Factors affecting global trade, flows and patterns

Trade Blocs and Trade Agreements

EU and NZ Agricultural Agreement

There are many different types of trade agreements, with a trade bloc being a group of countries that share trade agreements between each other. The main forms of economic integration include, free trade areas(NAFTA), customs unions (Mercosur), common markets and economic unions (EU)

Locational Advantage

Locational advantage

Any reason for a firm to locate production, or a stage of production, in a particular place, such as availability of a natural resource, transport cost, or barriers to trade. May explain why a country's firms succeed in trade, or why a multinational firm locates there

Spatial patterns have long influenced trade patterns, if exporting countries are close to the market for its products this reduces transport costs.

Some countries and cities are strategically located along important trade routes (Singapore).

Historical Factors

Historical relationships, often based on colonial ties remain an important factor in trade patterns (e.g UK and Commonwealth links).

Unfortunately historical factors have commonly led to trade dependency.

What influences trade flows?

Difference between countries

OPEC

Resource Endowment

Exporting raw materials goes hand in hand with the wealth of many countries (Middle East Oil dominance or Australian mining)

Raw Materials

Changes in the Global Markets

The rapid growth of NICs has brought about major changes in the economic strength of countries. Do the BRICS pose a significant threat to the established economic order?

The comparative advantage of countries depends on a number of factors

Natural resources

Geographical situation. For example, countries with sea borders specialize in transport logistics and ship building.

Abundant and relatively cheap labor.

Abundant land

Traditions developed over time

Comparative Advantage

Countries are blessed with different resources

International Trade

Different countries will specialise in producing those goods and services for each is best endowed. It trades with others to obtain goods that it is not favourably endowed, creating supply and demand. Relevant for raw materials but also reputation eg Germany and cars.

A contemporary example: China’s comparative advantage with the United States is in the form of cheap labor.

Terms of trade (TOT) refers to the relative price of exports in terms of imports and is defined as the ratio of export prices to import prices. It can be interpreted as the amount of import goods an economy can purchase per unit of export goods.

Output of a country would increase when the principle of comparative advantage is applied to  determine what goods and services they should specialise in producing.

Investment

Investment in a country is the key to increasing its trade. Brazil is a great example of this, attracting a large amount of FDI. Some LICs work in investment markets that undermine their incentive to invest and grow, where economic, social and political factors deter investment. Crime and corruption remain a great deterrent to investment.

The terms of the trade

Often this comes down to a question of volume needed, many developing countries are primary product dependent. This often puts them at a disadvantage with the global market price for primary products lower than manufacturing and services.

Primary Product Dependent

Many poor nations are primary product dependent, which means they rely on one or a small number of primary products to obtain foreign currency through export.

The terms of the trade for many lEDC’S is worse than it was 10 years ago. This leads to poor countries having very high trade deficits Thus it is not surprising that so many nations are struggling to get out of poverty.

Trade balance by income

Brazil

A country whose terms of trade is very sensitive to world commodity prices and fluctuation in the exchange rate against the US dollar

Factors affecting global trade, flows and patterns