Learning Outcomes

Upon the successful completion of this module, you should be able to:

 Analyze world trade patterns and how they affect global trading.
 Identify the basic functions of the multilateral trading system.
 Discuss why tariffs, duties or import restrictions are imposed.
 Outline the preconditions for trading.
 Outline the major drivers of the trading industry.
 Explain the major trade blocs of the world.

Global Trade Changes

Global trade continues to accelerate both in volumes and complexity, with the WTO’s most recent trade forecast
revised to show improved growth in world merchandise trade volume. Just look at the numbers from Alibaba and their
most recent Singles Day, where products were purchased from 192 countries.
The number of tons shipped by ocean containers has multiplied many times over in recent years-almost 17 times-from
102 million tons in 1980, to 1,720 million tons in 2016. After years of stagnation, trade has been soaring as an upturn
across major global economies picking up momentum However, Political unrest, myriad of and ever-increasing
regulatory requirements including veiled protectionism have all added to layers of distress.

Changes in the Global Economy

The main changes in the global economy are:

 The emergence of regional trading blocs, where members freely trade with each other, but erect barriers to
trade with non-members, has had a significant impact on the pattern of global trade. While the formation of
blocs, such as the European Union and NAFTA, has led to trade creation between members, countries outside
the bloc have suffered from trade diversion.
 Like several advanced economies, the UK's trade in manufactured goods has fallen relative to its trade in
commercial and financial services. Many advanced economies have experienced de-industrialization, with less
national output generated by their manufacturing sectors.
 The collapse of communism led to the opening-up of many former-communist countries. These countries have
increased their share of world trade by taking advantage of their low production costs, especially their low
wage levels.
 Newly industrialized countries like India and China have dramatically increased their share of world trade and
their share of manufacturing exports. China, in particular, has emerged as an economic super-power. China's
share of world trade has increased in all areas, and not just in clothing and low-tech goods. For example, in
1995, the US had captured nearly 25% of global trade in hi-tech goods, while China had only 3%. By 2005, the US
share had fallen to 15%, while China's share had risen to 15%.

Growth in Trade

Although subject to short term fluctuations as a result of the economic cycle, the value of trade has continued to grow,
reflecting the increased significance of trade and globalization. The chart below shows that, as a % of world GDP, trade
increased from 40% in 1990 to 60% in 2014. The effects of the financial crisis and subsequent recession can also be seen,
as world trade fell as a % of GDP between 2008 and 2010.

Container Trade-Some Details

General description – dimensions vary by specific units.
Special refrigerated containers, commonly called reefers, can control temperatures, allowing everything from meat,
fruit, vegetables and dairy products, to chemicals and pharmaceuticals to travel across the world.

Cryogenics may sound like a science of the future but reefer containers get pretty close today. Special super-freeze
reefers can keep goods frozen at temperatures as low as -60 degrees C. But other reefers can preserve goods at
warmer temperatures if that is necessary.
De-humidification systems are able to ensure optimal humidity inside reefer containers. Some reefers also allow the
atmosphere in the container to be controlled so for example, bananas can be shipped between continents without
turning brown. Even fresh flowers can remain fresh in reefer containers while they are travelling many miles over several
days. It is because of reefer containers, that grocery stores are able to stock and sell all kinds of fresh produce all year
round
Reefer containers generally come in 20 foot and 40 foot lengths, with the same general dimensions as that of dry cargo
containers of the same size. However, there is slightly less cargo space available inside the reefer container due to the
space taken up by the refrigeration unit and ventilation equipment.

QUIZ

 Global trade continues to accelerate both in volumes and complexity

 True or False. Newly industrialized countries like India and China have dramatically increased their share of
world trade and their share of manufacturing exports.

Multilateral Trading System Under the WTO

The multilateral trading system under the WTO aims to encourage free and fair trade globally. The most basic goal is to
eliminate tariffs on goods moving between countries. However, even if tariffs are eliminated, trade is not necessarily fully
free if there are other, non-tariff barriers restricting trade.

Countries have historically used many strategies to restrict imports in order to protect their local industries. The global
trade system functions optimally when countries agree to import goods that they don’t produce competitively, but are
free to export goods they do produce competitively.

