The pattern of trade
The global economy has grown continuously since the Second World War. Global growth has been accompanied by a change in the pattern of trade, which reflects ongoing changes in structure of the global economy. These changes include the rise of regional trading blocs, deindustrialisation in many advanced economies, the increased participation of former communist countries, and the emergence of China and India.
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 deindustrialisation, 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 industrialised 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%.
(Source: European Central Bank – ECB, Occasional Paper – China and India’s Role in Global Trade and Finance, 2008)
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 globalisation. 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.
The ratio of trade to GDP – an indicator of trade ‘openness’ – has increased for most trading nations, and is a result of globalisation.
More on trade openness