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Global Interdependence
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In-depth overview of A-level CIE Geography Global Interdependence content including case studies.
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Global Interdependence Revision13.1: Trade Flows and Trading Patterns
Keywords
Trade: the exchange/flow of goods/commodities and services for money. Countries who trade with each other are interdependent.
Trade results from the uneven distribution of resources across the globe. No country is completely self-sufficient in all the raw materials (food,
minerals, energy) and manufactured goods therefore must trade with each other.
Exports: goods and services sold to other countries.
Imports: goods and services bought from other countries.
Net Exports/The trade balance: Exports minus imports (difference between X&M).
Trade deficit: M>X the value of a country’s imports exceeds the value of its exports. The govt. can fund the trade deficit through savings or
borrowing. (country becomes poorer).
Trade Surplus: X>M a value of a country’s exports exceeds the value of its imports. (country becomes richer).
Visible Trade: the exchange of physically tangible goods between countries eg: raw materials (oil), food, manufactured goods (cars, furniture).
Invisible Trade: trade in services eg: travel, tourism, business & financial services
Bilateral Trade: involves the development of a trade between two countries for their mutual benefit.
Tariff: is a duty tax imposed by one country on the imports from other countries to protect its own home-based industries from foreign
competition of cheaper products.
Quota: is the introduction of a set figure for the amount of imports from a particular source – to protect a country’s home-based industries.
They usually work in a developed country’s favour.
Global Patterns of and inequalities in trade flows
*Statistics taken from the World Trade Statistical Review 2016/2017
The value of merchandise trade and trade in commercial services
in 2015 is nearly twice as high as in 2005.
The value of merchandise trade and trade in commercial services
declined in 2015, following modest growth in 2012-2014.
Merchandise Trade Trade in Commercial Services
World exports of manufactured goods increased from US$ World exports of commercial services totalled US$
8 trillion in 2006 to US$ 11 trillion in 2016. 4.8 trillion in 2016, up from US$ 2.9 trillion in 2006.
,The top 10 traders in merchandise trade/commercial services accounted for 53% of the world’s total trade in merchandise/commercial
services in 2016.
Developing economies had a 41%/34% share in world merchandise/commercial trade in 2016.
Main changes in global economy:
• Emergence of regional trading blocs, where members freely trade with each other, but erect trade barriers for non-members.
Formation of trading blocs eg: EU and NAFTA has led to trade creation between members but countries outside bloc have suffered
from trade diversion.
• HIC’s → trade in manufactured goods has fallen relative to trade in commercial and financial services. Many of these advanced
economies have experienced deindustrialisation → less national output generated by manufacturing sectors.
• Collapse of communism → led to opening up of former-communist countries which have increased their share of world trade by
taking advantage of low production costs & low wage levels.
• NIC’s eg: China & India → increased share of world trade & of manufacturing exports.
Inequalities:
HIC’s normally export valuable manufactured goods eg: electronics, cars and import cheaper primary products eg: tea, coffee.
LICs earn less from selling primary goods → inequality.
LIC’s have little purchasing power making it difficult for them to pay off their debt and escape from poverty.
DEPENDENCY THEORY – A.G Frank
Dependency Theory: based on the notion that there is a group of wealthy states (core) and a periphery of poor underdeveloped states (third
world). Resources are extracted by the core form the periphery to sustain their growth and wealth. Ongoing process, exploitation of cheap
resources, labour.
Factors affecting global trade (volume, nature & direction)
Resource Endowment
Resource Endowment: the amount of natural resources that a country possesses.
Some countries are rich in domestic resources (eg: Middle Eastern countries dominate oil exports, Costa Rica → tropical climate → suitable for
growing bananas). Some countries lack certain resources → rely on imports.
Capital & technology are required to exploit the resources.
,Comparative Advantage
Comparative Advantage: states that a country should specialise in the production of goods or services that it can produce at the lowest
opportunity cost/for which it is best endowed, only then should it trade with another nation.
The good with the least opportunity cost is the good the country has a comparative advantage in and is the good it should specialise in.
The result of this is that some countries have a reputation for particular products eg: Germany for cars, Japan for hi-tech products, Belgium
for chocolate.
Absolute Advantage: exists when a country is able to produce goods at a lower cost per unit (cheaper) than the cost at which another country
produces the same good. Less resources are needed to produce the same amount of goods. If a country using same FOP can produce more of
a product then it has an absolute advantage.
Locational Advantage
It’s an advantage if an exporting country is near its market as this reduces travel cost.
