Introduction
The USA is the largest economy in the world. Aside from ranking the highest in terms of its nominal GDP, the U.S. economy also leads in terms of its net world and is among the best by purchasing power parity. Canada, one of the most immediate neighbors of the United States, also enjoys a strong trading relationship with the USA. However, the longest trading partner, with ties tracing back to the 1940s, in the United Kingdom. In addition to Canada and the United Kingdom, the essay will also look into the trading pattern between the USA and the emerging economy of Japan. The analysis will use various trading theories, including the New Trade Theory, the Gravity Model, and the Standard Trade Model, to explain the trading pattern between the United States and the United Kingdom, Canada, and Japan, respectively.
USA/UK
Overview :
The US is the U.K.’s largest trade partner; the trade between these two nations is valued at over £160B. In addition, the two countries are each other’s largest contributors of foreign direct investment, with about $1 trillion invested in each other’s economies. In 2019, exports to the United States accounted for 15.5% of the total U.K. exports (“The United Kingdom | United States Trade Representative,” 2020 ). Following Brexit, the U.K. Department of International Trade (DIT) has identified a trade deal as its first priority. The relationship between the two countries can be traced back to more than 80 years ago, with multiple deals being signed between the two countries. Aside from the 1941 Atlantic Charter, which was signed to promote the broad international economic collaboration, the U.K. and the U.S. have entered into other agreements, including the Louvre Accord and the Plaza Accord, among others. In recent years, the prospective free trade agreement between the two countries, which targets to replicate the effects of E.U. trade agreements, is expected to increase the trading relationship between the two nations.
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The UK is the 5 th largest export destination and 7 th largest import partner of the United States. The top export categories to the United Kingdom, based on the 2-digit H.S., are aircraft, valuable metal and stone, machinery, mineral fuels, and electrical machinery (“The United Kingdom | United States Trade Representative,” 2020 ). The United Kingdom is also one of the largest export markets for USA’s agricultural products, including wine & beer, tree nuts, prepared food, live animals, and soybeans. On the other hand, the USA imported various manufactured and agricultural goods from the United Kingdom, including vehicles, machinery, pharmaceutical, mineral fuels, snack foods, cheese, wine & beer, red meat, and live animals.
An in-depth analysis of the USA’s imports and exports to the United Kingdom shows an intra-industry trade, where the two countries import and export the same goods. An analysis of the USA and the U.K. import of agricultural products shows that both countries import and export wine & beer from each other. In the case of manufactured goods, the U.K. and the USA import machinery and mineral fuels from each other. Despite the almost identical nature of the two economies, the USA and U.K. participate in intra-industry trade, making the New Trade Theory a suitable theory to explain the trade pattern between the two countries.
According to the New Trade Theory (NTT), the primary factor dictating the international pattern of trade is the very substantial economies of scale and network effects. In some instances, the economies of scale can overwhelm the conventional theory of comparative advantage. While there might not be a significant opportunity cost in one country when compared to the other, an industry that specializes in a given industry might gain economies of scale and other network advantages from its specialization (Pettinger, 2020). Also, if one country enters the industry earlier compared to the other country, such a nation can gain significant economies of scale and thus giving it an advantage over the other. The NTT can be used to explain the intra-industry trade in the agricultural and manufacturing sectors. Monopolistic competition, which is one of the core elements of NTT, suggests that organizations tend to compete on branding, quality, in addition to pricing, and thus the scenario where the countries import and export the aforementioned goods from each other (Pettinger, 2020). Moreover, when one firm reaches industrial maturity compared to the other, the unfair competitive advantage gained by such an organization leads to the scenario of a country. Importing and exporting products from each other. Finally, the growth of globalization and the need for variety by consumers, especially when the trade partners are both capital-intensive countries, can also result in the export and import of similar products from the two countries.
USA/Canada
The trade between the USA and Canada is estimated to cost about $720 billion. In 2018, the cost of goods and services transacted between the two countries totaled an estimated $718.5. With a total export value of $ 363.8 billion and imports of $354.7 billion, the trading partnership between the United States and Canada ranked among the highest (“ Canada | United States Trade Representative,” 2020 ). Besides, the United States is Canada’s primary source of foreign direct investment. The trading relationship between the two countries is guided by the theme of integration and asymmetry. The integration is the result of the successive trade liberation following the US-Canada Auto Pact of 1965, which contributed to the North American Free Trade Agreement. The asymmetry is a result of the Canadian dependence on the U.S. market and from the significant size difference between the two economies. The economies of the two countries are strongly integrated, particularly following the bilateral U.S-Canada free trade agreement (FTA) of 1988 and the NAFTA. Both countries have industrialized economies with high standards of living. The main export from the USA to Canada include vehicles, machinery, mineral fuels, electrical machinery, and plastic. On the other hand, the USA imports products, including mineral fuels, vehicles, machinery, and plastic from Canada. While agricultural imports from Canada totaled $23 billion in 2018, the United States managed to export $24 billion worth of agricultural products to its largest agricultural export market (“ Canada | United States Trade Representative,” 2020 ). Despite the good trading relationship between the two countries, the trading relationship is not free of disputes. For instance, the most recent dispute concerning the 2006 softwood lumber agreement has been under arbitration with the World Trade Organization.
