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Globalisation and F ree Trade (ch 17)

Globalisation and F ree Trade (ch 17). MBA Session 5 Professor Dermot McAleese Trinity College Dublin. OUTLINE.  Trends in global trade  Gains from foreign trade  Quantifying the gains from trade  Why protection failed  C ompetitiveness and Globalisation.

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Globalisation and F ree Trade (ch 17)

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  1. Globalisation and Free Trade(ch 17) MBA Session 5 Professor Dermot McAleese Trinity College Dublin

  2. OUTLINE  Trends in global trade  Gains from foreign trade  Quantifying the gains from trade Why protection failed Competitiveness and Globalisation

  3. WHERE ECONOMICS BEGAN Adam Smith, Wealth of Nations, 1776 • Productivity the key to wealth of nations (not gold, not balance of trade surplus) •  Productivity enhanced by specialisation • Dexterity •  Saving of time • Machinery invented by workmen •  Specialisation increased by enlarging the extent of the market •  Extent of market limited by •  Trade barriers • Monopoly • ‘Invisible hand’ will even look after the poor! ‘in a well-governed society, opulence extends itself to the lowest ranks of the people’

  4. TRENDS IN GLOBAL TRADE  Growth in trade  Composition of trade  Trade regimes (GATT, Uruguay Round, WTO)

  5. Two Core Principles of WTO • Non-discrimination • National Treatment (banks, insurance, gasoline stations etc)

  6. THE FUNCTIONS OF THE WTO •  Administration and implementation of the 29 multilateral agreements which make up the WTO ( incl agriculture, textiles, GATS, government procurement) •  A forum for multilateral trade negotiations •  Resolving trade disputes (200 cases outstanding) •  Reviewing national trade policies (142 members to date) •  Co-operating with other global economic policy institutions

  7. Table 1. Trade and GDP, 1900-2000(average annual percentage change in volume) Source: WTO, Regionalism and the World Trading System (Geneva, April 1995); International Trade Statistics (1995); own estimates Table 1a. Value of world exports, 2000 (US$ billion) Source: WTO and own estimates

  8. Table 2. Leading exporters and importers in merchandise trade in 2000 Source: WTO, press release, 6 April 2000.

  9. Table 3. How important is trade? Source: World Development Indicators, The World bank (2000).

  10. GAINS FROM TRADE Traditional gains comparative advantage variety of products Modern extensions competition and contestability economies of scale and scope innovation and R&D (imports) product and quality improvement

  11. ON FOREIGN TRADE ‘No extension of foreign trade will immediately increase the amount of value in a country, although it will very powerfully contribute to increase the mass of commodities, and therefore the sum of enjoyments.’ David Ricardo, Principles of Political Economy and Taxation 1821, Chapter VII

  12. The gains from trade liberalization should not only be seen through a narrow economic lens. Trade has also been a vehicle for promoting broader political objectives, especially peace and stability. Trade establishes mutually beneficial links among nations, creating interest in cooperation. It cements relationships among disparate peoples and societies, lessening the risk of conflict, and it strengthens the commitment of governments to rules in the place of realpolitik. World Trade Organization, Annual Report, 1998

  13. Table 4. Developing countries: trade orientation and economic performance Source: IMF, World Economic Outlook (May 1993), p. 76.

  14. Estimated Annual Income Gains form the Uruguay Round ($bn) US 122 EU 164 Japan 27 Developing economies 116 China 19 Chinese Taipei 10 Other 52 Total 510

  15. COMPARATIVE ADVANTAGE ‘nations should concentrate on what they are best at producing’ International Trade Theory A country can have an absolute disadvantage in all goods and yet gain from trade with the more efficient partner The gain is realised through imports  Trade involves mutual gains (trade is a positive sum game)  The total gain from trade may be unevenly shared

  16. X-EFFICIENCY AND FREE TRADE Wine T’ T 0 T T’ Clothing

  17. QUANTIFYING THE GAINS FROM TRADE gains from free trade vs. autarky gains of incremental movement towards freer trade  comparative analysis