Example: France’s tourist industry → benefits from large populations of neighbouring countries
Example: Canada’s manufacturing industry → benefits from large American market
Some countries & cities are strategically located along important trade routes eg: Singapore → Southern tip of Malay Peninsula → main trade
route between Indian and Pacific Ocean. Eg: Rotterham in Netherlands → located near mouth of River Rhine → goods bought in by large
ocean carriers → trans-shipped onto smaller river vessels.
Investment
Foreign countries are more willing to invest in a country where trade is increasing substantially.
Historical Factors (colonial ties)
Relationship based on colonial ties can increase trade between colonial groups.
Terms of Trade
Terms of Trade: the ratio between average export prices and average import prices. Tells us the quantity level of exports that need to be sold
in order to purchase a given level of imports.
Many poor nations are primary product dependent → rely on one/few primary products to obtain foreign currency through export. Problem
→ world market price for primary products is generally low in comparison to manufactured goods → deteriorating TOT → country can buy
less imports than before with a given quantity of exports.
Primary product prices are also very volatile → uncertainty, no regular income, difficult for economic/social planning.
Changes in global market
Rapid growth of industrialised countries has brought changes in the economic strength of countries. BRIC’s (Brazil, Russia, India, China) are
emerging markets which hold 42% of the global foreign exchange reserves in contrast to the G7 countries (UK, USA, Canada, Germany, Japan,
France, Italy) holding only 17%.
The emerging economies have more power in international negotiations.
Trade agreements
Trading Bloc: a group of countries which share trade agreements between each other eg: regional barriers to trade, (tariffs and non-tariff
barriers) are reduced or eliminated among the participating states → free trade.
Free Trade Areas: members abolish tariffs and quotas on trade between themselves but maintain independent restrictions on imports from
non-member countries. Eg: NAFTA
Customs Unions: besides free trade between member nations, all members are obliged to operate a common external tariff on imports from
non-member countries. Eg: Mercosur trade agreement 1995 (Argentina, Brazil, Paraguay, Uruguay).
Common Markets: customs unions which in addition to free trade also allow the free movement of labour or capital.
Economic Unions: a common market which requires members to adopt common economic policies on matters such as agriculture, transport,
industry and regional policy. Eg: EU.
Regional Trading Bloc: group of countries within a geographical region that protect themselves from imports from non-members. Eg: EU,
NAFTA, ASEAN, Mercosur.
,Regional agreements can divert trade, inducing a country to import from a member of its trading bloc rather than from a cheaper supplier
elsewhere.
Regional groups might raise barriers against each other creating protectionist blocks.
Regional trade rules may complicate the establishment of new global regulations.
The Role of the World Trade Organisation (WTO)
The World Trade Organization (WTO): is an intergovernmental organization that regulates international trade. It deals with the rules of
trade between nations and is responsible for negotiating and implementing new trade agreements, and for policing member countries’
adherence to existing ones.
Established: 1st Jan 1995
Location/HQ: Geneva, Switzerland
Secretariat Staff: 634 → provide technical support for various councils and committees and technical assistance to developing countries.
Members: 164 since July 2016 (75% LIC’s).
Annual Budget: 197 million Swiss Francs for 2016.
• 1947; 23 nations agreed to reduce tariffs on each other’s exports under the GATT (General Agreement of Tariffs and Trade). 9 rounds
of global trade talks between 1948-2001.
• 1995: WTO was formed to settle trade disputes between members. WTO Created by Uruguay Round negotiations (1986-1994).
Today, average tariffs are one tenth of what they used to be when GATT came into force.
Aim: is to liberalise trade within countries all over the world in order to promote economic growth and ensure that trade flows as “smoothly,
predictably and freely” as possible. Exists to promote free trade by persuading countries to lower protectionist barriers (eg: tariffs). Seeks to
make trade between countries transparent.
It does this by…
• negotiating trade disputes, resolve conflicts between nations
• provide forums for agreeing over trade agreements and their implementation
• reduced tariffs from 40% to 25%.
• encourage trade agreements → bilateral, multilateral trade
• trade policies
• works with IMF & World Bank
Any country can file a complaint with the WTO against the competitive practices of another country. WTO attempts to resolve through
negotiations. Meetings consist of disputing trade agreements and ensuring fair trade is occurring, especially between HIC’s and LIC’s.
WTO’s Structure:
The council for Trade in Goods, Council for Trade of Intellectual Property Rights (designs, copyright, patents) and Council for Trade in
Services all report to the General Council → they report to the top-level decision-making body (Ministerial Conference) which have meetings
every 2 years → “trade rounds”.
