Chapter Introduction

In August 2009, the ships Beluga Fraternity and Beluga Foresight made a historic voyage through the Northern Sea Route of the Arctic Ocean, accompanied by a Russian nuclear icebreaker. These ships carried power-plant components from South Korea, around the top of Russia, to the Siberian port of Novy, where the cargo was unloaded. The ships continued westward to the city of Rotterdam in the Netherlands. This was one of the first times that commercial ships had successfully navigated this northern route through the Arctic Circle, and it was made possible by the shrinkage of Arctic ice in recent years. It is believed that global warming is causing the Arctic ice to melt, which will open up new shipping lanes through the Arctic Ocean.

In this historical milestone, we see that global climate change can have important consequences for international trade, by which we mean the movement of goods (such as cargo) and services (such as the shipping of the cargo) across borders. To move goods from South Korea (or elsewhere in Asia) to Europe would normally involve a trip through the Suez Canal (in the Middle East) at much greater cost. The Northern Sea Route is shorter than the Suez Canal route by about 4,000 nautical miles. If the Northern Sea Route becomes passable for much of the year, then we would expect that the amount of trade from Asia to Europe will increase.

In this book, we will study international trade in goods and services and will learn the economic forces that determine what that trade looks like: what products are traded; who trades them; at what quantities and prices they are traded; and what the benefits and costs of trade are. We will also learn about the policies that governments use to shape trade patterns among countries.

Why should we care about international trade? Many people believe that international trade creates opportunities for countries to grow and thrive. The manufacture of goods exported from China, for example, creates employment for many millions of workers there. The same is true for exports from the United States and European countries. It is not just large countries that potentially benefit from trade; smaller countries, too, are affected. In Greenland, for example, higher temperatures due to global warming have exposed deposits of “rare earth” minerals, such as lanthanum and neodymium, which are used in cell phones and other high-tech devices. Because of international trade, Greenland is expected to benefit from exporting these rare earth minerals to meet global demand. But such benefits can also bring difficult social change and challenges, as the traditional lifestyle of fishing becomes less crucial to Greenland’s economy. In this book we will explore both the opportunities and challenges created by international trade for different groups in society.

Let’s begin by looking at a very broad picture of international trade. What country was the world’s largest exporter of goods in 2012? If you guessed China, you are right: since 2009, it overtook Germany as the top exporter. In 2012, China sold around $2.0 trillion in goods to other countries, ahead of the $1.6 trillion exported by the second-place country, the United States. The third largest exporter of goods was Germany, which exported $1.5 trillion in goods.

These numbers reveal only part of the trade picture, however, because in addition to exporting goods, countries also export services. In 2012 the United States exported $0.6 trillion in services (including business services, education of foreign students, travel by foreigners, and so forth). If we combine exports in goods and services, then in 2012 the world’s largest exporter was the United States at $2.2 trillion, followed by China, Germany, the United Kingdom, and Japan.

Nations trade goods for many reasons, the most obvious of which is that they can get products from abroad that are cheaper or of higher quality than those they can produce at home. For example, Germany was the largest exporter of goods up until 2009, a position that reflected its world-class technologies for producing high-quality manufactured goods, such as cars like the BMW and Mercedes-Benz. China, on the other hand, can produce goods more cheaply than most industrial countries. The United States has both the technology to produce high-quality manufactured goods and the ability to produce agricultural goods very cheaply (because of its abundant land resources as well as government policies).

In the first part of this book, we develop a number of models that help us understand the reasons that countries trade goods and services. In addition, we investigate migration, the flow of people across borders as they move from one country to another, and foreign direct investment (FDI), the flow of capital across borders when a firm owns a company in another country. All three types of flows between countries—of products (goods and services), people, and capital—are so common today that we take them for granted. When you go into a store to purchase an item, for example, it is possible that it was made in another country, the store itself might be foreign-owned, and the salesperson who assists you may be an immigrant. Why are these international flows so common? What are the consequences of these flows for the countries involved? And what actions do governments take to make their countries more or less open to trade, migration, and FDI? These are the questions we address.