Trade

International Trade

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

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

Pre-trade exchange ratiosPre-trade exchange ratios

Less developed country: 2 wheat for 1 clothDeveloped country: 1 wheat for 2 cloth

International trade exchange ratiosInternational trade exchange ratios


(LDC exports wheat: DC exports cloth)



















The Gains from TradeThe 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

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 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

Measuring the efficiency loss from protection

Problems with protection

protection as ‘second best’

world multiplier effects

retaliation

cushions inefficiency

bureaucracy

Measuring the efficiency loss from protection

The cost of protectionThe cost of protection

O

P

Q

Sdom (=MC)

Q1 Q2

S worldPW

Ddom

O

P

Q

Sdom (=MC)

S world + tariff

S world

a

de

c b

Q1 Q2Q3 Q4

TariffPW + t

PW

Ddom

Area edbc equals lossof consumer surplus


O

P

Q

Sdom (=MC)

S world + tariff

S world

a

de

c b1 2 3 4

Q1 Q2Q3 Q4

TariffPW + t

PW

Ddom

Area 3 equals gainin tariff revenue

Area 1 equals gain inproducer surplus


O

P

Q

Sdom (=MC)

S world + tariff

S world

a

de

c b1 2 3 4

Q1 Q2Q3 Q4

TariffPW + t

PW

Ddom

Areas 2 + 4equals

net loss


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

World Attitudes towards Trade and ProtectionWorld Attitudes towards Trade and Protection

-3-2-10123456789

10111213

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Rea

l gro

wth

rat

e (%

)Growth in world real GDP and world merchandise exportsGrowth in world real GDP and world merchandise exports

Source: Trade Statistics, WTO (www.wto.org)

Growth in world real GDP and world merchandise exportsGrowth in world real GDP and world merchandise exports

Growth in real GDP


-3-2-10123456789

10111213

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Rea

l gro

wth

rat

e (%

)

Growth in world real GDP and world merchandise exportsGrowth in world real GDP and world merchandise exports

Growth in real GDP

Growth in merchandise exports


-3-2-10123456789

10111213

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Rea

l gro

wth

rat

e (%

)

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

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


The World Trade Organisation WTO more powerful than GATT WTO rules

non-discrimination reciprocitygeneral prohibition of quotas fair competitionbinding tariffs

attitudes of the WTO WTO activity in recent years

resistance from various groups to unfettered trade

The World Trade Organisation WTO more powerful than GATT WTO rules

non-discrimination reciprocitygeneral prohibition of quotas fair competitionbinding tariffs

attitudes of the WTO WTO activity in recent years

resistance from various groups to unfettered trade


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

Trading BlocsTrading 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 disadvantagescertain 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 disadvantagescertain regions of the union may suffer

possibility of oligopolistic collusion

administrative costs

Preferential Trading in PracticePreferential Trading in Practice

Preferential trading in practice the EU the EEA NAFTA

the advent of NAFTAexperience to dateproposals to extent to an all Americas free

trade area the Asia-Pacific Economic Co-operation

forum (APEC) other free trade areas / customs unions

Preferential trading in practice the EU the EEA NAFTA

the advent of NAFTAexperience to dateproposals 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 UnionThe 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

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 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 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


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

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 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 theorycomparative 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 theorycomparative 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

World primary commodity prices (1990 = 100)World primary commodity prices (1990 = 100)




Average annual changes inprices of various productsAverage annual changes inprices of various products

Average annual changes inprices of various productsAverage annual changes inprices of various products


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 migrationadverse effects on rural sector leads to greater inequalityenvironmental 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 migrationadverse effects on rural sector leads to greater inequalityenvironmental problems limit to home market


Approach 3: exporting manufactures transition from inward-looking to outward-

looking industrialisationa neutral trade approachactive promotion of manufactured exports

benefits from exporting manufacturesconforms more closely with comparative

advantage increased competition increased investmentmore employment and greater equality

Approach 3: exporting manufactures transition from inward-looking to outward-

looking industrialisationa neutral trade approachactive promotion of manufactured exports

benefits from exporting manufacturesconforms more closely with comparative

advantage increased competition increased investmentmore employment and greater equality

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

Education

Trade