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World Trade

Trade is the business of buying and selling goods or products in order to make a profit. Trade can be conducted within a country, or internationally between nations. Goods or services sold by one country or region to another are exports, while those brought into a country or region are imports. All sorts of commodities can be traded, from a small quantity of a precious metal such as gold to a supertanker full of oil. Trade products fall into three main categories: primary products are natural resources obtained from mining, forestry, agriculture, and fishing, such as tin, wood, grain, and fish; secondary products are manufactured from primary products, and include cars, computers, ships, and clothes; tertiary products are services provided by banks, insurance companies, law firms, and other professional organizations.
Nations trade with one another for two main reasons: to earn money to buy things they need, and to enrich their national economies by providing jobs and a better standard of living for their citizens. Trade allows individual countries to specialize in the goods which they produce best, exporting those items in order to earn money to buy goods that are produced more cheaply elsewhere, or which they cannot produce themselves. For trade to be conducted, two essentials must be in place—a source of supply in one country to produce and sell goods, and a demand from another country to buy them.

This balance between supply and demand is not even throughout the world, and creates difficulties for poorer countries. Many poor countries need items such as lorries, computers, telephone systems, and medical equipment in order to develop their economies and feed their growing populations. Few have substantial manufacturing industries of their own, and therefore need to buy most secondary and tertiary products from abroad. Paying for these expensive imports is difficult, since many of the world's poorest nations rely heavily on just one primary product. For example, the island nation of St Lucia, in the Caribbean, depends heavily on one cash crop, bananas, while Zambia relies on the export of copper. If the crop fails, or the price of the mineral drops, the economies of these nations suffer. As a result, many primary-producing nations import far more goods than they export, leading to a trade deficit with the rest of the world. Conversely, most secondary- and tertiary-producing nations maintain healthy trade surpluses.

This divide between rich nations with developed economies producing a wide range of primary, secondary, and tertiary products, and poor nations with undeveloped economies dependent on a few primary products, follows the geographical divide between the Northern and Southern Hemispheres. With few exceptions—Australia and New Zealand being the most obvious—the world's richest nations are in North America, Europe, and the far east of Asia, while the world's poorest nations are concentrated in Central and South America, Africa, and southern Asia. The seven biggest trading nations in the world—the United States, Germany, Japan, France, Britain, Italy, and Canada—are in the northern hemishphere and account for 54 per cent of world trade, while the remaining 185 nations share 46 per cent. The world's 40 poorest countries, among them Ethiopia, Somalia, and Laos, control only 5 per cent of world trade. In 1995, the seven richest nations exported $2,462 billion of goods abroad; by comparison, the entire continent of Africa exported only $95 billion.

International trade in many products is dominated by a few private companies—five car companies control 54 per cent of world car production, while a mere handful of companies dominate the global oil market. These powerful companies are all concentrated in the northern hemishphere. For economic reasons, they extract the minerals or harvest the crops they require in their country of origin, and ship them to other nations to be processed or manufactured into finished goods. In recent years, many developing countries improved their local economies by setting up manufacturing plants to process their raw materials before export—the island of Trinidad in the Caribbean has a large oil refinery to process its crude oil, Bangladesh and India now produce many of the cotton shirts sold in Europe, and Malaysia manufactures its own car, the Proton, which is exported internationally.

Protection or Free Trade?

Countries reliant on a single commodity for their export trade suffer if the price of that commodity drops, or if demand reduces. In order to control both price and supply, groups of countries exporting similar products combine together in cartels for mutual support. The most famous of these cartels is the Organization of Petroleum Exporting Countries (OPEC), established by 13 nations in 1960. OPEC achieved great success in the 1970s when it restricted oil production, thereby raising the price. In recent years, OPEC has had less success because oil-producing countries outside the organisation, such as Norway and Britain, have set their own prices and levels of supply. A similar cartel, Geplacea, operates between 23 sugar-producing nations.

In order to protect their own industries from lower-priced imports, many countries place a tariff on imports. This protectionism raises the price of the imports and so reduces their volume, making them less desirable and more difficult to buy. Most countries of the world have tariffs against particular products, but while they benefit from keeping out certain imports, they lose out when their own exports are subject to similar tariffs in other countries.

