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 You are in: Special Report: 1999: 11: 99: Battle for Free Trade
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Wednesday, 24 November, 1999, 14:01 GMT
The engine of economic growth

Trade has been the driving force of world economic growth in the last 50 years.

The battle for free trade
Since the end of the Second World War, trade flows have increased much faster than world population, and even faster than overall world economic growth.

Initially trade expansion fuelled the post-war economic miracles in Germany and Japan. More recently, it has become the engine of development across many Asian developing countries, transforming the economy of countries like South Korea and Singapore into near Western standards of living.

The role of trade in economic growth may now be lessening. As more and more companies invest in other countries, trade may yet be eclipsed by foreign direct investment.

Vodafone's 79bn hostile bid for Mannesmann may worth more to Germany than its exports. No small feat, given that Germany is the world's second largest exporter.

World's biggest exporters

Although the world's biggest exporters are also some of the world's biggest economies, some countries punch above their weight.

The United States, which makes up one-third of the world economy, is the biggest exporter.

World's Biggest Exporters
United States: $683bn
Germany: $540bn
Japan: $388bn
France: $307bn
UK: $273bn
Italy: $241bn
Canada: $214bn
Netherlands: $198bn
China: $183bn
Hong Kong: $174bn
But surprisingly, perhaps, it is Germany, not Japan, that is in second place, despite the fact that Japan's economy is twice as big as Germany's. Japan has a very modern and competitive export sector, led by consumer electronics and auto companies, but it also has a rather inefficient domestic economy in service sector areas like retailing and financial services.

Other rich industrial countries, including Britain, France, Italy dominate the list of top exporters.

But China - and its special administrative area of Hong Kong - have moved rapidly up the list of the world's biggest exporters. Taking China, Taiwan, and Hong Kong together, they are now the world's third largest export bloc.

And other Asian countries, like South Korea, Singapore, Malaysia and Thailand have also increased their exports dramatically, even if they were held back last year by the Asian financial crisis.

Korea is the world's twelve largest exporter, wth $133bn in exporters.

In Latin America, Mexico and Brazil are the biggest exporers.

In recent years, exports of services have been growing faster than exports of manufactured goods.

Services covers a diverse area, from royalties on songs to accountancy, consultancy and financial services.

The UK, France and the United States are among the world's most important exporters of services.

Trade imbalances

The fast growth of these so-called "newly industrialised countries" has come at the expense of increasing trade imbalances with the rest of the world.

Their export-led growth has not led to the rapid opening of their domestic markets.

Instead, they have proved effective in exporting goods like cars, electronics, and textiles, especially the United States.

The combination of higher-than-average growth in the USA in the last few years, and its relative openness to imports, has created a huge trade imbalance.

The US trade deficit now stands at a record $300bn a year.

In trade theory, such imbalances become corrected because the US dollar then falls, causing imported goods to become more expensive.

But so far the booming US stock market has sucked in funds from abroad, preventing that fall.

Foreign Investment

Indeed investment, both indirect (such as in stocks) and direct (when companies build or buy factories abroad) is replacing trade as a major factor in world trade.

Large multinational companies, with plants in many different countries, have the power to adjust prices

Foreign investment has boomed in the past decade, both between industrialised countries and towards some (but only a selected few) developing countries.

Indeed it was the sudden flight of foreign investment from Asian countries in 1997 and 1998 that precipitated the global financial crisis.

There are far fewer rules regulating those flows, however.

And even after the Asian crisis, proposals for global reform have failed to make much progress in this area.

Indeed, as protesters gather in Seattle, including them in global negotiations at all may prove impossible.

But the momentum for closer global economic integration shows no sign of slowing down.

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