Significance of Trade

  1. Trade and Language

Business language:

Greek: 1 - 5th century in Europe. Later in Byzantine Empire (330 - 1453 AD).

Latin in Western Europe (France, Italy, Spain and Portugal)

Today: English

The language of traders is adopted as the lingua franca (trade/business langugage) in the world market, and may even become adopted as the universal langauge.

English is now the business language, due to

(i) the dominance of the British Empire during the 19th century. British naval superiority secured Britain's control of maritime trade, and
(ii) the rise of US as the dominant world power in the 20th century.

Tomorrow: English or Chinese?

Sumerian's influence on the European civilization

Sumerians suddenly appeared on the horizon with advanced technology:

(i) cuneiform (syllabary)→ writing is similar to the Japanese. Later Phoenicians developed an alphabet, consisting of mostly consonants (with the acrophonic principle):

Greeks → vowels

(ii) Sexagesimal time counting: a day is divided into 24 hours
an hour is divided into 60 minutes,
a minute is divided into 60 seconds.

(iii) numbers→ (Arabs adopted this method of writing numbers and developed Arabic numerals.)

(iv) liquor

(v) used wheels (pottery, chariots)

Ubaid pottery in Sumer (about 5000 BC), Louvre Museum

comparable to painted pottery in Yellow River basin (Neolithic period, 4000-3000 BC)

Sumerians were early traders



Sumerian instruments of writing (precuneiform letters).

Ancient Sumerian clay tablet (c. 2500 BC)

How to read Sumerian numbers in early cuneiform text.

Counting in Babylon, copy

Semites began to infiltrate this region. Eventually, King Sargon united the region (about BC 2334 )

Babylonian children learned advanced mathematics.

Plimpton Tablet (about 1800 BC), Columbia University Library, May 2001. It lists three sides of right triangles, illustrating Sumerian's knowledge of the Pythgoras Theorem (a2 +b2 = c2).
  See the similarity of Cretan and Japanese syllabaries.

Cretan Linear B Syllabary copy
Ugariatic alphabet
Phoenician alphabet

Hiragana (Japanese) copy

Where are the Sumerians now?

Sumerians exited Mesopotamia through several waves of migrations after Sargon of Akkad (BC 2334) united the kingdom.

Some went to Egypt. The majority went to Europe. Others went to East. A small fraction remained. They were all intermixed with other races. Today no pure descendants exist today.



  2. Sumerians invented writing

Mesopotamia (middle of potamus/river) was one of the three major civilizations.

It began in the Jemdet Nasr period (3100 -2900 BC). Abraham was born in a Sumerian city of Ur of Chaldea.

Agriculture insures a stable supply of foods ⇒ urbanization ⇒ trade.

 Writing  Sumerians also invented writing. On this basis Phoenicians simplified symbols and used acrophonic principles to write alphabetical words. The Phoenician alphabet was mostly consonants. Greeks invented the vowels.
A cast of a stone tablet from the Uruk period (3300 - 3100 BC). The original is from Kish and was in Irak Museum. (Whether it is still there is uncertain due to the looting in 2003.) Symbols: head, hand, foot, 1, 2, 3, hammer (British Museum) Early letters were graphic or sketch. A stick made from a reed was used.
Archaic cuneiform letters: The symbol for beer is an upright jug with a pointed base. It appears three times on this tablet. (British Museum)
The symbol of a human head with a triangular object is the verb meaning "eat." (British Museum)
Look for this symbol in the above tablet.

Oracle bone, late Shang period (1300-1046 BC)



The Epic of Gilgamesh also records that Babylonains drank beer. After Enkidu dies, Gilgamesh writes the first poem of lamentation:

My friend, whom I loved, has turned to clay,
Must I, too, lik him, lay me down
Not to rise again for ever and ever?

Sumerians also wrote the prototype of the wisdom sayings and Aesop's fables (Samuel Kramer):

He who has much silver may be happy,
He who has much grain may be glad
But he who has nothing can sleep.



  3. Impacts of Trade on Civilization

Trade encouraged the invention of letters in the early stage of civilization. (Lenders needed a means of keeping records of loans)

(Sumerians invented the cuneiform —wedge shaped— letters in the Biblical city of Uruk around 3300 BC.)

Evidence of Chinese characters are in the oracle bones during Shang dynasty (1700 - 1046 BC) (for ritual purposes, not for trade).

 20th century

 1. Trade promotes peace among nations, e.g., European Union. There have been no large scale wars in Europe since WWII.

Churchill's speech at U of Zürich, Sep 19, 1946
(We must re-create... the United States of Europe)

European Union comprises 28 countries of Europe.

2. Trade encourages exchange of ideas and encourages new inventions. For example, China or any other country does not need to reinvent light bulbs.

3. Trade is a great civilizer. (Trade produces civilized traders and contributes to a gradual reduction of racial prejudices among traders. One cannot hate the Japanese people and love their products. Trade promotes mutual respect for fellow human beings that produce quality products.)

 Future (21st Century) 1. Increasing global trade encourages small countries to adopt the language of a larger trading bloc. Common language builds confidence among different races. Global trade will lead to the adoption of a universal language. (English or Chinese?)

2. Despite gains from trade, factor prices will be equalized (wait until we cover this topic in the Heckscher-Ohlin model).

3. Convergence of per capita income in the absence of technological changes . (K/L ratio falls as income rises): A nation's economic power depends on its population.

4. Middle Income Trap

Once a certain income level (per capita GDP: $10-12,000) is attained, a country gets stuck at that level. Due to rising wages, a developing country loses its cost advantage and is unable to keep up with more developed economies. e.g., South Africa and Brazil.


