International Trade in Historical Perspective

Onassis Prize Lecture

Elhanan Helpman
Harvard University and CIFAR

September 1, 2012

I have studied international trade and investment all my adult life. The
source of this fascination is not entirely clear to me, except for the fact that
this …eld combines many diverse parts of economics and is rich in themes
and methods. Although I have ventured from time to time into other …elds,
such as macroeconomics, public economics, growth, and political economy,
the challenge of understanding the structure of international specialization
never left my mind.

It goes without saying that long-distance trade plays an important role

in modern economies. But it was already a salient feature of economic de-
velopment after the Neolithic Revolution, as hunter-gatherers evolved into
sedentary societies that specialized in food crops, and even more so with the
emergence of cities and early civilizations. Caravans traveled along the Fertile
Crescent trading between Mesopotamia and the Levant three millennia ago.
Over time, trading routes expanded to distant parts of Asia and Europe.
The Roman Empire managed an extensive network of trade, which bound
together Europe, western Asia, and Northern Africa.

The collapse of the western part of the Roman Empire in the …fth century
C.E. brought many of these developments to a halt. Nevertheless, long-
distance trade continued, although to a lesser extent. Historians have doc-
umented in great detail the evolution of communications and the mobility
of people across distant regions during that period, developments that were
particularly pronounced during the Carolingian Empire in the 8th century.
European imports of spices were replaced then by imports of exotic medicines
and new drugs developed by Arab pharmacology, while silk continued to ‡ow
into northwest Europe. To pay for these imports, Europe produced a rather
narrow range of high-value, low-bulk goods: textiles, tin, Frankish swords,
but primarily European slaves.

The Middle Ages saw an expansion of trade with the rise of city-states
such as Venice and Genoa, and the advent of the commercial revolution. The
discovery of America by Christopher Columbus in 1492 and the discovery
of the passage to the East Indies via the Cape of Good Hope by Vasco da
Gama in 1498 had monumental e¤ects on world history and on long-distance
trade. Historians dispute the immediate impact of these discoveries but no
one doubts that the Iberian states of Portugal, Castile and Aragon were soon
a¤ected, and the rest of the world was in‡uenced in the following centuries.
Particularly important were these developments for European countries with
access to the Atlantic Ocean, in which the new commercial opportunities
shook up the social and political order and led to a new balance of power
between the nobility, the merchants, and the crown.

But how important were these discoveries for the global integration of mar-
kets? Some historians argue that world markets were integrated before the
age of discovery; others argue that integration started in earnest only after-
wards, with the advent of the Industrial Revolution. In particular, while the
discovery of the new world and the passage to the Indies played a prominent
role in the evolution of the European economies in the centuries to come, the
volume of world trade relative to income remained very small until the 19th
century.

Figure 1 shows the evolution of world trade from the early 19th century
to the early 1990s. It clearly identi…es two waves of globalization; one that
started in the second half of the 19th century and lasted until World War I,

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 Trade
Income
0.3
0.25
0.2
0.15
0.1
0.05
0
1800 1870 1900 1913 1929 1938 1950 1973 1992

Source: Estevadeordal, Frantz and Taylor (2003)

Figure 1: Trade-Income Ratio in the World Economy

and the second that stared after World War II and proceeds until this very
day. Initially the share of trade in income was 2% and it exceeded 25% in
1992.

While long-distance trade was related to economic development, the inter-

dependence between them was complex. In particular, long-distance trade
a¤ected economic development and economic development a¤ected trade.
Moreover, the in‡uence of trade on development operated through multiple
channels, including the institutional and political. Long-distance trade in the
aftermath of the discovery of the Americas is often cited as a major event
that contributed to the divergence in economic conditions between Europe
and China. Although Europe and China were similarly advanced in the mid-
18th century, the industrial revolution took place in Europe, as a result of
which Europe grew faster than China, eventually leading to large gaps in
income per capita that have been closing only in recent years. Naturally,
the industrial revolution was not driven by trade per se, but trade was an
indispensable contributing factor.

Some studies point out that European growth in the post-1500 period was
concentrated in countries with access to the Atlantic Ocean: Britain, France,
the Netherlands, Portugal and Spain, countries that engaged in trade with the
New World and acquired overseas colonies. These commercial opportunities

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strengthened the political power of merchant groups and entrepreneurs and
weakened the power of monarchs. As a result, constraints on the executive
were broadened and property rights became more secure for a larger segment
of society. These unintended consequences of trade with the New World
enabled the Atlantic traders to forge ahead of other European countries.

Yet trade with the new world also had negative e¤ects in Spain, where
Castilian institutions proved to be inadequate in limiting the power of Philip
II. The ‡ow of silver from the Americas encouraged Philip II to engage in
wars that eventually became too expensive and required domestic taxes and
large loans from foreign bankers. The ensuing struggles between the Crown
and the Cortes weakened domestic institutions, and this had unfortunate
consequences for Spanish economic growth.