The overall effect of both cartels and tariffs is to impede the free movement of goods and services around the world by erecting artificial barriers to trade. As a result, the volume of world trade is reduced. To counteract this trend and promote free enterprise, thus expanding national economies, a number of countries around the world have set up regional common markets. These markets aim to reduce barriers between member states to trade in both goods and services, while erecting tariffs to control the influx of cheap imports, thus protecting their own industries and jobs. The most successful common market is the European Union (EU), which began when six European nations pooled their coal and steel industries in 1951. It has since grown to become a massive free trade union comprising 15 of the richest nations in western and southern Europe. Other common markets include the vast North American Free Trade Agreement (NAFTA), established in 1994 by Canada, the USA, and Mexico, and the Caribbean Community and Common Market (CARICOM), set up by 13 Caribbean nations in 1973.

To coordinate international efforts to achieve free trade, in 1947 the United Nations (UN) drew up a General Agreement on Tariffs and Trade (GATT). Member nations met at regular intervals to discuss world trade and to agree planned reductions in tariffs on certain goods. The most recent round of discussions, known as the Uruguay Round, took place between 1986 and 1993 in Uruguay: when all the agreements are in place, the average tariffs on manufactured goods will have dropped from more than 40 per cent in the 1940s to about 3 per cent by 2002. In 1994, 128 of the GATT negotiating states set up the World Trade Organization (WTrO) to take over the management of GATT and to provide a forum to discuss trade issues. Its aim is to achieve the free trade of all goods and services around the world.

World trade plays an important part in international politics. Trading links between countries help to establish friendly relations and reduce the possibility of conflict: simply put, if countries need each other for trade, they are less likely to resort to war. Trade can also be used as an important peace-keeping tool in international relations: for example, one or more nations may decide to boycott another country's exports in order to try and force it to change its policies, as was the case with South Africa over its policy of apartheid. Similarly, sanctions are in place to prevent countries from breaking the international trade embargo with Iraq, following its invasion of Kuwait in 1990, and subsequent refusal to obey UN resolutions. Boycotts and embargoes have their limitations, however, for they are difficult to enforce and therefore open to abuse.

History of International Trade

Trade between the peoples and countries of the world is as old as human history. Land and sea routes connected the first civilizations in Mesopotamia and around the Mediterranean; and the Phoenicians of the eastern Mediterranean traded metals, cedar wood, cloth, and animals across the sea as early as 3000 BC. One of the most important land routes was the Silk Road, connecting China in the east with the Roman Empire in the west. Silks, gemstones, perfumes, and other luxury goods were carried along this route from 300 BC onwards, providing a direct link between two of the major civilizations of the world. The European end of this route was controlled first by Constantinople (Istanbul) and then by the cities of northern Italy, particularly Venice, which grew rich on the proceeds of this trade.

In the 15th and 16th centuries, the development of sea-going vessels and advances in navigation by the Portuguese and Spanish led to a vast increase in world trade, as European merchants sought out new markets in Africa and Asia and brought back rare spices and other exotic goods. All of the major European nations set up trading posts around the world which grew into colonies and eventually, between the 16th and 19th centuries, developed into land-based empires many times the size of their parent countries.

During the 18th and 19th centuries, the Industrial Revolution transformed the British economy into the richest in the world. New factories manufacturing cotton and other goods sprung up throughout the country, requiring raw materials from overseas to keep them supplied. This led to a vast increase in world trade and established Britain as the world's largest trading nation. The development of railways and steam ships enabled goods to be transported around the world in a fraction of the time achieved by sailing ships. A century later, most of Europe and North America were industrialized, leading to the dominance of the world economy by a few key nations. Until the mid-20th century, trade was mainly in primary products, but today it is dominated by the import and export of secondary and tertiary products between industrialized nations.

The pattern of world trade has shifted in the 20th century as developed nations have set up their own manufacturing plants in developing countries, where labour and manufacturing costs are much cheaper. This situation can be both helpful and harmful to the developing country. For example, the new industry can create employment for the people living there, develop the infrastructure, and boost the economy. However, such a set-up can also be seen as exploitative because wages are often very low, the majority of profits go to the manufacturer, and the situation often prevents the host country from developing its own manufacturing base, thereby increasing its reliance on expensive imports. Today, tourism is an increasingly important service industry in developing nations whose economies would otherwise be solely dependent on one or two primary products. As these poorer countries become more profitable, they will have more money to invest in their own industries, and so the balance of trade will shift again, as it continues to reflect the fluctuating fortunes and needs of the nations of the world.