  4. How to measure Significance of International Trade
  What is the best single indicator that suggests the importance of trade to an open economy?
 Consumption dependence

Average Propensity to Import = M/Y

APMNetherlands = 50%

APMUS = 3 - 4% until 1960s, but has been increasing, ~ 11%


In 1991

1. Kuwait ?
2. Switzerland 35%
3. Japan: 10%
4. Sweden 28%
5. Norway 45
6. Finland 22
7. Denmark 36
8. Germany 34
9. US 11
10. Canada 25
11. France 23
17. UK 24
18. Singapore 185
19. Hong Kong 141
107. China 20
125. Uganda 7

 Income dependence

Why is X/Y greater than 1 for some countries? 

X/Y = Export-income ratio.

Y = value added

X = total value of goods exported

So X/Y can be greater than one.

Trade-income ratio  
(X + M)/2Y  in 1985
Canada 28% France 24% Germany 33% Italy 27% J 15% UK 28% US 8.5%


  5. If the US were to sever its trade relations with other countries
  Currently, international trade accounts for more than 10% of GDP in the US. (X = $1.4T, M = $2.1T)

1. GDP would probably fall. How much?

We need more information about the structure of the economy.


2. Prices will be affected. The prices of importables would rise, while those of exportables decline.

To understand the impact of severing trade relations, consider the next question.

Hermitage Museum, St. Petersburg (on the eastern end of the Baltic Sea)

During the siege of Leningrad, Sep 1941- Jan 43 (872 days), about one million people died (the soldiers of the Red Army plus the civilians.) By the end of 1942, the population shrank to less than 1 million. (In June 1941, it had been 2.5 million. In December 1941, 52,000 died in Leningrad.)

No trade ⇒ war! President Roosevelt slapped an embargo on US exports of scrap iron, steel and oil to Japan on August 1, 1941. Also, US froze Japan's asset in the US. ⇒ Japan's attack on Pearl Harbor in December.


  6. If the US had no steel industry
Income loss is small

The steel industry accounts for less than 1% of GDP.

The US steel industry is the largest in the world (12% of total world production. The value of its shipment is about $61 billion.)

The US loss would be much more than 1% of GDP. (but the value of iron and steel industry = $113 billion in 2014 < 1% of US GDP)

Aircraft carriers and automobiles cannot be built without steel plates (used in skin and landing gears).

Embargo causes a bottleneck

1. The iron and steel industry is an essential industry for a modern economy.

  Because steel is used as inputs in many other industries, the US economy would probably collapse.

Some industries may have to find close substitutes for steel. For example, the auto industry has used aluminum and plastics as substitutes for steel. However, the absence of steel would cause a bottleneck in most countries.

A steel plate from a blast furnace, Pohang Steel, South Korea.
Rolled steel plates.
Large countries survive, but small countries suffer more from economic sanctions.  2. Cutting our external trade would cause a similar bottleneck in our economy. England or Japan, which heavily rely on foreign trade would probably collapse when trade is eliminated by external forces such as earthquakes or electromagnetic storm in the solar system.

          The US probably could cope with such disaster better than any other countries. But we would still suffer from a significant reduction in our standard of living.

          For example, coffee, tea and cocoa have to be foregone.

          The US is the country that is most abundantly endowed with natural resources. But there are only two kinds of metals that the US has enough and does not import from the ROW.

          Molybdenum: a metal used as alloy with iron to make high-speed cutting tools, as drill bits and electric saw blades.

          Magnesium: a metal that burns with dazzling white light, used as flare, antacids.


  7. U.S. Dependence on the ROW 

In 2016 the US petroleum consumption is about 19 million barrels per day. US petroleum production is about 14 Mbd. ⇒ net import is about 5 million barrels per day.

US is the largest exporter of refined oil ($64 billion)
Russia: $46 billion

other minerals

Mineral    Import (% of C)      Source
Manganese      100%           South Africa
Bauxite        100            Australia
Platinum        88%           Canada
Tungsten        75%           China
 large country  Remark: One may argue that if trade is not allowed, the US could still survive. We could produce close substitutes for all imported goods. Aside from the EU, the US may be the only country which can survive and function adequately without trade. Japan would collapse. Russia's economy had already collapsed, and is on its way to recovery.
Costs of producing import substitutes  The real question is not whether the US is capable of surviving or not, but the question is whether the cost of producing the import substitutes is higher than the cost of imports. We are importing those because it is cheaper to import than to produce those goods ourselves in the domestic market.
 small countries  Small countries cannot maintain industries with large capital requirement. For instance, Israel does not have the automobile industry. Even large countries do not have the ship building industry. Iraq has difficulty due to lack of medicine and medical supplies.

Large countries tend to manage without trade, but small countries would suffer most when imports are eliminated.


  8. World Trade, 2003
Gross World Product (2013) $73 trillion. (=$49 trillion in 2003, growth rate = 50% in 10 years, trade doubled)
US = $16.7 trillion, EU = $17.5 trillion
China = $9.2, Japan = $4.9 trillion
 4 regions US, Europe, Asia, and Rest of the World 
 US-Europe  trade is balanced

US has a large bilateral trade deficit.

US bilateral trade deficit with Japan has declined.

US bilateral trade deficit with China has not abated.

 US-Rest of the world balanced 

world trade 2010

World GDP declined to about $58 trillion in 2009 due to recession.
Trade = $15 trillion, world GDP = about $70 trillion.
World trade is increasing faster than GWP.

Peterhof Palace, St. Petersburg