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Annual growth in volume of world merchandise exports and GDP 14 12 10 Annual % change 8 6 4 2 0 -2 -4 -6 -8 -10 1955 1960 1965 1970 1975 Exports GDP Average export growth Average GDP growth 1980 1985 Source: based on data in Statistics Database (WTO) and World Economic Outlook (IMF ) Note: 2009 and 2010 forecasts 1990 1995 2000 2005 2010 Share of world merchandise exports, by value (2008) Other Asia (inc Australasia) 13.6% China 9.1% USA 8.2% Canada and Mexico 4.7% Latin America 3.8% UK 2.9% France 3.9% Japan 5.0% Netherlands 3.9% Middle East 6.6% Germany 9.3% Africa 3.6% CIS 4.5% Other Europe 17.6% Source: Based on data in WTO Statistics Database Italy 3.4% Growth in Chinese export volumes and real GDP (%) GDP Exports Annaul % growth 30 20 10 0 -10 -20 1990 1992 1994 1996 1998 2000 2002 Source: data drawn from World Development Indicators (World Bank) and Outlook 2009 (Asian Development Bank) 2004 2006 2008 2010 World real (inflation adjusted) primary commodity prices (2000 = 100) 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008 Food 185 196 208 402 220 142 138 140 100 108 236 Agricultural raw materials 218 171 159 152 160 143 137 129 100 112 202 Metals and minerals 146 171 198 192 143 121 128 103 100 125 332 62 60 55 143 286 157 93 69 100 161 266 Oil Source: data drawn from World Development Indicators 2005 (World Bank); Handbook of Statistics 2008 (UNCTAD) Growth rates and export performance of selected secondary outward-looking countries Average annual growth in real GDP (%) 1960–90 1991–2009 Share of manufactures in merchandise exports (%) 1970 2008 Average annual growth rate of merchandise exports 1960–90 1991–2008 Brazil 5.5 3.0 13 44 14.1 8.0 Malaysia 6.8 6.2 7 65 13.4 10.0 South Korea 8.4 5.4 77 87 30.4 13.9 Singapore 9.2 6.4 28 70 16.3 7.4 Hong Kong 7.9 4.4 96 94 18.3 8.8 China 8.1 10.2 35 93 13.4 17.9 All developing countries 4.3 4.9 27 60 13.6 8.7 Sources: data drawn from Handbook of Statistics (UNCTAD) and World Development Indicators (World Bank). GAINS FROM TRADE • International specialisation as basis for trade - economies of mass production can be obtained through concentration within a limited number of countries • Law of Absolute Advantage - e.g. if A can produce food more efficiently than B, and B in turn can produce cars more efficiently than A, then A should concentrate on food and B on cars with trade taking place between both countries • Law of Comparative Advantage - even if with reference to the previous example one country - say A is more efficient at producing both products, then specialisation should still take place in terms of relative advantage. So if A is even more efficient at producing both cars than food then A should specialise in car production and B in food - means that every country, however poor, can be involved in trade GAINS FROM TRADE (con) However there are limits to specialisation so for example if Ireland was to completely specialise in agriculture, people with no talent for farming would have to be employed in the sector leading to inefficiency • Other Reasons for Trade - differences in demand e.g. if the French like Irish lamb then it makes sense to specialise - growing competition from imports can increase competitiveness thus stimulating efficiency - trade opens up the possibility - as in Ireland - for rapid economic growth - there are strong political and cultural benefits from fostering increased trade (as in EU) TERMS OF TRADE • The law of comparative advantage suggests that overall production will increase through specialisation. However it does not state how gains should be distributed between nations. This is where terms of trade are important It is defined as: Average price of exports X 100 Average price of imports So for example if there is a sharp increase in the price of oil, (other things being equal) the terms of trade would deteriorate for Ireland as the average price of imports would rise more rapidly than that of exports, as Ireland imports all its oil In general terms of trade are poor for the developing nations as the demand for what they produce e.g. food and raw materials does not rise as rapidly as industrial goods CSO Weblink CSO - Statistics: Volume, Price and Terms of Trade Indices METHODS OF RESTRICTING TRADE • Tariffs (customs duties) - tax or levy on imports; has a number of effects on consumer, producer, government and distribution • Quotas - quantitative limitations on imports • Exchange Controls - limits on taking foreign currency out of country • Export Restrictions and Export Taxes • Export Subsidies and other supports • Administrative Barriers • Procurement Policies The welfare costs of a tariff Price SS The tariff leads both to transfers and net social losses. The government raises revenue – i.e. there is a transfer to the government Pw+ T Pw DD Q s Qs ' and there is a transfer in the form of extra profits to producers Qd' Qd Quantity There is a social cost from production inefficiency, given that the good could be imported at Pw. There is also a loss of consumer surplus. 