International Trade: Theories and Practice

Per Altenberg19 October 2015

Why don’t we have trade barriers between Uppsala and Gävle?

Do we need trade negotiations?

“The economist’s case for free trade is essentially a unilateral case: a country serves its own interests by pursuing free trade regardless of what other countries may do. Or, as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts” (Paul Krugman, 1997)

The evolution of trade theory

• Trade theory typically attempts to explain why nations trade

• It also often models the effects of going from autarky to free trade:

–in terms of the structure of production and trade

–in terms of groups that gain/lose

• It identifies sources of “gains from trade”

The evolution of trade theory – relaxing assumptions along the way

• Adam Smith (1776): Absolute advantages

• Ricardo (1817): Comparative advantage

• Heckscher-Ohlin (1933): Factor endowments

• Helpman-Krugman (1980): Imperfect competition

• Krugman (1991) New Economic Geography

• Marc Melitz: Firm heterogeneity or “New new trade theory” (2003)

• Richard Baldwin et. al. (2000s): Global Value Chains

• Raúl Prebisch (1950s): Import substitution

Sources of welfare gains from trade

Static gains

• Efficiency gains from specialization: higher wages/return to capital and lower prices (Ricardo, Heckscher-Ohlin)

Dynamic gains

• Increased competition (Helpman & Krugman)

• Economies of scale (Helpman & Krugman)

• Productivity growth through:

–Transfers of knowledge and technology (Grossman & Helpman)

–Selection of productive firms (Melitz)

Good governance gains

• Reduced corruption

• Rise of income Political demand for voice in government

Some arguments against free trade

• Winners and losers: Structural reform can be painful

• Sustainability: Negative externalities. Price does not fully reflect climate/environmental costs

• Income distribution: Cause of rising within country inequality?

• Development: Import substitution strategies?

• Lowering tariffs implies a reduction in government revenue when the tax system is poorly developed

Trends in 21st Century Trade – the Big Four

•Global value chains

•The servicification of trade

•The digitilization of trade

•The growth of emerging economies

21st century trade in one number

• More than 50 percent of the value of a truck or a car exported from Sweden is added outside Sweden

• More than 50 percent of world trade are in intermediate goods used in further production

• More than 50 percent of OECD trade are in services, when measured in value-added terms

• More than 50 percent of world FDI go to developing countries (since 2012)

• More than 50 percent of all trade in services would not take place at all without the support of digital data flows

21st Century Trade: Global Value Chains

• Old image: A firm in one country exports for final consumption in another

• New reality: Production fragmented into global value chains

Global value chains – some trends

• Increased vertical specialization: Import content of exports up by almost 40% since 1995.

• Dip in 2009 but the long-term trend picked up again in 2010 (Los, Timmer and De Vries).

• “Global fragmentation of value chains has progressed much faster than regional fragmentation” (Los, Timmer and De Vries)

Measuring global value chains: The import content of exports by country

Sweden China Germany France India Japan UK USA Russia0

5

10

15

20

25

30

35

40

1995 2008

The fragmentation of supply chains

21st Century Trade: ”Servicification”

• “Servicification” occurs when the manufacturing industry:1. Purchases and uses more services in production

2. Increasingly sells services as a package deal with the product

• Both these developments are evident–Services can constitute up to 80 percent of the value of a

business offer of a manufacturing company in Sweden

–50 percent of all employees in Swedish manufacturing now work in service professions, an increase from 40 percent in 2001

Services share of value-added exports

Source: TiVA/Kommerskollegium

Sandvik Tooling Supply Chain: Services used in production

Case study: Sandvik Tooling

21st Century Trade: ”Digitalization”

• “Digitalization” is the most important trend. Closely related to ICT revolution.

• Gives rise to new types of trade but it also drives servicification and further specialization in international production networks.

• Transforms industries, business models and consumption.

A Trade New World?

1. Broader perspective on trade: Goods, services, data, capital and people all matter

2. Trade is not about conflict but about cooperation

3. Global value chains underline:• need for non-discriminatory economic regulation

• the case for multilateralism

• Increased cost of protectionism when imports matter as much as exports

Why do we have trade negotiations?

• Import-competing interests are more concentrated and better organized

• By introducing negotiations, export interests are mobilized to counterbalance import-competing interests

Trade policy from a Swedish perspective

• Sweden an EU member since 1995

• The EU has a common commercial policy

• The World Trade Organization (WTO)

• Bilateral and regional trade agreements (TTIP and TPP)

• Other important for a: OECD, UNCTAD, G20

World Trade Organization - WTO (1995 -)

Functions:• Administering WTO trade agreements

• Forum for trade negotiations

• Handling trade disputes

• Monitoring trade policies

• Technical assistance and training for developing countries

• Cooperation with other international organizations

Organisation: • Location: Geneva, Switzerland

• Established: 1 January 1995

• Membership: 162 countries

• Secretariat staff: 640

• Director-General: Roberto Azevêdo (Brazil)

WTO – some basic principles

• Reciprocity

• Most favoured nation (MFN) clause (GATT article I).

• National treatment (GATT article III)

• Transparency (GATT article X)

• Elimination of quantitative restrictions (GATT article XI)

• The Enabling Clause: Special and differential treatment of developing countries (GATT article XXXVI)

• General exceptions (GATT article XX)–Protection of public moral

–Protection of human, animal, plant life or health

–Exhaustible natural resources

World Trade Organization - structure

GATSservices

Financial servicesTelecommunications

TourismConstruction

Environmental servicesEducationTransport

Etc.

TRIPSintellectual property

rightsCopyrights

Trade marksPatents

etc.

GATTgoods

Tariffs manufacturesAgriculture

Textile and clothingSubsidies

Sanitary rulesTechnical barriers

AntidumpingRules of origin

etc.

Dispute Settlement

WTOWorld Trade Organisation

More on this topic from the National Board of Trade

• Visit our web site at www.kommers.se

• Reports on global value chains and servicification are available at: www.kommers.se/In-English/Areas-of-Expertise/Global-value-chains/