Evidently, the historical record shows that long-distance trade interacted in

complex ways with economic development, and that it played an important
role in the evolution of the world’s economy. It is therefore important to
understand what drives such trade and how it impacts economic outcomes.

Unlike the natural sciences, in which important research objects do not

change over time, in the social sciences generally and in economics particu-
larly, the objects of research reshape over time. In this respect, international
trade is no exception. When countries and regions transform as a result
of economic, technological, political, or institutional change, the nature of
foreign trade and its causes and consequences change too. Moreover, such
changes are not rare in historical perspective, but rather frequent. As a re-
sult, the thinking on this subject has been repeatedly adapted to varying
circumstances. And this motif has been central to my thinking about this
subject.

The history of thought on international trade, with its interplay between

theory and evidence, is fascinating. The chain of theorizing, empirical in-
vestigation that con…rms parts of the theory and contradicts others, and
updating of the theory in view of new evidence, has propelled advances in
this research for two centuries. Moreover, this pattern has been unavoidable

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in view of the changing nature of international economic interactions. In
other words, theories that had been suitable at one point in time became less
appropriate as national economies— and with them patterns of international
specialization— changed.

Two major paradigms of foreign trade that were developed in the early
parts of the 19th and 20th centuries, respectively— the former by David Ri-
cardo in England, the latter by Eli Heckscher and Bertil Ohlin in Sweden—
dominated the …eld for many years. Each one was cultivated in the context
of its time; the former explained trade ‡ows by di¤erences in labor produc-
tivity across countries, while the latter explained foreign trade by di¤erences
in factor endowments. In each case the hypothesized causes of trade served
their purpose, and they were applied to a host of issues, such as gains from
international trade, the con‡ict of interest between di¤erent groups in society
concerning the desirability of open markets, the impact of trade policies—
including free trade agreements and multilateral trade negotiations— and the
relationship between international trade and economic growth.

While these approaches have many merits, they proved inadequate in ad-
dressing a number of phenomena that became particularly salient in the post-
World War II period. This led to the …rst major revolution in trade theory
during my professional life, and to the development of what was then dubbed
the ‘new’trade theory. The motivation for this revolution was empirical, and
the new trade models— which emphasize economies of scale and monopolis-
tic competition— triggered new empirical work. Yet as the nature of world
trade kept changing and new data sets became available in the 1990s, the
inadequacy of the theoretical models from the 1980s became visible. As a
result, a second revolution took place in the early 2000s, this time focusing
on characteristics of individual …rms and how they engage in international
transactions. This approach enabled researchers to explain new patterns of
international specialization that have emerged since the 1980s, including the
central roles played by multinational corporations in the shaping of interna-
tional specialization, and patterns of outsourcing and o¤shoring in the world
economy.

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 Figure 2: Evolution of Trade in Intermediate Goods and Commercial Services

Figure 3: O¤shoring of Goods and Services

Figure 2 shows the evolution of trade in intermediate goods and commer-

cial services relative to total merchandise trade. It shows clearly that trade in
intermediates and commercial services has grown much faster than merchan-
dise trade since the 1980s. This is a re‡ection of the growth in international
vertical specialization, as companies source more and more intermediate in-
puts and business services in foreign lands.

Figure 3 shows data on the o¤shoring of goods and services. Among the
top o¤shoring countries Ireland o¤shores 71% of its intermediate inputs and
33% of services. On the other side, Japan o¤shores little: 9% of intermediate
inputs and 2% of services. This variation across countries re‡ects a complex

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 Figure 4: Share of Exporting Firms in Total Number of Manufacturing Firms

Figure 5: Per Cent of Exports Accounted for by Largest Exporters

web of international supply chains and the location of di¤erent countries

in this chain. In addition, the variation in the share of exporters across
manufacturing sectors is also very large.

Figure 4 shows the fraction of exporting …rms in manufacturing in vari-

ous countries. The …rst thing to note is that this fraction is small in most
countries, between 17 and 21 percent. This means that most …rms do not
export. Moreover, exporters sell most of their output in the domestic market
and their size distribution is very skewed, as shown in Figure 5. In the UK,
for example, the top 1% of exporters export 42% of the value of exports in
manufacturing while the top 10% export 80% of the value. And in the US

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the top 1% export 81% of the value while the top 10% export 96%.

We now better understand why only a small fractions of …rms export and
an even smaller fraction of companies engages in foreign direct investment,
why exporters are bigger and more productive than nonexporters and why
they pay higher wages, why multinationals are bigger and more productive
than exporters, how foreign trade a¤ects wage inequality and the distribu-
tion of income, what makes some countries attractive hosts of foreign direct
investment, and what is driving global supply chains. All these issues have
important implications for standards of living around the globe and for the
degree to which a country’s standard of living depends on economic develop-
ments in other countries.

I have been most lucky in choosing to study international trade and in-
vestment during a time when the world economy has been rapidly changing
and research progressed in leaps and bounds, chasing world events. And even
more lucky to receive the Onassis Prize for participating in this journey.