Trade in a Globalizing WorldWORLD TRADE REPORT 2008World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system. International trade is integral to the process of globalization. Over many years, governments in most countries have increasingly opened their economies to inter-national trade, whether through the multilateral trading system, increased regional cooperation or as part of domestic reform programmes. Trade and globalization more generally have brought enormous benefits to many countries and citizens. Trade has allowed nations to benefit from specialization and to produce more efficiently. It has raised productivity, supported the spread of knowledge and new technologies, and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved to be popular, nor have the benefits of trade and globalization necessarily reached all sections of society. As a result, trade scepticism is on the rise in certain quarters. The purpose of this year’s Report, whose main theme is “Trade in a Globalizing World”, is to remind ourselves of what we know about the gains from international trade and the challenges arising from higher levels of integration. The Report addresses a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, what benefits does it bring, what challenges does it pose and what role does trade play in this world of ever-growing inter-dependency. TheReport asks why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. It also considers who the winners and losers are from trade and what complementary action is needed from policy-makers to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical gains from trade and empirical evidence that can help to answer these questions.ISBN 978-92-870-3454-0WORLD TRADE REPORT 2008 - Trade in a Globalizing WorldiiiCONTENTSCONTENTSABBREVIATIONS AND SYMBOLS ...............................................................................................................................viiACKNOWLEDGEMENTS .................................................................................................................................................ixDISCLAIMER .........................................................................................................................................................................xFOREWORD BY THE DIRECTOR-GENERAL ..........................................................................................................xiEXECUTIVE SUMMARY ................................................................................................................................................. xiiiI THE TRADE SITUATION IN 2007 ...................................................................................................................... 1A INTRODUCTION ...................................................................................................................................................... 1B REAL MERCHANDISE TRADE AND OUTPUT DEVELOPMENTS IN 2007......................................... 3C NOMINAL TRADE DEVELOPMENTS IN 2007 ............................................................................................... 5II TRADE IN A GLOBALIZING WORLD............................................................................................................. 13A INTRODUCTION .................................................................................................................................................... 13B GLOBALIZATION AND TRADE ........................................................................................................................ 151. Trends in globalization .................................................................................................................................... 152. Main drivers of globalization .......................................................................................................................... 203. Public attitudes to globalization ..................................................................................................................... 21C THE CAUSES OF TRADE ...................................................................................................................................... 271. The traditional approach: gains from specialization ................................................................................... 282. “New” trade theory: gains from economies of scale, product variety and increased competition .......403. Recent developments: productivity gains ...................................................................................................... 534. Dynamic gains ..................................................................................................................................................645. Conclusions ........................................................................................................................................................ 74D TRADE, THE LOCATION OF PRODUCTION AND THE INDUSTRIAL ORGANIZATION OF FIRMS ............................................................................................................................... 811. Falling international trade costs ..................................................................................................................... 812. Geographical concentration ............................................................................................................................883. International fragmentation of production ................................................................................................... 984. Conclusions ...................................................................................................................................................... 118 Technical Appendix ........................................................................................................................................