Transcript Lecture 3

Chapter 3
The World of International Trade
Ancient Silk Road trade routes across Eurasia
Outline
 International Trade
 Environment (Agreements and Organizations)
• A Framework for Trade Analysis
 The SETP System
 Market Identification
 Impediments to Trade
 Trade Intermediaries
• Comparative and Competitive
Advantage
• New Theories of International Trade
• Real Exchange Rates
International Trade
 The impetus for the existence and expansion of
international trade is the same as that for any
commercial transaction: value creation. International
trade creates value for both producers and
consumers
increases demand for
exportable products
International
Trade
increases the supply
for importable products
increases the efficiency
of resource allocation
worldwide
raising prices and volumes
reducing prices and increasing
availability and variety for
consumers
reduces production costs
Economies and lowers input costs
of Scale
International Trade
 International trade leads to increased exposure for
both firms and countries to the forces in the
international economy, and disruption and
restructing.
Increased openness to
the international
economic environment
Less expensive or
higher-quality
imported products
Changes in prices and
demand in export markets
Changes in prices and
supply in imported products
Changes in exchange rates
Increased competition
for domestic firms
increase the risks of a
firm’s operations
reduce the stability of
a country’s economy
Disruption and restructing
International Trade
 International trade is inextricably linked with FDI,
international technology transfer and
international finance.
FDI: change trade flows and patterns
International
Trade
International financial flows: foreign exchange
availability and exchange rate movements impact on
trade
International technology transfer (capital goods):
leads to trade in materials and semi-finished and
financial products
International Trade Environment
 In the 1970, international trade was one of the major
driving forces behind world economic expansion.
 The expansion in 1970-1980 was fostered by:
falling tariff and nontariff barriers to trade in most countries;
decreased transportation and communication costs;
the export-oriented growth strategies of many countries.
 During the global recession in the early 1980s, world
trade declined in real terms by a greater amount than
did world GDP.
International Trade Environment
 Major political leaders may have significant
implications for the the world trade
environement. The Uruguay round of GATT
negotiations resulted in the establishment of
the WTO and some of the most basic changes
to the GATT since it was implemented in 1947.
 The gains from the negotiation and
implementation of trading agreements such as
GATT, NAFTA, and FTAA(Free Trade Area of the Americas)
can be great, resulting in some reductions in
protection in manufacturing sector.
Group 20 (G20)
 The Group of Twenty (G20) is the premier forum for international
cooperation on the most important issues of the global economic and
financial agenda.
 It brings together finance ministers and central bank governors from 19
countries: Argentina, Australia, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi
Arabia, South Africa, Turkey, the United Kingdom, the United States of
America plus the European Union
 The 2013 G20 Leaders' Summit was held in St. Petersburg on September 56, 2013, which was the main G20 event of 2013.
Asia-Pacific Economic Cooperation (APEC)
The APEC CEO Summit is the premier business event in the Asia-Pacific. In
2013, Indonesia, the Summit’s theme is ‘Towards Resilience and Growth:
Reshaping Priorities for Global Economy’ , which will provide enriching
discussion by policy makers, business leaders and innovative thinkers on
securing inclusive sustainable growth and achieving the aim of shared
development and common prosperity for all.
Largest countries by total international trade
(In 2012)
Growth in volume of world merchandise trade
and GDP, 2005-13 (Annual % change)
Volume of world merchandise exports, 1990-2013a
Indices, 1990=100
Merchandise exports and imports by region, 2011
Top traded commodities (exports) in 2012
Source: World Economic Outlook (WEO) data, IMF
Exports and imports of commercial services
by region, 2011
A Framework for Trade Analysis
1. The Social, Technological, Economic and
Political (STEP) system, and its effects on
comparative and competitive advantage
2. Market Identification: Countries abroad as
markets for exports and sources of imports
3. Impediments to Trade: Tariff and nontariff
barriers to trade and government incentives
to promote trade.
4. Trade Intermediaries: Linking producers
and buyers through trade intermediaries
1.The STEP system
 Each firm operates within the social, technological, economic,
and political (STEP) environment of the country in which it
produces.