An example of a non-tariff barrier is complexity of paperwork involved in customs clearance and excessive
administrative fees. Another may be a local health and safety regulation when there is no scientific basis. For example,
consider that a shipment of apples enters country A. First, it has to clear Customs, which it does after verification that
tariffs have been paid. The shipment can’t enter the country officially until the agricultural inspection service certifies
that the goods are free of disease.

In most cases, these inspections are a legitimate way for Country A to protect its citizens. But if Country A is trying to
protect its local apple growers, the inspectors might delay shipment and this could result in excessive warehouse fees at
the port of arrival and perhaps the spoilage of the shipment. This is an example of a non-tariff barrier.

Aims of the Multilateral Trading System

Another aim of the multilateral trading system is to promote the healthy economic growth of nations by fostering a
system of balanced trade between exports and imports. A country with a balanced trade is able to sell the goods and
services that it produces, thereby being able to import goods and services that it needs. This situation leads to
improvement in standards of living in the country.
However, when there is a continuing imbalance in trade, that is, more imports than exports, the economy of a country is
negatively affected. How does this happen? When a country is spending more money on imports than it receives for
exports, it leads to an imbalance of payments. There is an overall gap between the total amount of money that a
nation brings in and the money that is leaving the nation. In order to make up for this gap, the nation has no choice but
to borrow from other nations. In doing so, it becomes a debtor nation, which often leads to a devaluation of its
currency. When a country’s currency is devalued, its exports are priced more competitively, but it has to pay more for
imports.

An example of the success of the WTO is the fact that on a global basis, there is a relative balance between exports
and imports. In 2005, for example, world trade was worth US$7.7 trillion in exports against US$8.1 trillion in imports.

However, between many pairs of individual countries, there exists a large trade imbalance, which is unhealthy and
ultimately unsustainable. Trade imbalances are a major cause of the economic instability in the world that began in
2007.
QUIZ

The multilateral trading system under the WTO aims to encourage free and fair trade [Link] two.

 to encourage free and fair trade globally

 promote the healthy economic growth of nations by fostering a system of balanced trade between exports and
imports.

Trade imbalances are a major cause of the economic

Imposition of Tariffs

The imposition of tariffs or duties is necessary to check the unfair exchange of goods between countries. A protection or
retaliatory action such as temporary duty is imposed to resolve such problems.
Prior to the imposition of income taxes, which is a relatively recent phenomenon, customs duties often provided the
primary source of Government revenues. The second reason for the imposition of tariffs is to protect and nurture a home
grown industry.

India’s protection of the automobile industry is a classic example of the use of high tariffs to protect a home grown
industry. Today, in a major Indian city like Mumbai, you will see many older model cars. This is because low priced and
higher quality imports have not been allowed into the country. This protectionist policy has prevented the Indian auto
industry from modernizing and thus it does not build internationally known vehicles.

In contrast, US automakers were exposed to global competition and although US automakers have struggled in recent
times, their products have continually improved to compete against foreign competition. The bottom line is that
opening the local industry to foreign competition is a painful process that often results in severe dislocation and
hardship, but ultimately results in a more competitive industry.

Reasons for Imposing Tarrifs

There are certain situations where tariffs will nurture a local industry, buying time for the industry to develop, before it is
exposed to the pressures of global competition. An example is the Indian banking sector. For many years foreign banks
were barred from entering the Indian market while the Indian banking sector developed. Once Indian banks achieved
a level of maturity, the Indian banking market began to open to foreign banking institutions, with the confidence that
Indian banks would not get decimated by foreign competition.
In addition to protecting local industry and raising revenue for the government, there are additional reasons as to why
governments impose tariffs. These relate to furthering different government policies. For example, Singapore has a
policy of keeping roads free from congestion and encouraging citizens to use public transport. Therefore, the nation
places a high tariff on imported automobiles. For example, if a BMW normally sells for $40,000, in Singapore it might sell
for $140,000 due to the import tariff. In India, high tariffs are placed on luxury goods to encourage the spending of
money on necessities like food and housing.

