11. International Trade. The Gains from Trade The law of comparative advantage –specialisation as the basis for trade –absolute advantage –comparative

11. International Trade

The Gains from TradeThe 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 countriesProduction possibilities for two countries







• The limits to specialisation and trade














• The terms of trade
















–PX/PM








–PX/PM


• Other reasons for gains from trade

–decreasing costs

–differences in demand

– increased competition

– trade as an ‘engine of growth’

–non-economic advantages

• 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 TradeArguments 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

• 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 (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 (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


• Problems with protection

–protection as ‘second best’

–world multiplier effects

– retaliation

– cushions inefficiency

–bureaucracy

• Problems with protection

–protection as ‘second best’

–world multiplier effects

– retaliation

– cushions inefficiency

–bureaucracy

World Attitudes towardsTrade 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

• History of protection

–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT

• the growth in world trade

Growth in real GDP and in real exports of goodsand services: total OECD countries


Growth in GDP


Growth in GDP


Growth in exports of goods and services

Growth in GDP


Growth in exports of goods and services

Growth in GDP



• History of protection–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT• the growth in world trade

–Re-emergence of protectionism in the 1980s



–Re-emergence of protectionism in the 1980s





–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers









–The Uruguay Round




–The Uruguay Round






–The Uruguay Round• aims of the Uruguay round negotiations




–The Uruguay Round• aims of the Uruguay round negotiations



• The Uruguay Round settlement and the creation of the WTO

–problems in reaching agreement

– the agreement

– the work of the WTO

• dispute settlement

• conflicting interests in trade disputes

– efficiency in trade versus environmental and social interests

– international protests

• The Uruguay Round settlement and the creation of the WTO

–problems in reaching agreement

– the agreement

– the work of the WTO

• dispute settlement

• conflicting interests in trade disputes

– efficiency in trade versus environmental and social interests

– international protests

Trading BlocsTrading 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

• 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


• 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

• 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

– the EU

–NAFTA

• differences between the EU and NAFTA

–other examples

• Preferential trading in practice

– the EU

–NAFTA

• differences between the EU and NAFTA

–other examples

The European UnionThe European Union

• Historical background

• From customs union to common market

–Common Agricultural Policy

– regional policy

– competition policy

– tax harmonisation

– social policy

• Historical background

• From customs union to common market

–Common Agricultural Policy

– regional policy

– competition policy

– tax harmonisation

– social policy


• The single market

–historical background

– the Single European Act

– completing the single market

–benefits of the single market

• trade creation

• reduction in the direct costs of barriers

• economies of scale

• greater competition

• The single market

–historical background

– the Single European Act

– completing the single market

–benefits of the single market

• trade creation

• reduction in the direct costs of barriers

• economies of scale

• greater competition


• The single market (cont.)

– criticisms of the single market

• radical economic change is costly

• adverse regional multiplier effects

• development of monopoly/oligopoly power

• trade diversion

– evidence

– the future of the EU

• effect of new members

• The single market (cont.)

– criticisms of the single market

• radical economic change is costly

• adverse regional multiplier effects

• development of monopoly/oligopoly power

• trade diversion

– evidence

– the future of the EU

• effect of new members

Trade and Developing CountriesTrade 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 strategies

–primary outward looking

– secondary inward looking

• import-substituting industrialisation (ISI)

– secondary outward looking

• possibly complemented by primary inward looking


• 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

• 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


• 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

• 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


• 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

• 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


• 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

• 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


• 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 with comparative advantage

• increased competition

• increased investment

• more employment and greater equality

• faster growth

• 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 with comparative advantage

• increased competition

• increased investment

• more employment and greater equality

• faster growth

Growth rates and export performance ofselected secondary outward-looking countries

Growth rates and export performance ofselected secondary outward-looking 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

• 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

Documents

11. International Trade. The Gains from Trade The law of comparative advantage –specialisation as the basis for trade –absolute advantage –comparative