Meetings consist of disputing trade agreements and ensuring fair trade is occurring, especially between HIC’s and LIC’s.
Current round: Doha Round in Qatar (9th round since 2001).
➢ Cutting protectionist measures on trade in agricultural goods
➢ Reductions in tariffs on manufacturing goods
➢ Tightening intellectual property rights
The round has become stalled because for an agreement to go forwards, every single member must agree.
Criticisms of WTO:
• HICs take advantage of natural resources in LICs → environmental damage → free trade has enabled imports to be made from
countries with the least environmental protection.
• Undemocratic → WTO’s structure enables the richer countries to win what they desire; arguably they benefit the most.
• Forces LICs to lower their barriers to trade whilst HICs keep their barriers in place → free trade benefits HICs more than LICs →
developing countries need some trade protection to be able to develop new industries; this is important to be able to diversify the
economy → “infant industry argument”. Many developed economies used a degree of tariff protection in their development phase.
• Countries and producers increasingly specialize in certain stages of production depending on their comparative advantage. This
makes the cost of importing components and raw materials crucial for their competitiveness. This incentivizes countries to pursue
bilateral trade agreements rather than agree multi-lateral trade deals → defeats the whole purpose of promoting multilateral
trade. This is because bilateral negotiations can be fully focussed and relatively quick to complete. The result is that many countries
prefer to bypass the WTO process, and deal directly with other countries.
, • Tariff barriers may have reduced but non-tariff barriers (quotas, embargos, red tape, intellectual property laws eg: copyright
protection) have increased.
• WTO takes too long to arbitrate and settle disputes. Eg: it can take over five years from the initial receipt of a complaint from one
member to the final panel ruling.
Impact of removal of agricultural tariffs example → India forced by WTO to accelerate opening up of markets → food imports have
quadrupled. Large volumes of cheap, subsidised imports have flooded in from countries such as the USA, Malaysia, Thailand.
Impact of this on India…
- Prices & rural incomes have fallen → price of coconuts fallen by 80%, coffee 60%.
Evaluating the impacts of trade in exporting and importing countries
Example where WTO achieved relative success in its goal to ensure trade runs smoothly…
1) Subsidies: The Case of Sugar, 2005
Common Agricultural Policy (*CAP) provides considerable support for European sugar producers (£400 per tonne, and with total subsidies of
around $1.5b). This was done to make the EU the leading exporter of white sugar and protect domestic farmers.
*The EU protects its farmers and growers through its CAP. European farmers receive CAP subsidies. Provides financial support to farmers in member states.
Initial purpose of subsidy was to enable the sugar surplus to be exported at the world price of 4p a pound by 2005, compared to the EU price
of 15p. Estimated 5m tonnes of excess EU sugar are dumped on world markets each year due to the fact it was cheaper.
*[If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product].
The EU imposed a 200% tariff on sugar-cane from non-EU countries. Critics argue that the effect of this is to divert trade away from more
efficient sugar producers, especially those based a number of African countries.
USA retaliated by flouting GATT rules and imposing restrictions on EU exports to the US.
In 2005, following complaints from Brazil, Thailand and Australia, the WTO imposed an annual limit on subsidised EU sugar export of 1.37m
tonnes. EU’s sugar subsidies give its farmers an unfair advantage on global export markets.
WTO allowed LIC’s to compete in the market and ensured HIC’s were not taking advantage in the market by using their subsidies.
2) Trade Facilitation Agreement (TFA) – December 2013, Bali Ministerial Conference
Aims to reduce the time and cost of trade. TFA contains provisions for expediting the movement, release and clearance of goods in transit
→ improve effectiveness of trade.
Meeting in Bali → countries agreed TFA → covered easing of customs procedures to facilitate the move, release and clearance of goods. This
would reduce red tape for transport of goods at national borders, reduce journey times for X&M → reduces cost → encourages more trade.
TFA 3 sections:
Section 1: making trade faster → ‘provisions for expediting the movement, release and clearance of goods’. Did this by improving old
agreement (GATT, 1994). Contains approximately 40 "technical measures".
Section 2: gives special differential treatment (SDT) to LIC’s by helping them in trade agreements so they won’t be exploited. Allows them to
implement agreement at their own pace.
Section 3: establishes a permanent committee on trade facilitation at the WTO. It requires members to have a national committee to
facilitate domestic coordination and national implementation of the agreement.
Importers & exporters incur significant costs due to inefficient control and clearance procedures at customs and other border authorities,
unnecessary border formalities and documentation requirements and opaque administrative fees and charges – all of which add significant
dead-weight economic cost to international trade.
