Transcript Document

International
Trade
International trade is the exchange of
capital, goods, and services across
international borders or territories.[1]
In most countries, such trade represents a
significant share of gross domestic product
(GDP).
1. dictionary.reference.com
While international trade has been
present throughout much of history
(see Silk Road, Amber Road), its
economic, social, and political
importance has been on the rise in
recent centuries.
International trade is also a
branch of economics, which,
together with international finance,
forms the larger branch of
international economics.
International trade is, in principle,
not different from domestic trade as the
motivation and the behavior of parties
involved in a trade do not change
fundamentally regardless of whether
trade is across a border or not.
The main difference is that
international trade is typically more costly
than domestic trade.
The reason is that a border typically
imposes additional costs such as tariffs,
time costs due to border delays and costs
associated with country differences such as
language, the legal system or culture.
Another difference between
domestic and international trade is
that factors of production such as
capital and labor are typically more
mobile within a country than across
countries.
Thus international trade is mostly
restricted to trade in goods and services,
and only to a lesser extent to trade in
capital, labor or other factors of
production.
Trade in goods and services can serve
as a substitute for trade in factors of
production.
New Trade Theory
New Trade Theory tries to explain
empirical elements of trade that
comparative advantage-based models
above have difficulty with.
These include the fact that most
trade is between countries with
similar factor endowment and
productivity levels, and the large
amount of multinational production
(i.e., foreign direct investment) that
exists.
New Trade theories are often based on
assumptions such as monopolistic competition
and increasing returns to scale.
One result of these theories is the homemarket effect, which asserts that, if an industry
tends to cluster in one location because of
returns to scale and if that industry faces high
transportation costs, the industry will be
located in the country with most of its demand,
in order to minimize cost.
The Gains from Trade
• The law of comparative advantage
• specialisation as the basis for trade
• absolute advantage
• comparative advantage
• the gains from trade based on comparative advantage
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country Either
2
or
1
Developed country
4
or
8
Either
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country Either
2
or
1
Developed country
4
or
8
Either
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country Either
2
or
1
Developed country
4
or
8
Either
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
Production possibilities for two countries
Kilos of
wheat
Metres of
cloth
Less developed country Either
2
or
1
Developed country
4
or
8
Either
Pre-trade exchange ratios
Less developed country:
Developed country:
2 wheat for 1 cloth
1 wheat for 2 cloth
International trade exchange ratios
(LDC exports wheat: DC exports cloth)
Less developed country:
Developed country:
1 wheat for 1 cloth
1 wheat for 1 cloth
The Gains from Trade
• The limits to specialisation and trade
• The terms of trade
• PX/PM
• Other reasons for gains from trade
• decreasing costs
• differences in demand
• increased competition
• trade as an ‘engine of growth’
• non-economic advantages
Arguments for Restricting Trade
• Methods of restricting trade
• tariffs
• quotas
• administrative barriers
• other
• Arguments for restricting trade
• infant industry argument
• changing comparative advantage
• to prevent dumping
Arguments for Restricting Trade
• Arguments for restricting trade (cont.)
• to prevent establishment of a foreign-based monopoly
• to spread risks
• externalities
• pursuing national interests (but against world interests)
• exploiting monopoly power
• protecting declining industries
• non-economic arguments
Arguments for Restricting Trade
• Problems with protection
• protection as ‘second best’
• world multiplier effects
• retaliation
• cushions inefficiency
• bureaucracy
• Measuring the efficiency loss from protection
The cost of protection
P
Sdom (=MC)
S world
PW
Ddom
O
Q1
Q2
Q
The cost of protection
P
Sdom (=MC)
Area edbc equals loss
of consumer surplus
a
PW + t e
Tariff c
PW
d
S world
b
+ tariff
S world
Ddom
O
Q1
Q3
Q4
Q2
Q
The cost of protection
P
Sdom (=MC)
Area 1 equals gain in
producer surplus
a
Area 3 equals gain
in tariff revenue
PW + t e
Tariff c
PW
d
1
2
3
4
S world
b
+ tariff
S world
Ddom
O
Q1
Q3
Q4
Q2
Q
The cost of protection
P
a
PW + t e
Tariff c
PW
Sdom (=MC)
Areas 2 + 4
equals
net loss
d
1
2
3
4
S world
b
+ tariff
S world
Ddom
O
Q1
Q3
Q4
Q2
Q
World Attitudes towards Trade and Protection
• History of protection
• Pre-war growth in protection
• Post-war reduction in protection and the role of GATT
• the growth in world trade
Real growth rate (%)
Growth in world real GDP and world merchandise exports
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
1960
1965
1970
1975
1980
1985 1990 1995 2000 2005
Source: Trade Statistics, WTO (www.wto.org)
Real growth rate (%)
Growth in world real GDP and world merchandise exports
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
