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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


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 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

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 to ards 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 to ards 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 to ards 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)

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


Non-oil pri ar product e ports of developing countries Non-oil pri ar product e ports of heavil inde ted poor countries Oil prices Manufactured e ports of advanced econo ies . . . . . . . .

Average annual anges i Aver e l es in ri s r ts pri es f vari us pr ucts


198594 N - il ri f l i N - il ri f il i Oil ri M f f t r rt i r r t r tri r t r rt tri t rt 1. 1995 1.4 1. 4. .1 4

.4 5. 5.

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 outwardlooking 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 of selected secondary outward-looking countries


A erage annual growth in real G P % 1965 Brazil Malaysia South Korea Singapore Hong Kong All de eloping countries 4.4 6.9 8.0 8.1 7.2 1 hare of manufactures in merchandise exports % 1970 15 8 76 31 96 2001 53 80 90 84 95 Annual a erage growth rate of exports % 19652001 8.4 9.6 15.3 9.4 11.5

4.1

27

65

5.7

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


A erage annual growth in real GDP % 19652001 Brazil Malaysia South Korea Singapore Hong Kong All de eloping countries 4.4 6.9 8.0 8.1 7.2 Share of manufactures in merchandise exports (% 1970 15 8 76 31 96 2001 53 80 90 84 95 Annual a erage growth rate of exports (% 19652001 8.4 9.6 15.3 9.4 11.5

4.1

27

65

5.7

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


A erage annual growth in real GDP (% 19652001 Brazil Malaysia South Korea Singapore Hong Kong All de eloping countries 4.4 6.9 8.0 8.1 7.2 Share of manufactures in merchandise exports (% 1970 15 8 76 31 96 2001 53 80 90 84 95 Annual a erage growth rate of exports (% 19652001 8.4 9.6 15.3 9.4 11.5

4.1

27

65

5.7

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


A erage annual growth in real GDP (% 19652001 Brazil Malaysia South Korea Singapore Hong Kong All de eloping countries 4.4 6.9 8.0 8.1 7.2 Share of manufactures in merchandise exports (% 1970 15 8 76 31 96 2001 53 80 90 84 95 Annual a erage growth rate of exports (% 19652001 8.4 9.6 15.3 9.4 11.5

4.1

27

65

5.7

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


A erage annual growth in real GDP (% 19652001 Brazil Malaysia South Korea Singapore Hong Kong All de eloping countries 4.4 6.9 8.0 8.1 7.2 Share of manufactures in merchandise exports (% 1970 15 8 76 31 96 2001 53 80 90 84 95 Annual a erage growth rate of exports (% 19652001 8.4 9.6 15.3 9.4 11.5

4.1

27

65

5.7

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