  18. TRADE POLICY AND PROTECTION Sources of possible distortion: Unemployment and the capacity to adjust  Foreign monopoly power  Failure of prices to signal future changes in comparative advantage Neglect of environmental effects

  19. WHY FREE TRADE MIGHT NOT ALWAYS BE BEST POLICY (Adam Smith, Box 17.4) Defence of the country Level playing field  Retaliation Transitional protection

  20. MODERN ARGUMENTS FOR PROTECTION optimum tariff • infant industry • income distribution • strategic trade theory

  21. WHY PROTECTION FAILED • Protected industries started well but became inefficient • Downward pressure on prices for food products (bad for farmers, good for the consumer) • Protection discouraged exports, thus missing out on economies of scale • Protected industries were poor innovators • Protection gave incentive to corruption

  22. What determines comparative advantage? What can we export?

  23. ‘Comparative advantage is no longer seen as divine inheritance… …nor are market structures and rivals’ behaviour set in tablets of stone’ Cecchini, P., The European Challenge 1992, (Aldershot: Wildwood House, 1988), p. 85

  24. PORTER’S DIAMOND Chance Firm Strategy Structure and Rivalry Factor Conditions Demand Conditions Related and Supporting Industries Government Source: Michael Porter, The Competitive Advantage of Nations (London: Macmillan, 1990)

  25. TRADE POLICIES AND NEW TRADE ISSUES  how to cope with the losers (Box 17.5)  how to maximise the gains  trade agreements and the WTO  new forms of protection

  26. Case Study: Effects of China’s entry into WTO (Dec 2001) • Some concessions on agriculture • Improved access to global market • Textiles and clothing agreement • Strong foreign investment effect • Spur to efficiency in import-competing firms • Underpins market reform process

  27. Effects of China’s entry into WTO – Short run costs • Job losses in state operated enterprises • Pressure on agriculture • Cost of intellectual property agreement • Exposure to any downturns in the world economy

  28. Exports $bn % US 52 21 Hong Kong 45 18 Japan 42 17 Korea 11 5 EU 18 Imports $bn % Japan 42 18 Taiwan 26 11 S Korea 23 10 US 22 10 EU 15 China’s trade by area 2000

  29. Higt tech= computers, telecom,electronics Sitc 77 BIS annual report 2001 p.43 High tech Exports (% of total exports to OECD) • China 20 Thailand 34 • Hong Kong 30 Taiwan 50 • Indonesia 9 • Korea 41 • Malaysia 58 • Philippines 60 • Singapore 77

  30. China and WTO – the view from Geneva There is no doubt that China’s decision to join the WTO is particularly momentous. Opening its markets to foreign trade and investment will make China more prosperous, and commtting China to world trade rules will foster and consolidate market-based reforms. WTO Members stand to gain by better access to an economy of 1.3 billion consumers, which was growing at 8% in 2000. WTO Annual Report 2001

  31. Class Exercise What has the WTO done for the developing countries?

  32. NEW TRADE ISSUES  Services (GATS)  Intellectual property (TRIPS)  Environment  Direct foreign investment  Fair trade and competition  Labour standards  Bribery and corruption  Trade and development in the least developed countries

  33. FREE TRADE AND UNEMPLOYMENT Wine A P P* T Clothing Note: If free trade brings the economy from A to P* instead of to P, there will be unemployment. P* is certainly a worse point than P: it could also be wore than A

  34. ‘In the past comparative advantage was function of natural-resources endowments and factor proportions (capital-labour ratios). Cotton was grown in the American south because the climate and soil were right. Slavery provided abundant labour. Cotton was spun in New England because it had the capital to harness available waterpower. Each industry has its natural location. Consider what are commonly believed to be the seven key industries of the next few decades – microelectronics, biotechnology, the new materials industries, civilian aviation, telecommunications, robot plus machine tools, and computers plus software. All are brainpower industries. Each could be located anywhere on the face of the globe. Where they will be located depends upon who can organise the brainpower to capture them. In the century ahead comparative advantage will be man-made.’ Lester Thurow, Head to Head: The Coming Economic Battle Among Japan, Europe and America (1992).

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