An Introduction to International Business and Multinational Corporations – Part 3
Introduction
Welcome to the third session of the International Socio-Economic Context Course. This is the finalization of the Chapter titled An Introduction to International Business and Multinational Corporations and it is focused on the recognition of the recent trends in world trade.
This is important because MNC operates in global scenarios in which certain trends are identified as a response to the consumers behaviors but also some economic and social externalities. So any MNC or firm that is trying to become one, should know and comprehend these trends for the understanding of the international environment where the company competes. Rather than follow the trends it is important to analyze their origin and, eventually, adapt the management of the organization to them.
So, by the end of this class you will be able to mention the most important trends in terms of international trade common to the firms in all countries and sectors, in order to identify possible opportunities of internationalization for the domestic-oriented firms as well as the management of the present consolidated MNC.
Content developement
According to United Nations Conference on Trade and Development UNCTAD (2021), International trade largely relates to physical goods. Although increasing, trade in services accounts for a much lower share. In 2020 world trade in goods was valued at close to US$17 trillion, while trade in services accounted for about US$5 trillion. Global trade in goods has been volatile during the last 15 years, largely because of the economic crises. Global trade has been severely affected by the COVID-19 pandemic. While trade in services has been historically more resilient it has declined considerably more during 2020 than in any previous episode of economic crisis.
International trade can be broadly distinguished between trade in goods (merchandise) and services. The bulk of international trade concerns physical goods, while services account for a much lower share. World trade in goods has increased dramatically over the last decade, rising from about US$10 trillion in 2005 to more than US$18.5 trillion in 2014 to then fall in 2016. Goods trade peaked in 2019 but then fell to about US$17 trillion in 2020 as a consequence of the COVID-19 economic downturn. Trade in services steadily increased between 2005 and 2019 (from about US$2.5 trillion to close to US$6 trillion). The COVID-19 pandemic has a strong negative impact on the trade of services which substantially fell during 2020 (Figure 1a). Following the strong rebound in 2010 and 2011, export growth rates (in current dollars) turned negative both in 2015 and 2016 (Figure 1b). They showed a strong bounce back to a positive territory in 2017 – especially for goods’ exports from developing countries – but remained below pre-crisis levels. During 2020 export growth rates for both developing and developed countries declined, with rates for services considerably more negative than for goods.
Other remarkable trends are the following:
Since 2005 the volume of international trade of goods has increased dramatically. However, growth has slowed down significantly in the last few years, virtually stopping after 2018, and declining in 2020 as a consequence of the COVID-19 pandemic. In major economies, both imports and exports volumes continued to grow during the last 15 years. In 2020, imports and export volumes have been increasing for China but have declined for the United States and the European Union.
The value of trade in goods is almost equally shared between developing and developed countries. By contrast, trade in services is still largely about developed countries. BRICS account for an important share of trade in both goods and services. Least Developed Countries (LDCs) continue to account for a very small share in overall trade.
International trade in goods is largely composed of trade flows involving developed countries and the East Asian region. Trade among other developing regions is smaller, with some exceptions for trade in primary products.
International trade in goods is increasingly linked to imports and exports of developing countries. After the 2008 crisis, South–South trade rebounded promptly to pre-crisis levels, and continued to grow to reach close to US$ 5 trillion in 2014. After 2 years of decline in 2015 and 2016, South-South trade recovered to surpass that level in 2018 but it declined again in 2019 and 2020, approaching the levels of 2017. The relative significance of intraregional and other South-South (interregional) trade flows remained quite stable in 2020 compared to 2019 for most developing country regions. A large and growing part of trade among developing countries is with China.
The uneven performance of the largest bilateral flows in 2020 reflects the tumultuous nature of trade during this year. While agricultural trade flows experienced some large percentage increases, in particular exports from the European Union to China, and the United States of America to China, some manufacturing flows decreased significantly, in particular exports from China to the United States of America. Exports of natural resources to China and particularly to the European Union also experienced significant decreases.
Intermediate products represent almost half of world trade in goods (close to US$ 7.5 trillion in 2020), with consumer products amounting to about a quarter (US$ 4.5 trillion in 2020). While the amount of trade in each category has grown substantially since 2005, the relative importance of goods at different stages of processing remained relatively stable. In 2020, trade in all categories decreased, with the strongest fall in primary products. Trade in consumer products fell relatively less. Differentiated by broad category, world trade in goods is largely comprised of manufacturing products (about US$ 13.5 trillion in 2020). Trade of agricultural product remained constant in 2020 relative to 2019.
Trade of developed countries remains an important part of international trade, especially in relation to imports of consumers and capital goods. Participation in international trade varies significantly among developing regions. BRICS countries account for an important part of developing countries’ trade, especially with respect to trade in intermediates and exports of consumer products. The participation of other developing regions in world trade, both as importers and exporters, is more limited.
With more than US$2 trillion traded, chemicals represent a substantial share of world trade in goods. Other significant sectors include communication products, machinery and motor vehicles and fuel commodities. In 2020, the value of international trade shrunk in most sectors, particularly in energy products (oil, coal, gas and petroleum products). During the last decade, export market shares have moved to the advantage of developing countries in all sectors and more so for communications equipment, non-metallic minerals, oil, gas, coal and others.
World exports of services are largely about travel and transportation. Trade in services increased during the last decade across all categories of services. However, the trade performance across some categories of services dropped significantly during 2020, in particular for travel and transportation and small decreases in many other sectors. Moderate growth was observed in telecommunications and IT and financial services. Although during the last decade developing countries increased their share of trade in services, developed countries remain the main exporters in all sectors. However, developing countries are increasingly becoming important suppliers of construction, insurance, professional and consulting services.
Conclusion
Trends in international trade, of both products and services, are the result of a considerable amount of interactions between stakeholders with different economic and social interests in every country, industry or company.
Such interactions are complex and dynamic so it is reasonable to expect an evolution through the time and also, some unexpected events such as COVID-19 pandemic have proven to be of great interest for the managers of MNC.
Then, knowing the trends of international trade does not guarantee a complete and accurate prediction of the business future, but enables a proper preparation for different scenarios where the companies are well adequate to face the challenges of every market in a global perspective.
Information sources
- Ajami R., & Goddard J. G. (2015). International Business: Theory and Practice. Routledge (21-26)
- United Nations Conference on Trade and Development (2021). Key Statistics and Trends in International Trade 2020. PDF
- UNCTAD Online (October 21st, 2021). From Recovery to Resilience: Trade and Development Report 2021. [Video File]. Youtube. https://www.youtube.com/watch?v=DwXDRi7D1Qg