the steamship and railroad expansion, all of which encouraged trade. This golden age that
lasted up until 1920 experienced large increases in trade and globalization. In fact, the
Inter-War Period Because of World War I and its aftermath, the trade–to–GDP ratio
decreased between 1913 and 1920 for countries in Europe, as well as Australia. It
continued to decline with the Great Depression in 1929 and World War II in 1939. To
exasperate the problem, the United States passed the Smoot‒Hawley Tariff Act to protect
farmers in 1930, which raised tariffs on many goods imported from abroad. In retaliation,
European countries such as France, Italy, and Britain, as well as Canada, imposed their
Second “Golden Age” of Trade It took many decades for the world to experience the
same level of global integration experienced before World War I. With the end of World
War II in 1945 and the reductions in tariffs from GATT, many countries began to regain
The Financial Crisis The crisis of 2008, triggered by the collapse of Lehman Brothers, is
often referred to as the beginning of the Great Recession or the financial crisis. It began
in the United States and spread quickly throughout the global economy. The crisis began
with mortgage defaults and then spread to the entire financial system. Even though the
cause of the crisis was unrelated to international trade in goods and services, the impact
H E A D L I N E S
A Sea Change in Shipping 50 Years Ago
The introduction of shipping containers by Malcom McLean in 1956 dramatically
reduced transportation costs, transforming international trade in merchandise goods. As
The Future of Trade Countries have experienced unprecedented growth and the highest
ratios of trade–to–GDP ever experienced. We can expect that the future of trade will
benefit from the enhancement and development of free-trade areas between countries and
2 Migration and Foreign Direct Investment
Map of Migration The reasons for foreign direct investment (FDI) or movement of
capital across borders, as well as the reasons for migration or the movement of
populations across borders, are also studied and analyzed in International Trade. All
three types of trade flows—trade in goods, capital, and labor—impact the growth and
development of nations.
Unlike trade, in which the majority occurs between rich countries, more migration takes
place among less wealthy nations. In 2013, there were 232 million foreign-born people
globally; 60% were living in Organisation for Economic Co-operation and Development
(OECD) nations. In contrast, only 25% of foreign-born people from OECD nations live
European and U.S. Immigration With the increase in the number of countries joining
the EU, fears of labor movement from the low-wage countries to the high-wage countries
have triggered policy disagreements among many of the original members. Ultimately,
free labor mobility was agreed to among all countries within the EU except the United
gain citizenship.
Map of Foreign Direct Investment FDI occurs when a firm in one country purchases a
company or land in another country. Similar to trade in merchandise goods, most of the
stock of FDI is held within OECD countries (i.e., $20.7 of the $25.5trillion, or 81%). The
Horizontal FDI When a firm in one industrialized country invests in another
industrialized country by purchasing a foreign company, this form of investment is
considered horizontal FDI. Examples include the purchase of a Canadian fast-food
A second reason for horizontal FDI is that owning a foreign subsidiary allows companies
to gain better access to the local economy and to improve access to information for
marketing. A third reason is that companies may draw on technical expertise available in
the area by locating near other established firms.
Vertical FDI Vertical FDI occurs when a firm in an industrial country builds or
purchases a plant in a developing country. One of the advantages of establishing a plant
in a developing country is to lower production costs by hiring low-wage workers. Much
European and U.S. FDI More than one-third of the world FDI, or $9.5 trillion, was in
Europe in 2013, with $6.6 trillion originating from other European nations. Horizontal
FDI from Europe to the United States ($1.4 trillion) and from the United States to Europe
($2 trillion) was significant as well. Examples of European direct investments in the
FDI in the Americas There are also substantial stocks of FDI in the United States,
Canada, and Latin America. Although high, they are substantially lower than the amount
between Europe and the United States. Direct investment from the United States in
Canada totaled $368 billion in 2013, while from Canada to the United States, FDI was
costs.
FDI with Asia FDI between Japan and the United States and between Japan and Europe
are examples of horizontal FDI. European FDI to Asia ($315 billion) and U.S. FDI to
Asia ($429 billion) are examples of vertical FDI, and they are primarily due to the lower
wages in Asia.
In addition to receiving direct investments, there has also been a growing trend of FDI
outflow from Asia to the United States and Europe. This reverse–vertical FDI is
motivated by the desire of firms in developing countries, such as China, to purchase
3 Conclusion
International trade includes the study of not just goods and services, but the flow of the
factors of production—labor and capital—as well. This implies a transfer of cultures and
ideas, and the increasing integration of capital markets globally. Although this trend has
been growing in recent decades, it is far from a new world trend. In fact, this type of
global trade and financial integration occurred well before World War I. World War I and
the Great Depression (GD), soon followed by World War II, interrupted it, with the trend
not seen again until its re–emergence beginning in the 1950s.
Several institutions and organizations were responsible for re-establishing and
encouraging trade and the movement of capital across borders following World War II;
We have learned that migration is not as free as trade in goods. Many countries restrict
migration to minimize the impact of lower wages from a sudden increase in the inflow of
workers. In later chapters, we will find that this fear may not be realistic in all cases and
that immigrants can be absorbed into a country’s economy with few deleterious effects
and can even result in an increase in wages for some.
Among the industrial countries, FDI is for the most part unrestricted. Developing
countries may restrict capital flows. China has capital controls in place and requires
partnerships and/or approval for all foreign investments.
Teaching Tips
Tip 1: This chapter introduces students to trade: who trades with whom, by how much,
and what they trade. To stimulate students’ thinking about the causes of trade, ask them
to review Figure 1-2 and Table 1-1 and write down the reasons why some regions trade
more than others. Why do the United States and Canada trade so much? Why is trade
with Africa so low? What explains the relatively high trade volume of the Middle East?
Tip 2: The financial crisis that began in 2008 is not a major part of this book, but its
enormous impact on international trade warrants some discussion. Ask students to search
for and read Richard Baldwin’s Vox article “The Great Trade Collapse: What Caused It
Tip 3: For a more challenging assignment, consider this speech by David Lipton, first
deputy managing director of the IMF: “From the Fall of Communism to the Rise of
question. In what way has “practice” challenged our paradigms?
IN–CLASS PROBLEMS
1. What is the difference between horizontal and vertical FDI?
Answer: Horizontal FDI refers to the type of direct investment between
2. Provide reasons for the resurgence of trade that led to the second golden age.
Answer: Reasons include the end of World War II, reductions in tariffs following the