International Trade

The Gains from Trade

The law of comparative advantage

specialisation

as the basis for trade

absolute

advantage
advantage

comparative the

gains from trade based on comparative advantage

Production possibilities for two countries

Kilos of wheat Less developed country Developed country Either Either 2 4 or or Metres of cloth 1 8

Pre-trade exchange ratios

Less developed country: Developed country:

2 wheat for 1 cloth 1 wheat for 2 cloth

International trade exchange ratios

(LDC exports wheat: DC exports cloth)

Less developed country: Developed country:

1 wheat for 1 cloth 1 wheat for 1 cloth

Production possibilities for two countries

Kilos of wheat Less developed country Developed country Either Either 2 4 or or Metres of cloth 1 8

Pre-trade exchange ratios

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

International trade exchange ratios

(LDC exports wheat: DC exports cloth)

Less developed country: Developed country:

1 wheat for 1 cloth 1 wheat for 1 cloth

Production possibilities for two countries

Kilos of wheat Less developed country Developed country Either Either 2 4 or or Metres of cloth 1 8

Pre-trade exchange ratios

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

International trade exchange ratios

(LDC exports wheat: DC exports cloth)

Less developed country: Developed country:

1 wheat for 1 cloth 1 wheat for 1 cloth

Production possibilities for two countries

Kilos of wheat Less developed country Developed country Either Either 2 4 or or Metres of cloth 1 8

Pre-trade exchange ratios

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

International trade exchange ratios

(LDC exports wheat: DC exports cloth)

Less developed country: Developed country:

1 wheat for 1 cloth 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 differences increased trade

costs in demand

competition

as an engine of growth

non-economic

advantages

Arguments for Restricting Trade

Methods of restricting trade

tariffs quotas administrative other

barriers

Arguments for restricting trade

infant

industry argument comparative advantage

changing

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 protecting

monopoly power declining industries

non-economic

arguments

Arguments for Restricting Trade

Problems with protection

protection world

as second best

multiplier effects

retaliation cushions

inefficiency

bureaucracy

Measuring the efficiency loss from protection

The cost of protection

P
Sdom (=MC)

PW

S world

Ddom O Q1 Q2

The cost of protection

P
a Area edbc equals loss of consumer surplus Sdom (=MC)

PW + t e Tariff c PW

d
b

S world
S world

+ tariff

Ddom O Q1 Q3 Q4 Q2

The cost of protection

P
a Area 1 equals gain in producer surplus Sdom (=MC)

Area 3 equals gain in tariff revenue PW + t e Tariff c PW

d
1 2 3 4 b

S world
S world

+ tariff

Ddom O Q1 Q3 Q4 Q2

The cost of protection

P
a Areas 2 + 4 equals net loss Sdom (=MC)

PW + t e Tariff c PW

d
1 2 3 4 b

S world
S world

+ tariff

Ddom O Q1 Q3 Q4 Q2

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

13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1960

Real growth rate (%)

1965

1970

1975

1980

1985 1990 1995 2000 2005 Source: Trade Statistics, WTO (www.wto.org)

Growth in world real GDP and world merchandise exports

13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1960

Real growth rate (%)

Growth in real GDP

1965

1970

1975

1980

1985 1990 1995 2000 2005 Source: Trade Statistics, WTO (www.wto.org)

Growth in world real GDP and world merchandise exports

13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 1960

Growth in merchandise exports

Real growth rate (%)

Growth in real GDP

1965

1970

1975

1980

1985 1990 1995 2000 2005 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 in reaching agreement

problems the

agreement the agreement

assessing

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 common

unions
markets
of a full common market

features

Direct effects of a customs union

trade trade

creation diversion

Trading Blocs

Long-term effects of a customs union

longer-term
internal

advantages

economies of scale

external
better

economies of scale
competition between members

terms of trade

increased

longer-term
certain

disadvantages
of oligopolistic collusion

regions of the union may suffer

possibility

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 regional

Agricultural Policy

policy

competition tax

policy

harmonisation policy

social

trade

policy

The European Union

The single market

historical the

background the single market

Single European Act

completing

The benefits of the single market

trade

creation
in the direct costs of barriers of scale

reduction

economies 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 inward looking

industrialisation (ISI)

secondary

import-substituting

secondary
possibly

outward looking
complemented by primary inward

looking

Trade and Developing Countries

Approach 1: exporting primaries

justification
exploits

for exporting primaries

comparative advantage

'vent for surplus'

'engine for growth'

an

problems

with traditional trade theory

costs change over time may not flow to nationals from mines and plantations

comparative benefits trade

my lead to greater inequality

externalities

Trade and Developing Countries

Exporting primaries (cont.)

long-term

problems for primary exporting

countries
low

income elasticity of demand

in advanced countries developments

protection

technological

synthetic substitutes miniaturisation

rapid

growth in imports movements in terms of trade

adverse

World primary commodity prices (1990 = 100)

