51632984-trade-ppt

8/6/2019 51632984-trade-ppt

1/44

InternationalTrade

InternationalTrade

8/6/2019 51632984-trade-ppt

2/44

The Gains from TradeThe Gains from Trade

The law of comparative advantage

specialisation as the basis for trade

absolute advantage

comparative advantage

the gains from trade based on comparativeadvantage

The law of comparative advantage

specialisation as the basis for trade

absolute advantage

comparative advantage

the gains from trade based on comparativeadvantage

8/6/2019 51632984-trade-ppt

3/44

Kilos ofwheat

Metres ofcloth

Less developed country Either 2 or 1

Developed country Either 4 or 8

Production possibilities for two countriesProduction possibilities for two countries

Pre-trade exchange ratiosPre-trade exchange ratios

Less developed country: 2 wheat for 1 cloth

Developed country: 1 wheat for 2 cloth

International trade exchange ratiosInternational trade exchange ratios



(LDC exports wheat: DC exports cloth)

8/6/2019 51632984-trade-ppt

4/44

Kilos ofwheat

Metres ofcloth











8/6/2019 51632984-trade-ppt

5/44

Kilos ofwheat

Metres ofcloth











8/6/2019 51632984-trade-ppt

6/44

Kilos ofwheat

Metres ofcloth











8/6/2019 51632984-trade-ppt

7/44

The Gains from TradeThe 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

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

8/6/2019 51632984-trade-ppt

8/44

8/6/2019 51632984-trade-ppt

9/44

Arguments for Restricting TradeArguments for Restricting Trade

Arguments for restricting trade (cont.)

to prevent establishment of a foreign-basedmonopoly

to spread risks externalities

pursuing national interests (but againstworld interests)

exploiting monopoly power

protecting declining industries

non-economic arguments

Arguments for restricting trade (cont.)

to prevent establishment of a foreign-basedmonopoly

to spread risks externalities

pursuing national interests (but againstworld interests)

exploiting monopoly power

protecting declining industries

non-economic arguments

8/6/2019 51632984-trade-ppt

10/44

Arguments for Restricting TradeArguments for Restricting Trade

Problems with protection

protection as second best

world multiplier effects

retaliation

cushions inefficiency

bureaucracy

Measuring the efficiency loss fromprotection

Problems with protection

protection as second best

world multiplier effects

retaliation

cushions inefficiency

bureaucracy

Measuring the efficiency loss fromprotection

8/6/2019 51632984-trade-ppt

11/44

The cost of protectionThe cost of protection

O

P

Q

Sdom (=MC)

Q1 Q2

SworldPW

Ddom

8/6/2019 51632984-trade-ppt

12/44

O

P

Q

Sdom (=MC)

Sworld + tariff

Sworld

a

de

c b

Q1 Q2Q3 Q4

Tariff

PW + t

PW

Ddom

Area edbcequals loss

of consumer surplus


8/6/2019 51632984-trade-ppt

13/44

O

P

Q

Sdom (=MC)

Sworld + tariff

Sworld

a

de

c b1 2 3 4

Q1 Q2Q3 Q4

Tariff

PW + t

PW

Ddom

Area 3 equals gain

in tariff revenue

Area 1 equals gain inproducer surplus


8/6/2019 51632984-trade-ppt

14/44

O

P

Q

Sdom (=MC)

Sworld + tariff

Sworld

a

de

c b1 2 3 4

Q1 Q2Q3 Q4

Tariff

PW + t

PW

Ddom

Areas 2 + 4equals

net loss


8/6/2019 51632984-trade-ppt

15/44

History of protection

Pre-war growth in protection

Post-war reduction in protection and therole of GATT

the growth in world trade

History of protection

Pre-war growth in protection

Post-war reduction in protection and therole of GATT

the growth in world trade

World Attitudes to ards Trade and ProtectionWorld Attitudes to ards Trade and Protection

8/6/2019 51632984-trade-ppt

16/44

-3

-2

-1

01

2

3

4

5

6

7

8

9

10

11

12

13

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Realgrowthra

te(%)

Growth in world real GDP and world merchandise exportsGrowth in world real GDP and world merchandise exports

Source: Trade Statistics, WTO (www.wto.org)

8/6/2019 51632984-trade-ppt

17/44


Growth in real GDP


-3

-2

-1

01

2

3

4

5

6

7

8

9

10

11

12

13

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Realgrowthra

te(%)

8/6/2019 51632984-trade-ppt

18/44


Growth in real GDP

Growth in

merchandise exports


-3

-2

-1

01

2

3

4

5

6

7

8

9

10

11

12

13

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Realgrowthra

te(%)

8/6/2019 51632984-trade-ppt

19/44

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

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


8/6/2019 51632984-trade-ppt

20/44

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 unfetteredtrade

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 unfetteredtrade


8/6/2019 51632984-trade-ppt

21/44

Trading BlocsTrading Blocs

Types of preferential tradingarrangement

free trade areas

customs unions

common markets

features of a full common market

Direct effects of a customs union

trade creation

trade diversion

Types of preferential tradingarrangement

free trade areas

customs unions

common markets

features of a full common market

Direct effects of a customs union

trade creation

trade diversion

8/6/2019 51632984-trade-ppt

22/44

Trading BlocsTrading 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

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

8/6/2019 51632984-trade-ppt

23/44

Preferential Trading in PracticePreferential Trading in Practice

Preferential trading in practice

the EU

the EEA

NAFTA the advent ofNAFTA

experience to date

proposals to extent to an all Americas freetrade area

the Asia-Pacific Economic Co-operationforum (APEC)

other free trade areas / customs unions

Preferential trading in practice

the EU

the EEA

NAFTA the advent ofNAFTA

experience to date

proposals to extent to an all Americas freetrade area

the Asia-Pacific Economic Co-operationforum (APEC)

other free trade areas / customs unions

8/6/2019 51632984-trade-ppt

24/44

The European UnionThe 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

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

8/6/2019 51632984-trade-ppt

25/44


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 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

