Significance of Trade

1. Impacts of Trade on Civilization

Past

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

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

Present

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

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 civilizes traders and contributes to a gradual reduction of racial prejudice 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

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. Factor price equalization (wait until we cover this topic in the Heckscher-Ohlin model).

3. Convergence of per capita incomes. (K/L ratio falls as income rises)

2. Trade and Language

	The language of traders is adopted as the business langugage, and may even become adopted as the universal langauge. English is now the business langauge, due to the dominance of the British Empire during the 19th century. British naval superiority secured Britain's control of maritime trade.
Babylonians were early traders	Sumerian instruments of writing. Ancient Babylonian clay tablet (c. 2500 BC) How to read Babylonian numbers in early cuneiform text. Counting in Babylon, copy
	Plimpton Tablet, Columbia University Library, May 2001

	See the similarity of Cretan and Japanese syllabaries. Cretan Linear B Syllabary copy Ugariatic alphabet Phoenician alphabet Hiragana (Japanese) copy

3. Sumerians of Mesopotamia invented writing

	Mesopotamia (middle of potamus/river) was one of the three major civilizations. It began around 2700 BC. Abraham was born in a Sumerian city of Ur of Chaldea.
Writing	Sumerians also invented writing. On this basis Phoenicians simplified symbols and used acrophonic principles to write alphabetical words. Phoenician alphabet was mostly consonants. Greeks invented 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)
	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.

	The Epic of Gilgamesh also record that Babylonains drank beer. Gilgamesh sends a whore to Enkidu, who wanted a match with Gilgamesh. "Enkidu knew not what bread was nor how one ate it. He had also not learned to drink beer. The whore opened her mouth and spoke to Enkidu: Eat the bread now, O Enkidu, as it belongs to life. Drink also beer, as it is the custom of the land."

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 APM_Netherlands = 50% APM_US = 3 - 4% until 1960s, but has been increasing, ~ 11%
APM	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.
GDP	1. GDP would probably fall. How much? Need more information about the structure of the economy.
prices	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, 1941-43 (872 days), about one million died (soldiers of the Red Army plus 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.)

6. If the US had no steel industry

	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 would suffer from far greater losses than 1% of GDP. Aircraft carriers and automobiles cannot be built without steel plates.
	1. The iron and steel industry is an essential industry to 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.
	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

oil US has stockpiled some 500 million barrels in its strategic petroleum reserves to cope with possible shortages.

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 is the only country which can survive and function adequately without trade. Japan would collapse. Russia had already collapsed, and is slowly recovering.

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

4 regions	US, Europe, Asia, and Rest of the World
US-Europe	trade is balanced
US-Asia	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.

oil	US has stockpiled some 500 million barrels in its strategic petroleum reserves to cope with possible shortages.
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 is the only country which can survive and function adequately without trade. Japan would collapse. Russia had already collapsed, and is slowly recovering.
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.