations and handling of documentation. They insure that trade flows abide to the rules and regulations of the jurisdictions they cross. Cross-border clearance, particularly in developing countries, can be a notable trade impediment with border delays, bottlenecks and long customer clearance times. This underlines the need for enforcing revenue collection so that income from trade is taking place according to established rules. Customs fraud often takes place where revenue collection is lacking and requires accurate product valuation and labeling.
  • Transaction-based. Banking, finance, legal and insurance activities where accounts can be settled and risk mitigated. They insure that the sellers of goods and services are receiving an agreed upon compensation and that the purchasers have a legal recourse if the outcome of the transaction is judged unsatisfactory or is insured if a partial or full loss incurs. Improving the transactional efficiency of trade can also lead to more opportunities for fraud. Trade misinvoicing is a common form of transactional fraud and is reported to be the largest source of illicit financial outflows in the world. It can be used for money laundering when a larger sum than the actual reported trade transaction is paid to a third party, with the surplus diverted to another foreign account. It can also be used for tax evasion when a lower transactional value is reported, while the real transactional value is settled through a third party.
The quality, cost, and efficiency of these services influence the trading environment as well as the overall costs linked with the international trade of goods. Many factors have been conductive to trade facilitation in recent decades, including integration processes, standardization, production systems, transport efficiency and transactional efficiency:
  • Integration processes, such as the emergence of economic blocks and the decrease of tariffs at a global scale through agreements, promoted trade as regulatory regimes were harmonized. One straightforward measure of integration relates to custom delays, which can be a significant trade impediment since it adds uncertainty in supply chain management. The higher the level of economic integration, the more likely the concerned elements are to trade. International trade has consequently been facilitated by a set of factors linked with growing levels of economic integration, the outcome of processes such as the European Union or the North American Free Trade Agreement. The transactional capacity is consequently facilitated with the development of transportation networks and the adjustment of trade flows that follows increased integration. Integration processes have also taken place at the local scale with the creation of free trade zones where an area is given a different governance structure in order to promote trade, particularly export oriented activities. In this case, the integration process is not uniform as only a portion of a territory is involved. China is a salient example of the far-reaching impacts of the setting of special economic zones operating under a different regulatory regime.
  • Standardization concerns the setting of a common and ubiquitous frame of reference over information and physical flows. Standards facilitate trade since those abiding by them benefit from reliable, interoperable and compatible goods and services which often results in lower production, distribution and maintenance costs. Measurement units were among the first globally accepted standards (metric system) and the development of information technologies eventually led to common operating and telecommunication systems. It is however the container that is considered to be the most significant international standard for trade facilitation. By offering a load unit that can be handled by any mode and terminal with the proper equipment, access to international trade is improved.
  • Production systems are more flexible and embedded (see concept 3). It is effectively productive to maintain a network of geographically diversified inputs, which favors exchanges of commodities, parts and services. Information technologies have played a role by facilitating transactions and the management of complex business operations. Foreign direct investments are commonly linked with the globalization of production as corporations invest abroad in search of lower production costs and new markets. China is a leading example of such a process, which went on par with a growing availability of goods and services that can be traded on the global market.
  • Transport efficiency has increased significantly because of innovations and improvements in the modes and infrastructures in terms of their capacity and throughput. Ports are particularly important in such a context since they are gateways to international trade through maritime shipping networks. As a result, the transferability of commodities, parts and finished goods has improved. Decreasing transport costs does more than increasing trade; it can also help change the location of economic activities. Yet, transborder transportation issues remain to be better addressed in terms of capacity, efficiency and security.
  • Transactional efficiency. The financial sector also played a significant role in integrating global trade, namely by providing investment capital and credit for international commercial transactions. For instance, a letter of credit may be issued based upon an export contract. An exporter can thus receive a payment guarantee from a bank until its customer finalizes the transaction upon delivery. This is particularly important since the delivery of international trade transactions can take several weeks due to the long distances involved. During the transfer, it is also common that the cargo is insured in the event of damage, theft or delays, a function supported by insurance companies. Also, global financial systems permit to convert currencies according to exchange rates that are commonly set by market forces, while some currencies, such as the Chinese Yuan, are set by policy. Monetary policy can thus be a tool, albeit contentious, used to influence trade.
All these measures are expected to promote the level of economic and social development of the concerned nations since trade facilitation relies on the expansion of human, infrastructure and institutional capabilities.
4. Global Trade Flows
The nature of what can be considered international trade has changed, particularly with the emergence of global value chains and the trade of intermediary goods they involve. This trend obviously reflects the strategies of multinational corporations positioning their manufacturing assets in order to lower costs and maximize new market opportunities. About 80% of the global trade takes place within value chains managed by multinatiional corportations. International trade has thus grown at faster rate than global merchandise production, with a growing complexity of distribution systems supported by supply chain management practices. The structure of global trade flows has shifted with many developing economies having a growing participation in international trade with an increasing share of manufacturing activities.