33.10 An export subsidy S Pw+ s B G E Subsidy World price Price Pw A DD Qd ' Qd Qs Q`s' Quantity Under free trade, with the world price at Pw, consumers demand Qd production is Qs exports are GE. With a subsidy, producers supply Qd' to the domestic market and produce Qs'. Exports are now AB. Social costs arise from production inefficiency and consumer surplus. 33.15 ARGUMENTS IN FAVOUR OF RESTRICTING TRADE • The infant industry argument - industries may need to be protected to enable them to grow sufficiently to achieve economies of scale • To prevent "dumping" and other unfair trade practices - dumping refers to below cost selling • To prevent the establishment of a foreign-based monopoly • To reduce reliance on goods with little dynamic potential • To spread the risks of fluctuating markets • To reduce the influence of trade on consumer tastes • To prevent the importation of harmful goods • To take account of externalities ARGUMENTS IN FAVOUR OF RESTRICTING TRADE (con) • The exploitation of monopoly power • To protect declining industries • Non-economic arguments - to preserve the production of a wide range of products in case of war - refusal to trade with certain countries because of political disagreements - to preserve a traditional way of life - to maintain as diverse a society as possible PROBLEM WITH PROTECTIONISM • There may be better ways of helping industry • World multiplier effects - as one country's imports represents another country's exports reducing imports ultimately reduces export opportunities • Retaliation - generally when one country imposes restrictions the other country imposes retaliatory measures • Protection may encourage inefficiency with respect to production • Bureaucracy - protectionism can lead to large administrative costs TYPES OF TRADING AGREEMENTS • Free Trade Area - where countries remove tariffs and quotas against each other but are free to restrict imports from non-member countries • Customs Union - a free trade area where countries adopt a common external tariff (and quotas) with respect to non-members • Common Market - where member countries operate a single market, implying similar taxes, similar laws and regulations, free movement of labour capital and materials and common policies in different economic areas • Economic and Monetary Union (EMU) - fixed exchange rates leading to common currency - common Central Bank - common macroeconomic policies • Economic and Political Union - common defence policy - centralised decision-making DIRECT EFFECTS OF CUSTOMS UNION • Trade Creation - where consumption shifts from high cost to low cost producer • Trade Diversion - where consumption shifts from lower cost to high cost producer • Advantages of Customs Union - increased market size - external economies of scale - increased bargaining power of whole customs union - increased competition between member countries • Disadvantages of Customs Union - loss of sovereignty - possible diseconomies of scale - increased bureaucracy - uneven effects throughout union • Examples of Customs Union - EU, NAFTA, ASEAN etc THE EUROPEAN UNION The European Union • No. of countries - formerly 15 members Germany, France, Britain, Ireland, Italy, Spain, The Netherlands, Belgium, Luxembourg, Portugal, Denmark, Greece, Sweden, Austria, Finland • • New Member countries Now increased to 27 members - joined May 2004; Poland, Hungary, The Czech Republic, Estonia, Latvia, Cyprus, Malta, Slovakia, Slovenia, Lithuania - joined 2007; Bulgaria and Romania - to join Western Balkan states – Croatia and Macedonia Turkey also wants to join; however opinion is divided among existing member countries as to whether it should be allowed to join FROM CUSTOMS UNION TO COMMON MARKET • Common Agricultural Policy - artificial high prices set for farm food • Regional Policy - EU regional policy provides grants to firms and local authorities in depressed regions of the union • Competition Policy - EU controls restrictive policies and monopoly Harmonisation of Taxation - this has been carried out with respect to VAT