Transcript Q - waiukucollegesocialsciences

International
Trade
The Gains from Trade

The law of comparative advantage
 specialisation
 absolute
advantage
 comparative
 the
as the basis for trade
advantage
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
Either
4
or
8
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
Either
4
or
8
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
Either
4
or
8
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
Either
4
or
8
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
 trade
competition
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
 to
comparative advantage
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
 world
as ‘second best’
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
 the
in reaching agreement
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
trade
from various groups to unfettered
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
 certain
disadvantages
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
 regional
Agricultural Policy
policy
 competition
 tax
policy
harmonisation
 social
 trade
policy
policy
The European Union

The single market
 historical
 the
background
Single European Act
 completing

the single market
The benefits of the single market
 trade
creation
 reduction
in the direct costs of barriers
 economies
 greater
of scale
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
 effects
Market scoreboard
of expansion of the EU
Trade and Developing Countries

Trade strategies
 primary
outward looking
 secondary
inward looking
 import-substituting
 secondary
 possibly
looking
industrialisation (ISI)
outward looking
complemented by primary inward
Trade and Developing Countries

Approach 1: exporting primaries
 justification
 exploits
a
for exporting primaries
comparative advantage
'vent for surplus'
 an
'engine for growth'
 problems
with traditional trade theory
 comparative
 benefits
 trade
costs change over time
may not flow to nationals
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
 dynamic
of primary exporting
potential in manufacturing
• infant industries
• rapid technological advance
 patterns
of protection
 selecting
 tariff
industries for protection
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 outwardlooking industrialisation
a
neutral trade approach
 active
 benefits
promotion of manufactured exports
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
 possible
of exporting manufactures
retaliation from advanced countries
• but attitudes of WTO
 competition
 vulnerability
from other developing countries
to world fluctuations
• world recessions
• speculation
 trade
between developing countries
 trade
blocs of developing countries