1960
Growth in real GDP
1965
1970
1975
1980
1985 1990 1995 2000 2005
Source: Trade Statistics, WTO (www.wto.org)
Real growth rate (%)
Growth in world real GDP and world merchandise exports
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
1960
Growth in
merchandise exports
Growth in real GDP
1965
1970
1975
1980
1985 1990 1995 2000 2005
Source: Trade Statistics, WTO (www.wto.org)
World Attitudes towards Trade and Protection
• Re-emergence of protectionism in 1980s
• the increasing use of non-tariff barriers
• The Uruguay Round
• aims of the negotiations
• problems in reaching agreement
• the agreement
• assessing the agreement
World Attitudes towards Trade and Protection
• The World Trade Organisation
• WTO more powerful than GATT
• WTO rules
•
•
•
•
•
non-discrimination
reciprocity
general prohibition of quotas
fair competition
binding tariffs
• attitudes of the WTO
• WTO activity in recent years
• resistance from various groups to unfettered trade
Trading Blocs
• Types of preferential trading arrangement
• free trade areas
• customs unions
• common markets
• features of a full common market
• Direct effects of a customs union
• trade creation
• trade diversion
Trading Blocs
• Long-term effects of a customs union
• longer-term advantages
• internal economies of scale
• external economies of scale
• better terms of trade
• increased competition between members
• longer-term disadvantages
• certain regions of the union may suffer
• possibility of oligopolistic collusion
• administrative costs
Preferential Trading in Practice
• Preferential trading in practice
• the EU
• the EEA
• NAFTA
• the advent of NAFTA
• experience to date
• proposals to extent to an all Americas free trade area
• the Asia-Pacific Economic Co-operation forum (APEC)
• other free trade areas / customs unions
The European Union
• Historical background
• The economic nature of the EU
• Development of common EU policies
• Common Agricultural Policy
• regional policy
• competition policy
• tax harmonisation
• social policy
• trade policy
The European Union
• The single market
• historical background
• the Single European Act
• completing the single market
• The benefits of the single market
• trade creation
• reduction in the direct costs of barriers
• economies of scale
• greater competition
The European Union
• Criticisms of the single market
•
•
•
•
•
radical economic change is costly
adverse regional effects
development of monopoly / oligopoly power
trade diversion
political objections: loss of sovereignty
• Developments of the single market
• evidence of economic benefits
• eliminating remaining barriers
• Internal Market scoreboard
• effects of expansion of the EU
Trade and Developing Countries
• Trade strategies
• primary outward looking
• secondary inward looking
• import-substituting industrialisation (ISI)
• secondary outward looking
• possibly complemented by primary inward looking
Trade and Developing Countries
• Approach 1: exporting primaries
• justification for exporting primaries
• exploits comparative advantage
• a 'vent for surplus'
• an 'engine for growth'
• problems with traditional trade theory
• comparative costs change over time
• benefits may not flow to nationals
• trade my lead to greater inequality
• externalities from mines and plantations
Trade and Developing Countries
• Exporting primaries (cont.)
• long-term problems for primary exporting countries
• low income elasticity of demand
• protection in advanced countries
• technological developments
• synthetic substitutes
• miniaturisation
• rapid growth in imports
• adverse movements in terms of trade
World primary commodity prices (1990 = 100)
1960
1970
1980
1990
2000
Agricultural commodities
208
182
192
100
87
Metals and minerals
137
161
131
100
82
All non-fuel commodities
187
175
174
100
86
34
21
224
100
122
Oil
World primary commodity prices (1990 = 100)
1960
1970
1980
1990
2000
Agricultural commodities
208
182
192
100
87
Metals and minerals
137
161
131
100
82
All non-fuel commodities
187
175
174
100
86
34
21
224
100
122
Oil
World primary commodity prices (1990 = 100)
1960
1970
1980
1990
2000
Agricultural commodities
208
182
192
100
87
Metals and minerals
137
161
131
100
82
All non-fuel commodities
187
175
174
100
86
34
21
224
100
122
Oil
World primary commodity prices (1990 = 100)
1960
1970
1980
1990
2000
Agricultural commodities
208
182
192
100
87
Metals and minerals
137
161
131
100
82
All non-fuel commodities
187
175
174
100
86
34
21
224
100
122
Oil
Average annual changes in
prices of various products
1985–94
1995–2004
1.2
–1.4
Non-oil primary product exports
of heavily indebted poor countries
–0.4
–1.6
Oil prices
–5.7
4.6
5.0
–0.1
Non-oil primary product exports
of developing countries
Manufactured exports
of advanced economies
Average annual changes in
prices of various products
1985–94
1995–2004
1.2
–1.4
Non-oil primary product exports
of heavily indebted poor countries
–0.4
–1.6
Oil prices
–5.7
4.6
5.0
–0.1
Non-oil primary product exports
of developing countries
Manufactured exports
of advanced economies
Trade and Developing Countries
• Approach 2: ISI
• justifications
• problems of primary exporting
• dynamic potential in manufacturing
• infant industries
• rapid technological advance
• patterns of protection
• selecting industries for protection
• tariff and quota escalation
• attracting multinational investment
Trade and Developing Countries
• Approach 2: ISI (cont.)