 The STEP environment has a strong influence on the firm:
cost, quality, range of products, domestic demand, technology, efficiency,
cost and availability of natural resources and factor inputs.
comparative advantage of the products
STEP environment
competitive advantage of the firm in
the national market and abroad
Comparative and Competitive Advantage
 As with any form of voluntary exchange between
independent, value-maximizing agents, international
trade takes place when value is created for the
participants in the transaction above the value they
can receive through alternative uses of their
resources.
 The goal of international trade operations is to
increase the value of the firm; exports for exports’
sake (except in the short run to gain market share)
are not the goal.
 How and why is value created when some products
are exported and others imported?
Absolute Advantage
Output
Output/Hour
X
Y
X
Y
Country A
16
4
2
1
Labour
Hours
12
Country B
4
4
1
2
6
Total Output (no trade)
20
8
Total Output (trade)
24
12
Comparative Advantage
Output
Country A
Country B
Total Output
(no trade)
Total Output (trade)
Output/Hour
X
Y
X
Y
12
7
19
4
7
11
4
1
2
1
20
14
Labor Py/
Hours Px
5
14
2
1
2. Market Identification
If a firm has comparative and competitive advantages,
the next step is to identify markets aboard:
 Market Identification entails analysis of trends in demand
arising from changes in population, income levels, and
consumer preferences in potential export markets.
 If there is a demand for the firm's products in a market, the
supply capabilities of domestic firms and other exporters
worldwide to meet this demand at lower prices or higher
quality must be assessed.
3. Impediments to Trade
The third block of analysis: impediments to trade:
• Government policies to restrict and to promote trade
can have a decisive influence on:
Trade flows
The competitive position of firms in export markets
The availability and price of imports
The ability of firms to compete with imports
• Governments can also facilitate exports directly by:
Concessional export financing
Export subsidies
Differential taxation of export earnings
Financing for export market development
4. Trade Intermediaries
If the last three factors are settled:
 Trade Intermediaries analyze the linkages of producers on
one country to buyers in the export market.
The product must be:
Transported from the factory to the point of shipment (port or airport)
Transported to export market
Be received in the export market
Clear customs
Move through distribution channels to the point of sale
Sold to the customer
Be serviced after sale
 International channels of distribution are often long,
multilayered, complex, difficult to analyze and understand,
and expensive to access or to develop. Channel costs may
represent three times the production cost of a product.
Conclusions of Theories of International Trade
Trade enhances the welfare of both countries,
but the distribution of these gains among
participants within each country and among
the countries is not uniform.
Conclusions of Theories of International Trade
1. Trade improves the relative welfare of the factors of production
that are used intensively in the exported product.
2. If labor and capital are immobile among sectors, then the
returns to the factors of production (labor and capital) in the
exporting industry will improve relative to those in the
importing sector.
3. The welfare of consumers of the export products will decline
relative to consumers of imported products.
4. Countries will tend to export products that use their relatively
inexpensive and abundant factors of production intensively.
5. Trade brings about an equalization of the returns to factors of
production; that is, trade tends to equalize capital costs and
wage rates among countries over time.
Examples to show the change of
comparative advantage
◆Singapore's rapid economic development over the
past 20 years has led to a substantial rise in real
wages relative to those in most other countries. In
response to this change in Singapore's comparative
advantage in labor-intensive products, firms in the
export-oriented, labor-intensive garment industry
became less competitive on world markets. So
some firms have changed their comparative
advantage in the production of low-cost, low-quality,
standardized garments to a comparative advantage
in high-quality designer garments (based on
Singapore's relatively low-wage skilled workers).
Outsourcing in China
◆Situation: China is slowly emerging as the world's No 1
outsourcing hub, China's current outsourcing market is growing
at an estimated 30% every year, and many countries have
relocated their headquarters to China to establish businesses.