Improvement in the area of formalities → simplification of trade documents, automation of border process → cost savings of up to 4.2%.
For households, lower trade costs mean expanded consumption opportunities and access to a greater variety of goods.
Companies means inputs at lower cost and better entry to foreign markets.
Developing country exports are thus expected to grow by between 13.8% and 22.3% while at the same time becoming more diversified.
Companies are likely to become more profitable which should encourage domestic investment.
HOWEVER…
Before the agreement, the negotiations were close to collapsing. India's demand that it should be allowed to extend its domestic agricultural
subsidies indefinitely was met by opposition from the U.S. India provides subsidies to rice and wheat farmers so price is affordable to Indian
consumers → competitive advantage to US/EU farmers. Leads to overproduction in India → dumping onto world market → lowers price →
affected Rwanda, Nigeria → can’t compete. Nigeria raised tariffs on imports from Indian rice.
, India gained the right to continue subsidy programme indefinitely in return for agreeing to TFA.
3) Multilateralism & Bilateralism
WTO operates as a multilateral organisation but many countries favour bilateral discussions as bilateral negotiations are fully focussed and
faster → many countries bypass WTO process and deal directly with other countries.
Agreements take over a decade → shape of the economy has changed by then and countries may not want to agree anymore.
Trend towards bilateral/regional deals (eg: Trans Pacific Partnership [Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand,
Peru, Singapore, Vietnam] → easier and quicker to negotiate.
Bilateral agreements lack "special treatment for developing countries" provisions → their negotiation is dominated by a small number of
powerful players whose influence cannot be counterbalanced by groups of less powerful countries acting together (WTO). Agreements are less
fair and transparent → skewed in favour of corporate interests and against the interests of developing countries and ordinary people
everywhere.
4) The Banana Wars
EU and 10 Latin American countries signed an agreement in Nov 2012 to formally end 8 separate WTO cases.
- The US complained that an EU scheme giving banana producers from former colonies in the Caribbean special access to European
markets broke free trade rules.
- Latin American growers said European countries were favouring bananas from their former colonies → imperialism (UK).
EU imposed high tariffs on Latin American (LA) bananas so they can’t compete in the market. Even though LA bananas were cheapest, EU
didn’t buy all bananas from them.
American MNCs didn’t like → can’t trade in EU due to tariffs (lots of markets lost due to tariff). UK & EU did it to help Caribbean as they were
a weak market → complaint of unfair trading.
EU eventually agreed to lower tariffs on Latin American bananas → lower prices for EU consumers → more competition between LA & ACP.
Solution:
WTO worked with EU to make ‘Geneva Banana Agreement’ 2009 → decrease tariffs imposed on Latin American Countries (Brazil, Colombia,
Mexico).
“Compensation Package” → ACP countries were given £200 million to invest in farming & improve & adjust to stiffer competition to
compete with Latin American MNC’s.
Agreed maximum tariff rates went from €148/tonne euros to €114/tonne.
Took 15 years to resolve dispute → time lag.
The nature and role of Fairtrade
Fairtrade: a social movement whose stated goal is to help producers in developing countries achieve better trading conditions and to
promote sustainable farming. The movement focuses in particular on commodities, or products which are typically exported from developing
countries to HICs eg: coffee, wine, sugar, fruit, chocolate, flowers.
Producers get…
• Paid fairer price that covers full cost of production and provides a living wage for producers.
• Access to the market for their goods
• A contract (for extra financial security)
• Better prices for their products
• Access to the Fairtrade Premium → sum of money available from the Fairtrade foundation to be spent upon improving yields,
farming practices, health care or education.
> 7 million people in Africa, Asia and Latin America benefit from Fairtrade (farmers, families)
1226 Fairtrade producer organisations worldwide (2014).
Child labour must not be used.
Production must be sustainable and not take place at the expense of environmental degradation.
2013 → Fairtrade sales were £4.4bn → small relative to total world trade in goods → argued that Fairtrade makes insignificant impact.
Small scale producers deal directly with companies eg: Tesco, Sainsbury’s in HICs. HIC companies pay over the world market price for
products traded. Difference can be as large as 100%. Gives producers some certainty about sales and price. Raises incomes. Higher prices
save producers from bankruptcy and absolute poverty. Money to reinvest in farms.
Case Study: Kuapa Kokoo, Ghana. Set up in 1993.
Kuapa Kokoo is a co-operative of farmers in Ghana. 2013 → 88,000 members who are predominantly small-holders highly reliant on cocoa
income and living in remote and deprived parts of the country.
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