In this chapter we have looked at sea trade from the viewpoint of the countries which
trade. There are 100 countries and regions that trade by sea, but some are much bigger
than others. In 2004 north-west Europe headed the list with 1.9 billion tonnes of imports
and exports, while Brunei, the smallest, reported trade for only 2 million tonnes. When
we looked for an explanation for the volume of trade it was clear that the level of economic
activity, measured by GNP, was by far the most important. Two other explanatory
variables, the size (area) of the country, and its natural resources, make a small contribution,
explaining about a quarter of the variation in trade volume. This does not mean
they are unimportant, but rather that their impact on trade cannot be reduced to a simple
general rule. Population size, it seems, has no explanatory value whatsoever. In conclusion,
we must expect sea trade to go hand in hand with economic growth, but modified
by the availability of natural resources.
We then turned to trade theory for an explanation of why countries trade. The theory
of absolute advantage shows that countries enjoy a higher living standard if they trade
because it allows them to focus their scarce resources in the products they are most
efficient at producing. Trade increases efficiency and everyone is better off. Taking this
explanation a step further, the theory of comparative advantage shows that countries
are better off with trade even if their competitors are more efficient at producing everything.
All that is needed for trade to be beneficial is that they are relatively better at
producing some goods than their competitors. Countries that fear that they will be reduced
to poverty by foreign competition are wrong, though in a changing world, adjusting to
new competitors can be painful and expensive for some parts of the economy.
What, then, determines the comparative advantage of a particular country? There are
several different explanations. The Heckscher-Ohlin theorem argues that if goods
require different factor inputs and there are diminishing returns when factors are
substituted for each other, the comparative advantage is determined by the distribution
of factors of production. Thus countries specialize in the goods which make the best use
of their most abundant resources. Differences in technology, tastes, transport costs and
cyclical surpluses and shortages are other reasons why countries trade.
We discussed the commodity supply and demand model which is often used for the
analysis and forecasting of trade. The basic tool is supply–demand analysis, but we also
examined the role of prices and substitution in this model, in particular the demand
function which recognizes the impact of price changes on consumer demand and
income (the Slutsky equation) and on the factor substitution by manufacturers.
We should expect the trade of a country to change over time. Starting from the
proposition that GNP drives trade, we looked at the composition of GNP which we
divided into nine categories. Some of these activities, especially manufacturing, make
extensive use of sea transport, while others, such as services, do not. In practice, we
find that as a country grows the structure of its economy changes. The early stages of
growth tend to use large quantities of physical materials – infrastructure developments
such as roads, railways, ports, and building a stock of cars, ships and industrial plant.