8/6/2019 51632984-trade-ppt

26/44


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

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

8/6/2019 51632984-trade-ppt

27/44

Trade and Developing CountriesTrade and Developing Countries

Trade strategies

primary outward looking

secondary inward looking

import-substituting industrialisation (ISI)

secondary outward looking

possibly complemented by primary inwardlooking

Trade strategies

primary outward looking

secondary inward looking

import-substituting industrialisation (ISI)

secondary outward looking

possibly complemented by primary inwardlooking

8/6/2019 51632984-trade-ppt

28/44


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

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

8/6/2019 51632984-trade-ppt

29/44


Exporting primaries (cont.)

long-term problems for primary exportingcountries

low income elasticity of demand

protection in advanced countries

technological developments

synthetic substitutes

miniaturisation

rapid growth in imports

adverse movements in terms of trade

Exporting primaries (cont.)

long-term problems for primary exportingcountries

low income elasticity of demand

protection in advanced countries

technological developments

synthetic substitutes

miniaturisation

rapid growth in imports

adverse movements in terms of trade

8/6/2019 51632984-trade-ppt

30/44

1960 1970 1980 1990 2000

Agricultural commodities 208 182 192 100 87

Metals and minerals 137 161 131 100 82

All non-fuel commodities 187 175 174 100 86

Oil 34 21 224 100 122

World primary commodity prices (1990 = 100)World primary commodity prices (1990 = 100)

8/6/2019 51632984-trade-ppt

31/44

1960 1970 1980 1990 2000




Oil 34 21 224 100 122


8/6/2019 51632984-trade-ppt

32/44

1960 1970 1980 1990 2000




Oil 34 21 224 100 122


8/6/2019 51632984-trade-ppt

33/44

1960 1970 1980 1990 2000




Oil 34 21 224 100 122


8/6/2019 51632984-trade-ppt

34/44

Average annual changes in

prices of various products

Average annual changes in

prices of various products

Non-oil pri ar product e portsof developing countries

. .

Non-oil pri ar product e portsof heavil inde ted poor countries

. .

Oil prices . .

Manufactured e portsof advanced econo ies

. .

8/6/2019 51632984-trade-ppt

35/44

8/6/2019 51632984-trade-ppt

36/44


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

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

8/6/2019 51632984-trade-ppt

37/44


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

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

8/6/2019 51632984-trade-ppt

38/44


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

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

8/6/2019 51632984-trade-ppt

39/44

Growth rates and export performance of

selected secondary outward-looking countries



A erage

annual growthin real G P

%

hare of

manufactures inmerchandise

exports %

Annual a erage

growth rate ofexports

%

1965 1 1970 2001 19652001

B

razil4.4 15 53

8.4

Malaysia 6.9 8 80 9.6

South Korea 8.0 76 90 15.3

Singapore 8.1 31 84 9.4

Hong Kong 7.2 96 95 11.5

All de elopingcountries

4.1 27 65 5.7

8/6/2019 51632984-trade-ppt

40/44

A erage

annual growthin real GDP

%

Share of


exports (%

Annual a erage


(%

19652001 1970 2001 19652001

Brazil 4.4 15 53 8.4

Malaysia 6.9 8 80 9.6

South Korea 8.0 76 90 15.3

Singapore 8.1 31 84 9.4

Hong Kong 7.2 96 95 11.5


4.1 27 65 5.7





8/6/2019 51632984-trade-ppt

41/44

A erage


(%

Share of


exports (%

Annual a erage


(%

19652001 1970 2001 19652001

Brazil 4.4 15 53 8.4

Malaysia 6.9 8 80 9.6

South Korea 8.0 76 90 15.3

Singapore 8.1 31 84 9.4

Hong Kong 7.2 96 95 11.5


4.1 27 65 5.7





8/6/2019 51632984-trade-ppt

42/44

A erage


(%

Share of


exports (%

Annual a erage


(%

19652001 1970 2001 19652001

Brazil 4.4 15 53 8.4

Malaysia 6.9 8 80 9.6

South Korea 8.0 76 90 15.3

Singapore 8.1 31 84 9.4

Hong Kong 7.2 96 95 11.5


4.1 27 65 5.7





8/6/2019 51632984-trade-ppt

43/44

A erage


(%

Share of


exports (%

Annual a erage


(%

19652001 1970 2001 19652001

Brazil 4.4 15 53 8.4

Malaysia 6.9 8 80 9.6

South Korea 8.0 76 90 15.3

Singapore 8.1 31 84 9.4

Hong Kong 7.2 96 95 11.5


4.1 27 65 5.7





8/6/2019 51632984-trade-ppt

44/44


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

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

51632984-trade-ppt

Documents