Besides tariffs, governments also prohibit the importation of many types of goods and assess steep fines or impose long
jail terms on offenders. These prohibitions are designed to advance many different types of policies.
For example, to discourage the use of child labor in the manufacturing of goods, many countries prohibit the imports of
goods where child labor is used. To discourage the harming of endangered species, many nations will not allow
importation of known products made from the fur, hides, bones or tusks of endangered species like elephants.

Certain nations with strict religious policies will prohibit importation of alcohol or other goods. Since the use of narcotics is
considered by many nations to be detrimental to health and conducive to crime, they bar the imports of illegal
narcotics. In addition, many types of plants could be legitimately harmful to local crops, and are thus banned

Dumping

Nations also restrict imports due to alleged unfair trading practices by other nations. When a manufacturer or industry in
one country sells its product in another country at a price lower than its cost of production or selling rate in its home
country, it results in dumping. This is done with the intention of putting the importing country’s own producers out of
business.
On October 6, 2006, the European Union imposed anti-dumping duties, in addition to regular duties, of 16.5 percent and
10 percent, respectively. These duties were imposed on European imports of certain leather footwear from China and
Vietnam. According to the American Apparel and Footwear Association, the duties were imposed for a two-year
period beginning from October 5, 2006..
The case originated out of complaints by European footwear makers that Chinese and Vietnamese imports were
flooding the European market and driving down prices, forcing European makers out of business.

Countervailing Duties

Countervailing duties is another type of duty imposed to neutralize the effects of subsidized exports by a foreign
government. If a government subsidizes an industry, allowing that industry to sell its goods at an unfairly low price, the
importing country may impose countervailing duties to neutralize this impact.
According to the WTO, countervailing duties can be imposed to neutralized "subsidies that require recipients to meet
certain export targets, or to use domestic goods instead of imported goods. They are prohibited because they are
specifically designed to distort international trade, and are therefore likely to hurt other countries' trade."

For example, the European community, which has shipyards in several countries such as Spain, Portugal, Germany and
Denmark, alleged that the South Korean government directed state controlled banks to bail out troubled shipyards,
thereby enabling the Korean yards to sell ships at low prices. The case was taken to the WTO.

QIUZ

The imposition of tariffs or duties is necessary to check; Choose two

 check the unfair exchange of goods between countries

 to protect and nurture a home grown industry.

True or False. According to the WTO, countervailing duties can be imposed to neutralize subsidies that require recipients
to meet certain export targets.

Preconditions of Trade
The most basic precondition for trade is peace. When nations are at war, they do not trade. As soon as World War II
ended, one of the first initiatives was to create the GATT so as to restart the process of global trade, which had
decimated during the war.
Trade requires the presence of a stable government as a precondition for its ability to buy and sell goods in the
international market. In order to trade effectively, a country has to have a functioning internal economy, which should
include basic infrastructure such as roads, telecommunications, ports, electricity, and other services.

A functioning internal economy provides the government with an income to buy goods and services, and also provides
the private sector with capital to buy goods and services that it needs. A functioning internal economy also leads to the
creation of goods and services that the country can competitively sell to the world market.

Even countries that have a limited internal economy but are rich in natural resources, (such as Saudi Arabia in its early
stage of development) are able to trade, assuming an initial investment in basic infrastructure. Therefore, the basic pre-
conditions of trade are peace, a stable government, a functioning economy, and a supporting infrastructure.

Major Drivers of Trade

The most significant factor affecting the amount of trade that occurs, is economic growth. When countries experience
periods of economic growth, reflected in the Gross Domestic Product (GDP Growth), it results in healthy increases in
imports and exports.
A sustainable state of equilibrium in trade will exist if the imports and exports of a country are relatively balanced.
However, when imports and exports fall out of balance, pressures begin to effect the economy and will ultimately have
to be corrected.
Exchange rates is another major driver of trade. The exchange rate is the value of the currency of one country in
relation to another. A statement such as "The US dollar is declining," means that the dollar is declining, not just against
one currency but many at the same time.
If the currency of country A is falling in relation to the currency of country B, the goods of country A will become
cheaper in the market of country B, and conversely, the goods of country B will become more expensive in the market
of country A. Therefore, all else being equal, it is likely that country A's exports in relation to country B will increase, while
country B's exports in relation to country A, will decline.

