Transcript GAINS FROM TRADE

Annual growth in volume of
world merchandise exports and GDP
14
12
10
Annual % change
8
6
4
2
0
-2
-4
-6
-8
-10
1955
1960
1965
1970
1975
Exports
GDP
Average export growth
Average GDP growth
1980
1985
Source: based on data in Statistics Database (WTO) and World Economic Outlook (IMF )
Note: 2009 and 2010 forecasts
1990
1995
2000
2005
2010
Share of world merchandise exports, by value (2008)
Other Asia (inc
Australasia)
13.6%
China
9.1%
USA
8.2%
Canada
and Mexico
4.7% Latin
America
3.8%
UK
2.9%
France
3.9%
Japan
5.0%
Netherlands
3.9%
Middle East
6.6%
Germany
9.3%
Africa
3.6%
CIS
4.5%
Other Europe
17.6%
Source: Based on data in WTO Statistics Database
Italy
3.4%
Growth in Chinese export volumes and real GDP (%)
GDP
Exports
Annaul % growth
30
20
10
0
-10
-20
1990
1992
1994
1996
1998
2000
2002
Source: data drawn from World Development Indicators (World Bank) and Outlook 2009 (Asian Development Bank)
2004
2006
2008
2010
World real (inflation adjusted) primary commodity
prices (2000 = 100)
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008
Food
185
196
208
402
220
142
138
140
100
108
236
Agricultural raw materials
218
171
159
152
160
143
137
129
100
112
202
Metals and minerals
146
171
198
192
143
121
128
103
100
125
332
62
60
55
143
286
157
93
69
100
161
266
Oil
Source: data drawn from World Development Indicators 2005 (World Bank); Handbook of Statistics 2008 (UNCTAD)
Growth rates and export performance of selected secondary
outward-looking countries
Average annual growth in
real GDP (%)
1960–90
1991–2009
Share of manufactures in
merchandise exports (%)
1970
2008
Average annual growth
rate of merchandise
exports
1960–90
1991–2008
Brazil
5.5
3.0
13
44
14.1
8.0
Malaysia
6.8
6.2
7
65
13.4
10.0
South Korea
8.4
5.4
77
87
30.4
13.9
Singapore
9.2
6.4
28
70
16.3
7.4
Hong Kong
7.9
4.4
96
94
18.3
8.8
China
8.1
10.2
35
93
13.4
17.9
All developing
countries
4.3
4.9
27
60
13.6
8.7
Sources: data drawn from Handbook of Statistics (UNCTAD) and World Development Indicators (World Bank).
GAINS FROM TRADE
• International specialisation as basis for trade
- economies of mass production can be obtained through
concentration within a limited number of countries
• Law of Absolute Advantage
- e.g. if A can produce food more efficiently than B, and B in turn can
produce cars more efficiently than A, then A should concentrate
on food and B on cars with trade taking place between both countries
• Law of Comparative Advantage
- even if with reference to the previous example one country - say A is more efficient at producing both products, then specialisation
should still take place in terms of relative advantage.
So if A is even more efficient at producing both cars than food then A
should specialise in car production and B in food
- means that every country, however poor, can be involved in
trade
GAINS FROM TRADE (con)
However there are limits to specialisation so for example if Ireland was to
completely specialise in agriculture, people with no talent for farming
would have to be employed in the sector leading to inefficiency
• Other Reasons for Trade
- differences in demand e.g. if the French like Irish lamb then it makes
sense to specialise
- growing competition from imports can increase competitiveness
thus stimulating efficiency
- trade opens up the possibility - as in Ireland - for rapid economic
growth
- there are strong political and cultural benefits from fostering
increased trade (as in EU)
TERMS OF TRADE
• The law of comparative advantage suggests that overall production
will increase through specialisation. However it does not state how
gains should be distributed between nations. This is where terms of
trade are important
It is defined as:
Average price of exports X 100
Average price of imports
So for example if there is a sharp increase in the price of oil, (other things
being equal) the terms of trade would deteriorate for Ireland as the average
price of imports would rise more rapidly than that of exports, as Ireland
imports all its oil
In general terms of trade are poor for the developing nations as the
demand for what they produce e.g. food and raw materials does not rise as
rapidly as industrial goods
CSO Weblink CSO - Statistics: Volume, Price and Terms of Trade Indices
METHODS OF RESTRICTING TRADE
• Tariffs (customs duties)
- tax or levy on imports; has a number of effects on consumer,
producer, government and distribution
• Quotas
- quantitative limitations on imports
• Exchange Controls
- limits on taking foreign currency out of country
• Export Restrictions and Export Taxes
• Export Subsidies and other supports
• Administrative Barriers
• Procurement Policies
The welfare costs of a tariff
Price
SS
The tariff leads both to
transfers and net social
losses.
