International Trade

International Trade

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

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

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

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

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)

PW

S world

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 b

S world

+ 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

b

S world

+ 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

b

S world

+ 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

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 ✦ external ✦ better

economies of scale economies of scale

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

looking

complemented by primary inward

Trade and Developing Countries ■

Approach 1: exporting primaries ✜

justification for exporting primaries ✦ exploits ✦a

'vent for surplus'

✦ an

✜

comparative advantage

'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)

World primary commodity prices (1990 = 100)

World primary commodity prices (1990 = 100)

World primary commodity prices (1990 = 100)

Average annual changes in prices of various products

Average annual changes in prices of various products

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

✜

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

Growth rates and export performance of selected secondary outward-looking countries

Growth rates and export performance of selected secondary outward-looking countries

Growth rates and export performance of selected secondary outward-looking countries

Growth rates and export performance of selected secondary outward-looking countries

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