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World of International Trade

World of International Trade Prehistoric times:Archaeological evidence of trade between communities 100’s and even 1000’s of kms. apart - value creation - salt, tin -beauty - sea shells, amber, gems, porcelain Historic times: Roman Empire traded from China to England

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World of International Trade

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  1. World of International Trade Prehistoric times:Archaeological evidence of trade between communities 100’s and even 1000’s of kms. apart - value creation - salt, tin -beauty - sea shells, amber, gems, porcelain Historic times: Roman Empire traded from China to England Mediaeval Arabs dominated Silk route, spice islands, Africa (East coast and Sahara) Rome conquered England to secure grain for the Roman mob - policy of bread and circuses…..and perhaps the desertification of Libya was already underway International Trade is good for producers : increases demand increases prices International trade is good for consumers: increases supply, decreases price

  2. Where my shirts have been made: Poland U.S.A. England Canada Italy Thailand Zimbabwe Korea Ghana India Vietnam Hong Kong Mauritius Bahrain

  3. Going International has its downside 1. Increases risk - changes in both of supply and demand - changes in exchange rates - increased variability of sales and profits 2.Macroeconomic effects: - Destruction (restructuring) of domestic industry by imports - effect on employment - effect on communities 3. Producers diversify away from dependence on local markets and become dependent on a (relatively) few and specialized export/supplier markets

  4. Two fundamental issues 1. Economic Theory vs. Practice - Economic Theory says free trade is a good thing But it costs jobs, industries, disruption, so societies react with various kinds and degrees of protectionism 2. History - The Great Depression must never be allowed to happen again - collapse of international trade - collapse of international foreign exchange markets At the end of WW II the UN was founded (wars must not be allowed to happen again) and three parallel economic institutions established - IMF - lender of last resort to keep foreign exchange markets liquid - IBRD (World Bank) - finance development - eliminate poverty - GATT - liberalize trade

  5. Success of all three has been at best partial IMF - an institution to save the western banks from the consequences of bad lending? IBRD - Forced poorer countries into a kind of debt trap? - Economic development has been partial at best GATT - slow, partial, series of bilateral agreements -Uruguay round and founding of WTO was an attempt to make a frontal attack on ALL trade But more limited endeavours of a regional nature seem to have had most success - EEC - Mercosur - Auto Pact / NAFTA

  6. Characteristics of International Trade 1. In 1970’s expansion, Trade grew faster than world GDP; in 1980’s recession international trade fell faster than world GDP 2. Increasing Dominance of USA in world trade: 12.6% of exports 16.1% of imports (difference largely accounted for by petroleum) 3. Impact of changes in X.C rates - 1980’s US$ devalued - easier for US to export 1990’s US$ appreciated - easier for US to import 4. Debtor/creditor position US trade deficit now running $32 billion per month 1965 US was world’s largest creditor nation -$400 bn 2000 US is world’s largest debtor nation - $900 bn 5. US : paying by selling assets; net capital flow from EU to US in 1999 was $68 bn

  7. 6. US response: protectionism - about 24% of US imports getting some form of protection, e.g. Canadian potatoes, lumber, shell fish, steel 7. Agriculture: subsidized and/or protected just about everywhere 8. Many products subject to quotas, especially labour intensive items like textiles, clothing, footwear. 9. Importance of MNE’s - about 1/3 of world trade is intra-firm, i.e. companies selling to themselves

  8. Dimensions of the Struggle Protectionism vs. Free trade Agriculture vs. Industry Developed countries vs. Less Developed Countries Regional arrangements vs. Global arrangements Framework for Analysis of International Trade: Political ) Economic ) Social ) Technological ) environment Competitive (absolute) advantage and comparative advantage

  9. Absolute Advantage Country Output Output/man hr. Total labour hrs. X Y X Y A 16 4 2 1 8 + 4 = 12 B 4 4 1 2 4 + 2 = 6 Total output (no trade) 20 8 Now suppose each specializes in the product in which it has absolute advantage: A makes only X and B makes only Y Then total output of X = 12 x 2= 24 an Increase of 4 and total output of Y = 6 x 2 = 12 an Increase of 4

  10. Comparative Advantage Country Output Output/man hr. Ratio Total labour hrs. X Y X Y A 12 4 4 2 2:1 3+2 = 5 B 7 7 1 1 1:1 7+7 = 14 Total output (no trade) 19 11 Now suppose each specializes in the product in which it has comparative advantage: A makes only X and B makes only Y Then total output of X = 4 x 5 = 20 an Increase of 1 and total output of Y = 14 x 1 = 14 an Increase of 3 It still pays to specialize and trade even though B has no absolute advantage in either product

  11. Problems unresolved by economics 1. What price? 2. How to distribute the benefits? 3. How to cushion the costs of change? Which is why International Trade negotiations are so drawn out and complex!

  12. Traditional Theorems of International Trade 1. Trade improves the welfare of the factors used most intensively 2. Welfare of producers improves in exporting sector relative to producers in importing sector 3. Welfare of consumers in importing sector improves relative to consumers in exporting sector 4. Exports are biased towards resource abundance 5. Trade brings about equalization of incomes, interest rates and rents among all countries - in the long run But in the long run we are all dead (Lord Keynes). The last point shows the limitations of economic theory, because large scale inequalities persist around the world

  13. Newer Theories of International Trade 1.Old theories are for homogeneous products. Today we have branding and product differentiation (But note the weak position of unbranded commodities such as oil, gas, wheat, copper, sugar, coffee, bananas) 2. Importance of clustering (agglomeration) - coming together of groups of industries which are mutually supportive, e.g. Silicon Valley (Sometimes fostered by the coming together of critical resources) Points up the importance of externalities - things outside the firm but which affect the company’s balance sheet 3. Modern determinants of success are not costs or factors of production but design, quality, marketing skills SUMMARY: Trade is a good thing!

  14. Beyond comparative and competitive advantage Differences in exchange rates are determined by a variety of factors - differences in inflation rates - capital movements - -FDI - portfolio investment - savings rates - transfers - terms of trade - I.e. relative commodity prices - natural resource endowment and development Lags - it took 5 to 7 years for the oil price shock of the 1970’s to work its way through the economic system to the recession of the 1980’s Business cycles are not coincident around the world MORAL: If you are in foreign trade, you need a long time horizon - it’s not an in-and-out affair

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