The government raises
revenue – i.e. there is a
transfer to the government
Pw+ T
Pw
DD
Q s Qs '
and there is a transfer in
the form of extra profits to
producers
Qd' Qd Quantity
There is a social cost from production inefficiency,
given that the good could be imported at Pw.
There is also a loss of consumer surplus.
33.10
An export subsidy
S
Pw+ s
B
G
E
Subsidy
World
price
Price
Pw
A
DD
Qd ' Qd
Qs Q`s' Quantity
Under free trade, with the
world price at Pw,
consumers demand Qd
production is Qs
exports are GE.
With a subsidy, producers
supply Qd' to the domestic
market and produce Qs'.
Exports are now AB.
Social costs arise from
production inefficiency
and consumer surplus.
33.15
ARGUMENTS IN FAVOUR OF RESTRICTING
TRADE
•
The infant industry argument
- industries may need to be protected to enable them to grow
sufficiently to achieve economies of scale
•
To prevent "dumping" and other unfair trade practices
- dumping refers to below cost selling
•
To prevent the establishment of a foreign-based monopoly
•
To reduce reliance on goods with little dynamic potential
•
To spread the risks of fluctuating markets
•
To reduce the influence of trade on consumer tastes
•
To prevent the importation of harmful goods
•
To take account of externalities
ARGUMENTS IN FAVOUR OF RESTRICTING
TRADE (con)
•
The exploitation of monopoly power
•
To protect declining industries
•
Non-economic arguments
- to preserve the production of a wide range of products in case of
war
- refusal to trade with certain countries because of political
disagreements
- to preserve a traditional way of life
- to maintain as diverse a society as possible
PROBLEM WITH PROTECTIONISM
• There may be better ways of helping industry
• World multiplier effects
- as one country's imports represents another country's exports
reducing imports ultimately reduces export opportunities
• Retaliation
- generally when one country imposes restrictions the other
country imposes retaliatory measures
• Protection may encourage inefficiency with respect to production
• Bureaucracy
- protectionism can lead to large administrative costs
TYPES OF TRADING AGREEMENTS
•
Free Trade Area
- where countries remove tariffs and quotas against each other but are free to restrict
imports from non-member countries
•
Customs Union
- a free trade area where countries adopt a common external tariff (and quotas) with
respect to non-members
•
Common Market
- where member countries operate a single market, implying similar taxes, similar
laws and regulations, free movement of labour capital and materials and common
policies in different economic areas
•
Economic and Monetary Union (EMU)
- fixed exchange rates leading to common currency
- common Central Bank
- common macroeconomic policies
•
Economic and Political Union
- common defence policy
- centralised decision-making
DIRECT EFFECTS OF CUSTOMS UNION
•
Trade Creation
- where consumption shifts from high cost to low cost producer
•
Trade Diversion
- where consumption shifts from lower cost to high cost producer
•
Advantages of Customs Union
- increased market size
- external economies of scale
- increased bargaining power of whole customs union
- increased competition between member countries
•
Disadvantages of Customs Union
- loss of sovereignty
- possible diseconomies of scale
- increased bureaucracy
- uneven effects throughout union
•
Examples of Customs Union
- EU, NAFTA, ASEAN etc
THE EUROPEAN UNION
The European Union
•
No. of countries
- formerly 15 members Germany, France, Britain, Ireland, Italy,
Spain, The Netherlands, Belgium, Luxembourg, Portugal, Denmark,
Greece, Sweden, Austria, Finland
•
•
New Member countries
Now increased to 27 members
- joined May 2004; Poland, Hungary, The Czech Republic,
Estonia, Latvia, Cyprus, Malta, Slovakia, Slovenia, Lithuania
- joined 2007; Bulgaria and Romania
- to join Western Balkan states – Croatia and Macedonia
Turkey also wants to join; however opinion is divided among
existing member countries as to whether it should be allowed
to join
FROM CUSTOMS UNION TO COMMON
MARKET
•
Common Agricultural Policy
- artificial high prices set for farm food
•
Regional Policy
- EU regional policy provides grants to firms and local authorities in
depressed regions of the union
•
Competition Policy
- EU controls restrictive policies and monopoly Harmonisation of
Taxation
- this has been carried out with respect to VAT