• adverse effects of ISI
• often counter to comparative advantage
• tends to cushion inefficiency
• encourages establishment of monopolies
• artificially low interest rates
• use of capital-intensive techniques
•
•
•
•
•
encourages rural–urban migration
adverse effects on rural sector
leads to greater inequality
environmental problems
limit to home market
Trade and Developing Countries
• Approach 3: exporting manufactures
• transition from inward-looking to outward-looking industrialisation
• a neutral trade approach
• active promotion of manufactured exports
• benefits from exporting manufactures
• conforms more closely with comparative advantage
• increased competition
• increased investment
• more employment and greater equality
Growth rates and export performance of
selected secondary outward-looking countries
Average
annual growth
in real GDP
(%)
Share of
manufactures in
merchandise
exports (%)
Annual average
growth rate of
exports
(%)
1965–2001
1970
2001
1965–2001
Brazil
4.4
15
53
8.4
Malaysia
6.9
8
80
9.6
South Korea
8.0
76
90
15.3
Singapore
8.1
31
84
9.4
Hong Kong
7.2
96
95
11.5
All developing
countries
4.1
27
65
5.7
Growth rates and export performance of
selected secondary outward-looking countries
Average
annual growth
in real GDP
(%)
Share of
manufactures in
merchandise
exports (%)
Annual average
growth rate of
exports
(%)
1965–2001
1970
2001
1965–2001
Brazil
4.4
15
53
8.4
Malaysia
6.9
8
80
9.6
South Korea
8.0
76
90
15.3
Singapore
8.1
31
84
9.4
Hong Kong
7.2
96
95
11.5
All developing
countries
4.1
27
65
5.7
Growth rates and export performance of
selected secondary outward-looking countries
Average
annual growth
in real GDP
(%)
Share of
manufactures in
merchandise
exports (%)
Annual average
growth rate of
exports
(%)
1965–2001
1970
2001
1965–2001
Brazil
4.4
15
53
8.4
Malaysia
6.9
8
80
9.6
South Korea
8.0
76
90
15.3
Singapore
8.1
31
84
9.4
Hong Kong
7.2
96
95
11.5
All developing
countries
4.1
27
65
5.7
Growth rates and export performance of
selected secondary outward-looking countries
Average
annual growth
in real GDP
(%)
Share of
manufactures in
merchandise
exports (%)
Annual average
growth rate of
exports
(%)
1965–2001
1970
2001
1965–2001
Brazil
4.4
15
53
8.4
Malaysia
6.9
8
80
9.6
South Korea
8.0
76
90
15.3
Singapore
8.1
31
84
9.4
Hong Kong
7.2
96
95
11.5
All developing
countries
4.1
27
65
5.7
Growth rates and export performance of
selected secondary outward-looking countries
Average
annual growth
in real GDP
(%)
Share of
manufactures in
merchandise
exports (%)
Annual average
growth rate of
exports
(%)
1965–2001
1970
2001
1965–2001
Brazil
4.4
15
53
8.4
Malaysia
6.9
8
80
9.6
South Korea
8.0
76
90
15.3
Singapore
8.1
31
84
9.4
Hong Kong
7.2
96
95
11.5
All developing
countries
4.1
27
65
5.7
Trade and Developing Countries
• Approach 3: exporting manufactures (cont.)
• drawbacks of exporting manufactures
• possible retaliation from advanced countries
• but attitudes of WTO
• competition from other developing countries
• vulnerability to world fluctuations
• world recessions
• speculation
• trade between developing countries
• trade blocs of developing countries