The sheer proximity of the two countries to each other, along with the NAFTA, is a strong justification for the use of the Gravity Model to explain the trading pattern between the two countries. Canada and the United States, along with the third party in the NAFTA agreement, Mexico, share borders. Besides, the historical and cultural affinity, along with geography, meet the factors of the Gravity Model (Shahriar et al., 2019). The traditional gravity equation is as follows:
Trade
ij
= α.
|
Equation 1 |
Where:
Trade is the value of the bilateral trade between country i and j
GDPi and GDP j are countries i and j’s national income.
Distance is the measure of the bilateral distance between the two countries. It is a constant of proportionality.
The linear form of the above model is (Shahriar et al., 2019):
| Log (Trade ij ) = α +β 1 log ( GDP i .GDP j ) +β 2 log (Distance) + u ij |
Equation 2 |
Where α, β 1, and β 2 are coefficients to be estimated. u ij is an error term that captures any other shocks, events, or unobserved factors that might impact on the bilateral trade between the two countries.
The analysis of the US-Canada trade shows a consistent increase in trade from 1985 to 2008. However, following the 2008 Great Recession, the number of imports and export dropped significantly. The Canadian economy is heavily dependent on the U.S. market and, thus, the consistent high import compared to export. The dependence of the Canadian economy on the U.S. market was emphasized with the greater dip in the level of imports compared to the amount of export following the 2008 Great Recession. The next drop in the USA-Canada export and import was in 2015 and 2016 following global oil price drop as a result of oversupply from OPEC and the increasing oil production in the U.S.
USA/Japan
Japan, the third-largest economy in the world, is the fourth-largest U.S. trading partner with a total export to Japan of $121 billion and an import of $179 billion. Japan is also the largest foreign holder of U.S. government debt. Motor vehicles and parts form the biggest part of U.S. imports from Japan, with products worth $56 billion being imported in 2018 ( "Japan | United States Trade Representative," 2020 ). Following the U.S. withdrawal from the Trans-Pacific Partnership, the two countries have been involved in efforts to forge a trade agreement. The withdrawal of the U.S. from the Trans-Pacific Partnership, along with various free trade agreements between Japan and other major economies, puts U.S. exporters at a disadvantage. The expected trade agreement on agricultural goods and industrial goods, among others, will increase the levels of trade between the two countries. The primary export categories, according to the 2-digit H.S. in 2019, were mineral fuels, aircraft, optical and medical instruments, machinery, and electrical machinery ( "Japan | United States Trade Representative," 2020 ). On the other hand, the U.S. imported commodities, including vehicles, machinery, electrical machinery, optical and medical instruments, and pharmaceuticals.
The Standard Trade Model, which will be used to analyze the trading pattern between USA and Japan, is based on four primary relationships, including the relationship between the production possibility frontier and the relative supply curve, the relationship between relative price and relative demand, the world demand-supply equilibrium, and the effects of the terms of trade (Jayet and Lea, 2016). According to the production possibility frontier, an economy will opt for a production level that will maximize its output. The production of the vehicle in Japan has a higher output value compared to the production of aircraft. On the contrary, in the U.S., the production of aircraft is cheaper. Therefore, while the United States opts to produce aircraft, Japan produces vehicles.
The relationship between production and consumption can be represented in the standard trade model. The value of an economy’s consumption is equal to the value of its production as mathematically presented below:
P A Q A + P V Q V = P A D A + P V D V = V,
Where D A and D V are the consumption of aircraft and vehicles, respectively, therefore, the production and consumption of the two commodities must lie on the same isovalue line.
The growth of the economy on other sides of the world might either affect the relative price of demand and supply positively or negatively. Growth in the economy of the U.S. results in an increase in the markets in the region and thus facilitating growth in the market for Japan’s exports. Also, growth in the economy leads to a decrease in the price of imports. Alternatively, growth in the economy might result in increased competition in those other regions, and as a result, affecting the existing trade pattern. Finally, the trade deals between the trading partners will affect how the business is conducted. In the case of the U.S. and Japan, the exit from the Trans-Pacific Partnership affects the trading activities between the U.S. and Japan. However, the recent plan to negotiate a free trade agreement can help increase the trading relationship between the countries.
References
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Jayet, Hubert, and Léa Marchal. (2016). Migration and FDI: reconciling the standard trade theory with empirical evidence. Economic Modelling 59: 46-66.
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Pettinger, Tejvan. (2018). New trade theory - economics help. Economics Help . https://www.economicshelp.org/blog/6957/trade/new-trade-theory/.
Shahriar, Saleh, et al. (2019). The gravity model of trade: A theoretical perspective. Review of Innovation and Competitiveness: A Journal of Economic and Social Research 5.1: 21-42.
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United States Census Bureau. (2020). Foreign trade - U.S. trade with United Kingdom. Census.Gov , 2020, https://www.census.gov/foreign-trade/balance/c4120.html.