Globalization has been accompanied by growing flows of manufactured goods and their growing share of international trade. The trend since the 1950s involved a relative decline in bulk liquids (such as oil) and more dry bulk and general cargo being traded. Recently, the share of fuels in international trade has increased, mainly due to rising energy prices. Another emerging trade flow concerns the increase in the imports of resources from developing economies, namely energy, commodities and agricultural products, which is a divergence from their conventional role as exporters of resources. This is indicative an economic diversification as well as increasing standards of living. There are however significant fluctuations in the growth rates of international trade that are linked with economic cycles of growth and recession, fluctuations in the price of raw materials, as well as disruptive geopolitical and financial events.
The geography of international trade remains dominated by a few large economic blocs, mainly in North America, Europe and East Asia (Coastal China, Japan, South Korea and Taiwan), which are commonly referred as the triad. Alone, the United States, Germany and Japan account for about a quarter of all global trade, with this supremacy being seriously challenged by emerging economies. Further, G7 countries account for half of the global trade, a dominance which has endured for over 100 years. A growing share is being accounted by the developing countries of Asia, with China accounting for the most significant growth both in absolute and relative terms. Those geographical and economic changes are also reflected over trans-oceanic trade with Trans-Pacific trade growing faster than Trans-Atlantic trade.
Neo-mercantilism is reflective of global trade flows as several countries have been actively pursuing export-oriented economic development policies using infrastructure development, subsidies, and exchange rates as tools. This strategy has been followed by developing economies and is associated with growing physical and capital flow imbalances in international trade. This is particularly reflective in the American container trade structure, which is highly imbalanced and having acute differences in the composition of imports and exports. A large share of these imbalances were the outcome of the fiscal policies of exporting countries purchasing American financial instruments, such as bonds. This enabled the US dollar to uphold its value. Imbalances can also be misleading as products are composed of parts manufactured in several countries with assembly often taking place in a low cost locations and they are then exported to major consumption markets. In international trade statistics, a location assumes the full value of finished goods imported elsewhere while it may have only contributed to a small share of the total added value. Electronic devices are illustrative of this issue. Further, the growth of ecommerce has resulted in new actors to be involved in international trade, at times indirectly. For instance, ordering a product online may result in an international trade transaction.
Regionalization has been one of the dominant features of global trade as the bulk of international trade has a regional connotation, promoted by proximity and the establishment of economic blocs such as NAFTA and the European Union. The closer economic entities are, the more likely they are to trade due to lower transport costs, less potential delays in shipments, common customs procedures and linguistic and cultural affinities. The most intense trade relations are within Western Europe and North America, with a more recent trend involving trade within Asia, particularly between Japan, China, Korea and Taiwan as these economies are getting increasingly integrated.
5. Global Trade at a Threshold?
At the beginning of the 21st century, the flows of globalization have been shaped by four salient trends:
  • An ongoing growth of international trade, both in absolute terms and in relation to global national income. From 1970 to 2010 the value of exports has grown by a factor of 48 times if measured in current dollars, while GDP increased 22 times and population increased 1.8 times.
  • A substantial level of containerization of commercial flows, with container throughput growing in proportion with global trade. Containerization tends to grow at a rate faster than trade and GDP growth. This corresponded to about 135.5 million TEU of containerized trade.
  • A higher relative growth of trade of emerging economies, particularly in Pacific Asia that focus on export-oriented development strategies that have been associated with imbalances in commercial relations.
  • The growing role of multinational corporations as vectors for international trade, particularly in terms of the share of international trade taking place within corporations and the high level of concentration of their head offices.
Still, many challenges are impacting future developments in international trade and transportation, mostly in terms of demographic, supply chain, energy and environmental issues. While the global population and its derived demand will continue to grow and reach around 9 billion by 2050, demographic changes such as the aging of the population, particularly in developed countries, will transform consumption patterns as a growing share of the population shifts from wealth producing (working and saving) to wealth consuming (selling saved assets). Demographic trends in North America, Europe and East Asia (e.g. Japan, South Korea, Taiwan) may not place them as drivers of global trade, a function they have assumed in recent decades. The demographic dividend in terms of peak share of working age population that many countries benefited from, particularly China, will recede.
As both maritime and air freight transportation depend on petroleum, international trade remains influenced by fluctuations in energy prices. The paradox has become that periods of high energy prices usually impose a rationalization of international trade and its underlying supply chains, However, periods of low or sharply declining energy prices, which should benefit international transportation, are linked with economic recessions. Environmental issues have also become more salient with the growing tendency of the public sector to regulate components of international transportation that are judged to have negative externalities. Also, international trade enables several countries to mask their energy consumption and pollutant emissions by importing goods that are produced elsewhere and where environmental externalities are generated. Thus, international trade has permitted a shift in the international division of production, but also a division between the generation of environmental externalities and the consumption of the goods related to these externalities.