WHO TRADES ?
The extent to which a country trades with the rest of the world depends on many factors. Small countries, measured in this instance by population size, tend to trade more than larger ones, as they cannot efficiently produce the full range of consumer goods, intermediate products, and capital equipment demanded by consumers and businesses. Just as a small town cannot offer the same range of stores and services for shopper as a large town, small economies cannot efficiently produce everything that households and firms would like to buy, so they tend to import more products to satisfy those demands. On the export side, as firms in small economies increase production, they are more likely to be constrained by the limited size of the market and unable to take advantage of economies of scale if they sell only locally. By exporting to global markets, they can sell larger amounts of more-specialized products. Export earnings then pay for the imports small nations demand. Producers in larger economies can sell a much larger share of their output locally without being constrained by market size. In Guyana, with a population of under 1 million, imports and exports together exceed 200 percent of GDP; in Mauritius they reach 133 percent. But in much larger Brazil and India, the ratios are 27 and 45 percent, respectively. Figure 18-4 confirms this relationship across all countries. It helps explain why sub Saharan Africa, which has a large number of nations, half of them with populations below 10 million, has such a relatively high ratio of trade to GDP.
Trade patterns are also influenced by a country's geographical characteristics, including its access to shipping routes—especially whether it is landlocked—and its location relative to major markets. For the last several hundred years, the cheapest and most important from of transporting goods between countries was by sea, and to this day, countries with easier access to sea-based shipping tend to have larger exports and imports than do landlocked countries. Adam Smith recognized the advantages of access to the sea for trade and commerce more than 230 years ago in The Wealth of Nation:
As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the seacoast, and along the banks of navigable rivers, that industry of every kind naturally begins to sub-divide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland part of the country.
As Smith predicted, most landlocked countries trade less. Figure 18-5 identifies 44 nations that do not have a coastline. As a group, their trade to GDP ratio is 25 percent as compared to 75 percent for all other economies. Less trade among the landlocked countries is a result of much higher transport costs, as they must not only pay for sea-based shipping but overland costs to and from the nearest seaport. These costs can skyrocket when relationships between neighboring countries deteriorate. Periodic conflict between Ethiopia and Eritrea has forced firms in Ethiopia to seek other more distant ports, for example, in Djibouti or Kenya. Landlocked Nepal almost totally depends on shipment through India. In Africa, 16 countries are landlocked, and their shipping costs have been two or three times higher than for their coastal neighbors. As a result, everything that is imported is much more expensive. Similarly, exporters must pay more for shipping, raising the costs of export products and making firms less competitive on world markets.
As noted in Chapter3, being landlocked not only reduces trade but is also associated with slower economic growth. An inability to trade more may account for this slower growth. But there are exceptions. Some landlocked high-income countries have done well, such as Austria and Switzerland. But they are located in the midst of major markets, are connected by high-quality road networks, and have had good relations with neighboring states, so shipping costs are not a major barrier. Landlocked countries that ship raw materials for which the margins between production costs and world prices are large are also in a better position to export, despite higher shipping costs. Landlocked Botswana has been very successful, as its diamonds bring in plenty of revenue to overcome higher shipping costs. Uganda's coffee, the nation's primary export, does not enjoy the same advantage. In addition to landlocked countries, countries isolated from major markets, such as Samoa and other small island countries of the Pacific Ocean, face similar issues with high shipping costs. As air shipment costs decline these disadvantages are reduced, but the vast majority of trade still takes place by sea.
In addition to size and geography, government strategies for trade and choices about trade policy determine trade outcomes. Broadly speaking, governments in developing countries have employed two different trade strategies, import substitution and outward- looking development. Import substitution is the production of goods and services that replace (or substitute for) imports. Outward orientation shifts the focus to producing for export for global markets. Before examining these two strategies in Chapter 19 it is necessary to understand some of the core ideas that shape economic reasoning about international trade.