QUIZ
The most basic precondition for trade is peace
A functioning internal economy; Choose two
 provides the government with an income to buy goods and services
 leads to the creation of goods and services that the country
Trade Structure
It is essential to have the knowledge of world trade patterns to understand the movement of cargo across the globe. It
also helps sellers, buyers, and carriers plan their business operations accordingly.
Countries form regional groups or Trade Blocs and together facilitate trade amongst the members of the bloc.

They create a unified interface with other nations and blocs.

There are many regional blocs but the largest are the North American Trade Agreement (NAFTA) and the European
Union (EU) made up of the 25 Western and Central European countries, called the European Common Market. Other
trade blocs exist in Latin America, Southeast Asia, Southern Africa, the Caribbean, and Central America

Breakbulk Trade Flow

The structure of world trade constantly changes depending upon the supply and demand of goods. Developing
countries have a demand for manufactured goods while developed countries have a demand for raw materials. Over
time, the constant flow of trade in specific regions of the world creates a trade pattern.

World Trade and Breakbulk Shipping

Breakbulk ocean transportation tends to flow from the developed world to the developing world as it is based on the
movement of heavy equipment. Developing countries require heavy equipment to extract their natural resources,
which are in turn exported to the developed nations of the world. Manufactured goods and infrastructure are imported
by developing countries. This flow of trade encourages growth and development of developing countries.
The growth of Dubai into a world-metropolis on the edge of a desert is an example of the benefits of proper vision,
investment and infrastructure.

World trade and particularly breakbulk shipping, contributes greatly toward the growth and development of nations.
Breakbulk liner shipping is especially suited to assist in the early stages of any industrial enterprise. It helps to bring in
capital goods and machinery to develop the site, create the infrastructure, and get prime commodities to the market.
Following this, the breakbulk operator is able and equipped to assist the project through its development and expansion
stages.
Did you know: Large areas of Northern Australia, the Pacific Islands, Indonesia, the Philippines, East and West Malaysia,
Burma (Myanmar), South and North China, the Arabian Gulf countries, anywhere in Sub Saharan Africa, South Africa,
the Caribbean Island nations, much of South America, the Black Sea countries, and the Northern areas of Canada and
Russia are all likely areas with growth potential for breakbulk shipping operations.

Why Exports are Necessary

Exports are necessary for the following reasons:
 To turn excess domestic manufacturing into revenue
 To turn excess production of raw material into revenue
 Revenue obtained from exports keeps the domestic currency and exchange rate strong
 To provide jobs
 To pay for domestic infrastructure development
 To encourage the growth of international trading
 To encourage the development of a ocean shipping industry
However, the main reason is that exports pay for imports. Imports and infrastructure development create jobs. For
example, the oil rich middle-east countries have a major preponderance of exports in the form of crude oil. With
flourishing export trade, these countries have been able to generate revenue for imports of infrastructure, building
material, equipment, and project cargo. Construction and development of various projects provides a variety of jobs
for the citizens. A good export strategy helps in the development and prosperity of a country.

QUIZ

The structure of world trade constantly changes depending upon the supply and demand of goods.
True or False. Manufactured goods and infrastructure are imported by developed countries.
Lesson Summary
 The imposition of tariffs or duties is necessary to check the unfair exchange of goods between countries.
Protection or retaliatory action such as temporary duty is imposed to resolve such problems.
 Prior to the imposition of income taxes, which is a relatively recent phenomenon, customs duties often provided
the primary source of Government revenues. The second reason for the imposition of tariffs is to protect and
nurture a homegrown industry.
 Countervailing duties are another type of duty imposed to neutralize the effects of subsidized exports by a
foreign government.
 The most basic precondition for trade is peace.
 A functioning internal economy provides the government with an income to buy goods and services, and also
provides the private sector with capital to buy goods and services that it needs. A functioning internal economy
also leads to the creation of goods and services that the country can competitively sell to the world market.
 The most significant factor affecting the amount of trade that occurs is economic growth. Exchange rates are
another major driver of trade.
 Multipurpose ships of all nations are generally free to engage in worldwide ocean trade without restrictions.
Based on the breakbulk trade pattern, they carry cargo from developed countries to developing countries.