1960 Agricultural commodities Metals and minerals All non-fuel commodities Oil 208 137 187 34

1970 182 161 175 21

1980 192 131 174 224

1990 100 100 100 100

2000 87 82 86 122

World primary commodity prices (1990 = 100)

1960 Agricultural commodities Metals and minerals All non-fuel commodities Oil 208 137 187 34

1970 182 161 175 21

1980 192 131 174 224

1990 100 100 100 100

2000 87 82 86 122

World primary commodity prices (1990 = 100)

1960 Agricultural commodities Metals and minerals All non-fuel commodities Oil 208 137 187 34

1970 182 161 175 21

1980 192 131 174 224

1990 100 100 100 100

2000 87 82 86 122

World primary commodity prices (1990 = 100)

1960 Agricultural commodities Metals and minerals All non-fuel commodities Oil 208 137 187 34

1970 182 161 175 21

1980 192 131 174 224

1990 100 100 100 100

2000 87 82 86 122

Average annual changes in prices of various products

198594 Non-oil primary product exports of developing countries Non-oil primary product exports of heavily indebted poor countries Oil prices Manufactured exports of advanced economies 1.2 0.4 5.7 5.0 19952004 1.4 1.6 4.6 0.1

Average annual changes in prices of various products

198594 Non-oil primary product exports of developing countries Non-oil primary product exports of heavily indebted poor countries Oil prices Manufactured exports of advanced economies 1.2 0.4 5.7 5.0 19952004 1.4 1.6 4.6 0.1

Trade and Developing Countries

Approach 2: ISI
justifications
problems dynamic

of primary exporting

potential in manufacturing

infant industries rapid technological advance

patterns

of protection
industries for protection

selecting tariff

and quota escalation multinational investment

attracting

Trade and Developing Countries

Approach 2: ISI (cont.)

adverse
often

effects of ISI

counter to comparative advantage tends to cushion inefficiency

encourages establishment of monopolies
artificially

low interest rates

use of capital-intensive techniques

ruralurban migration adverse effects on rural sector leads to greater inequality environmental problems limit to home market
encourages

Trade and Developing Countries

Approach 3: exporting manufactures

transition
a

from inward-looking to outwardlooking industrialisation

neutral trade approach
promotion of manufactured exports
active

benefits

from exporting manufactures

conforms

more closely with comparative advantage

competition investment

increased increased more

employment and greater equality

Growth rates and export performance of selected secondary outward-looking countries

Average annual growth in real GDP (%) 19652001 Brazil Malaysia South Korea Singapore Hong Kong All developing countries 4.4 6.9 8.0 8.1 7.2 4.1 Share of manufactures in merchandise exports (%) 1970 15 8 76 31 96 27 2001 53 80 90 84 95 65 Annual average growth rate of exports (%) 19652001 8.4 9.6 15.3 9.4 11.5 5.7

Growth rates and export performance of selected secondary outward-looking countries

Average annual growth in real GDP (%) 19652001 Brazil Malaysia South Korea Singapore Hong Kong All developing countries 4.4 6.9 8.0 8.1 7.2 4.1 Share of manufactures in merchandise exports (%) 1970 15 8 76 31 96 27 2001 53 80 90 84 95 65 Annual average growth rate of exports (%) 19652001 8.4 9.6 15.3 9.4 11.5 5.7

Growth rates and export performance of selected secondary outward-looking countries

Average annual growth in real GDP (%) 19652001 Brazil Malaysia South Korea Singapore Hong Kong All developing countries 4.4 6.9 8.0 8.1 7.2 4.1 Share of manufactures in merchandise exports (%) 1970 15 8 76 31 96 27 2001 53 80 90 84 95 65 Annual average growth rate of exports (%) 19652001 8.4 9.6 15.3 9.4 11.5 5.7

Growth rates and export performance of selected secondary outward-looking countries

Average annual growth in real GDP (%) 19652001 Brazil Malaysia South Korea Singapore Hong Kong All developing countries 4.4 6.9 8.0 8.1 7.2 4.1 Share of manufactures in merchandise exports (%) 1970 15 8 76 31 96 27 2001 53 80 90 84 95 65 Annual average growth rate of exports (%) 19652001 8.4 9.6 15.3 9.4 11.5 5.7

Growth rates and export performance of selected secondary outward-looking countries

Average annual growth in real GDP (%) 19652001 Brazil Malaysia South Korea Singapore Hong Kong All developing countries 4.4 6.9 8.0 8.1 7.2 4.1 Share of manufactures in merchandise exports (%) 1970 15 8 76 31 96 27 2001 53 80 90 84 95 65 Annual average growth rate of exports (%) 19652001 8.4 9.6 15.3 9.4 11.5 5.7

Trade and Developing Countries

Approach 3: exporting manufactures (cont.)

drawbacks
possible

of exporting manufactures

retaliation from advanced countries

from other developing countries

but attitudes of WTO

competition vulnerability

to world fluctuations

world recessions speculation

trade

between developing countries

blocs of developing countries

trade