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: 2 wheat for 1 cloth Developed country: 1 wheat for 2 cloth International trade exchange ratios (LDC exports wheat: DC exports cloth) Less developed country: 1 wheat for 1 cloth Developed country: 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

Sdom(=MC) S world PW Ddom Q2 Q1 The cost of protection P O Q

e d Tariff c b Q4 Q3 The cost of protection P Sdom(=MC) Area edbc equals loss of consumer surplus a PW + t S world+ tariff S world PW Ddom O Q2 Q1 Q

e d Tariff 1 3 4 c b 2 The cost of protection P Sdom(=MC) Area 1 equals gain in producer surplus a Area 3 equals gain in tariff revenue PW + t S world+ tariff S world PW Ddom O Q4 Q2 Q3 Q1 Q

e d Tariff c b The cost of protection P Sdom(=MC) Areas 2 + 4 equals net loss a PW + t S world+ tariff 1 3 4 2 S world PW Ddom O Q4 Q2 Q3 Q1 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

Growth in world real GDP and world merchandise exports Source: Trade Statistics, WTO (www.wto.org)

Growth in world real GDP and world merchandise exports Growth in real GDP Source: Trade Statistics, WTO (www.wto.org)

Growth in world real GDP and world merchandise exports Growth in merchandise exports Growth in real GDP 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 from various groups to unfettered trade

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 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 complemented by primary inward looking

Trade and Developing Countries • 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

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)

Average annual changes inprices of various products

Trade and Developing Countries • 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

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 outward-looking 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 ofselected 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

International Trade