The market for outsourcing activities in China is expected to
reach $44 billion (36 billion euros) by 2014
◆New challenges: The general economic growth along with the
surge in demand for local talent means that Chinese labor
costs are also increasing and the comparative cost advantage
is threatened by competitors in the Asian region. Another threat
for the outsourcing industry stems from the technological
development of fully automated production facilities that are
prompting companies to move back sourcing activities to
Europe and the United States.
◆Solutions:
First, Chinese suppliers of outsourcing in manufacturing as well
as in services need to move beyond price as the dominant
attraction for foreign trade. The Chinese industry is increasingly
embracing the open innovation paradigm of the so-called
knowledge economy, where R&D is of the essence.
Second, suppliers of outsourcing can help their customers in
other ways: as identifiers and developers of possibilities in the
fast-growing Chinese market.
Finally, leading Chinese suppliers of outsourcing services may
consider following their customers out to other emerging
economies in Vietnam, Malaysia or Thailand in their search for
new sourcing opportunities and providing outsourcing services.
New Theories of International Trade:
▲Agglomeration of Interconnected Companies
Exchange of ideas among personnel
Building of support infrastructure
☆Some examples of industry Agglomeration in
some countries:
Food additives and furniture in Denmark;
Cutlery and printing presses in Germany;
Ceramic tiles, footwear, and wool fabrics in Italy;
Air-conditioning machinery, musical instruments, and
forklift trucks in Japan;
Pianos, travel goods and wig in Korea;
Ship repair in Singapore.
 Among firms and supporting infrastructure in clusters,
there are substantial economies of scale, positive
spillover effects(extranalities), and interlinkages that
promote both competition and cooperation.
 Agglomeration affect competition in three broad ways:
by increasing the productivity of companies in the area;
by driving the direction and pace of innovation;
by stimulating the formation of new businesses, which expands and
strengthens the cluster itself.
 "First-mover advantage" and the presence of
industry agglomeration can be overcomed by new
entrants with sufficient resources to bear the initial
losses entry entails.
Samsung launches construction
of $7b Xi'an high-tech factory
☆Construction of the first phase of Samsung's NAND flash plant
in Xi'an, Shaanxi province, involving a total investment of $7
billion, kicked off on Sep 13, 2012.
☆The South Korean company's plant, the biggest ever overseas
investment in western China, is located in Xi'an Hi-tech
Industrial Development Zone, will produce nanometer chips,
mainly used in smartphones and tablet PCs.
☆"The construction of the Samsung plant will greatly enhance
the international influence and competitiveness of Shaanxi's
information industry and lay a solid foundation to build a worldleading information industry cluster in the province."
☆Xi'an has more than 2,600 enterprises engaged in the IT
industry and a number of world-famous IT enterprises, such as
Applied Materials, Qualcomm, GE, Erisson, Micon, Walsin,
Simmtech Electronics, NEC, ZTE and Huawei, have already
entered the city's high-tech zone.
The Benefits of Trade
▲The overwhelming conclusion of all the theories of international
trade is that trade creates value for all the participants.
▲In theory, governments can increase national walfare by
protecting firms from trade competition while they are still
struggling to gain sacle efficiency, undertake R&D, differentiate
their products, and promote exports.
▲Management and goverments have focused their attentin on
the "hot" industries on the cutting edge of technology when
they have tried to identify the "winners of tomorrow" in export
markets.
Real Exchange Rate
▲Trade flows are also influenced by:
Real Exchange Rates
Demand conditions over the business cycle
 An increase in a country's real exchange rate has many of the
same effects as a reduction in its tariff rate.
reduces export
increases import
 Real exchanges rates may change due to:
A gap between investment demand and domestic savings.
Short-term government macroeconomic policy.
Change in a country's terms of trade.
Discovery of valuable natural resources.
Asian Real Exchange Rate against the US
Demand
 Demand conditions over the business cycles in the
domestic market and in export markets, and source
countries for imports influence international trade.
 If the domestic economy is expanding relative to the
economies of other countries, exporters will tend to
divert production to the domestic market.
 If the domestic demand is slack, producers will tend
to try to push excess production onto export markets.