Download International Trade and Regional Integration

Chapter 6
To learn how differing types of political system function, in terms
of governmental processes, societies and business interactions.
To gain a critical appreciation of democracy’s progress in
differing national environments.
To assess political risk, both internally and internationally.
To appreciate the nature and significance of diverse national
legal systems, as well as their interactions
with both regional and international legal frameworks
To assess legal risk for international
managers, including both national and
international implications.
To gain an overview of the changing pattern of trade
as it impacts on international business
To understand and apply key theories of international
trade, gaining insight into current trends
To identify the tools of government trade policy and
how they are exercised in practice
To take a critical perspective on the changing role of
the WTO and multilateral trade agreements
To examine the extent to which
regional and bilateral trade agreements
are affecting trade and impacting on
international business strategy
Trade may be in goods (merchandise trade) or
services (commercial services trade).
Merchandise trade may be: agricultural products, fuels
and mining products, or manufactured goods.
Increasing trade is linked with economic growth.
Countries which have surged ahead include those
who are…
rich in natural resources
leaders in low-cost mass-manufacturing
Balance of payments: a trade deficit indicates
an excess of imports over exports; strong
exporters enjoy trade surplus.
Absolute versus comparative advantage
1. The theory of absolute advantage
2. The theory of comparative advantage
The main concept of absolute advantage is generally
attributed to Adam Smith for his 1776 publication An
Inquiry into the Nature and Causes of the Wealth of Nations
in which he countered mercantilist ideas. Smith argued that it
was impossible for all nations to become rich simultaneously
by following mercantilism because the export of one nation is another nation’s
import and instead stated that all nations would gain simultaneously if they
practiced free trade and specialized in accordance with their absolute
advantage. Smith also stated that the wealth of nations depends upon the
goods and services available to their citizens, rather than
their gold reserves. While there are possible gains from trade
with absolute advantage, the gains may not be mutually
beneficial. Comparative advantage focuses on the range of
possible mutually beneficial exchanges.
Absolute versus comparative advantage
1. The theory of absolute advantage
2. The theory of comparative advantage
Perhaps the most important contribution of David Ricardo (1772 –1823)
The English political economist was the law of comparative advantage, a
fundamental argument in favor of free trade among countries and of
specialization among individuals. He argued that there is mutual benefit
from trade (or exchange) even if one party (e.g. resource-rich country,
highly-skilled artisan) is more productive in every possible area than its
trading counterpart (e.g. resource-poor country, unskilled laborer), as long
as each concentrates on the activities where it has a relative productivity
advantage.
Examples of absolute advantage
Party A can produce 5 widgets per hour with 3 employees.
Party B can produce 10 widgets per hour with 3 employees.
If wages are same for both parties, then Party B
has an absolute advantage over Party A because
Party B can produce twice as many widgets as
Party A can with the same number of employees.
Country A can produce 1000 parts per hour with 200 workers.
Country B can produce 2500 parts per hour with 200 workers.
Country C can produce 10000 parts per hour with 200 workers.
If labor and material costs are same then Country C has absolute advantage
over both Country B and Country A because it can produce the most parts per
hour at the same cost as other nations. Country B has an absolute advantage
over Country A because it can produce more
parts per hour with the same number of
employees. Country A has no absolute
advantage because it can't produce more
goods than either Country B or Country C
given the same input.
Business, government and social impacts of trade
Patterns of global trade
• Major industrialized countries – the triad of US, Japan and
Europe - have dominated trade in the post-war era, but this
pattern is breaking down.
• Developing and transition economies have increased their
shares of world trade. Notable performers:
• The rise of export-oriented manufacturing, e.g. China.
• The growing importance of resource-rich exporting
countries, such as those in the Middle East.
• The least-developed countries, concentrated in sub-Saharan
Africa, have fallen behind.
The world’s leading merchandise
exporting countries
Germany
US
Japan
China
Source: WTO (2007) International Trade Statistics, www.wto.org
Figure 6.3: Long-term trends in merchandise exports
Source: WTO (2007) International Trade Statistics,
www.wto.org
Shares of world
merchandise exports
($11,783 billion),
2006
Note: Developing/transition
countries = South and Central
America, Mexico, Commonwealth of
Independent States (CIS), Africa,
Middle East and the developing
countries of Asia
Source: WTO (2007) International
Trade Statistics 2007, www.wto.org
Trade theories
• Comparative advantage: a country should specialize in
producing the goods in which it has the greatest relative
advantage in terms of productive inputs.
• Factor endowment theory: Every country has factor
endowments – of labour, land, capital & natural resources.
Those that are scarce command a high price, but…
where trade takes place, the high rewards of the scarce factor
will diminish, whereas the rewards of the abundant factor will
rise.
• Product life cycle theory: as consumer products become
standardized over their lifetime, production shifts away from
high-cost locations to low-cost locations.
Figure 6.5: The Heckscher-Ohlin-Samuelson theory
Newer trade theories
• Take account of recent trends:
• Intra-industry trade
• Globalized production – breaks down production into different
steps in the value chain. Benefits from economies of scale.
• Global competition –
• First-mover advantages, by which early entrants in a market
gain a lead which later entrants struggle to make up.
• Oligopoly, whereby a few large firms dominate.
• Monopolistic competition, whereby many producers compete in
a product class on the basis of product differentiation.
National competitiveness
• Porter’s theory of national competitive advantage, the
diamond model:
• Factor conditions
• Demand conditions
• Related and supporting industries
• Firm strategy, structure and rivalry
• Relative competitiveness of countries – quantitative and
qualitative aspects. Some of the criteria:
• Economic performance, institutions, health, education
Firm strategy, structure
and rivalry
Factor
conditions
Demand
conditions
Related and
supporting
industries
Firm strategy, structure
and rivalry
Factor
conditions
Demand
conditions
Related and
supporting
industries
Sources: WEF (2007) Global
Competitiveness Report 2007–
8, www.wef.org; IMD (2007)
World
Competitiveness Yearbook
(Lausanne: IMD)
Figure 6.6: National competitiveness rankings
Government trade policies
• Government considerations in designing trade policy:
• National security
• Strategic needs
• Domestic employment
• Cultural goods
• Consumer protection
• Policies may vary between free trade and protectionism,
whereby governments attempt to support domestic
producers.
Figure 6.7: Tools of government trade policy
Import tariffs
Import quotas
Non-tariff barriers
Importing
country
Health and safety rules
Local content rules
Export tariffs
Exporting
country
Voluntary export restraints
Subsidies to domestic producers
Subsidies to exporters
Government incentives to export-oriented industries
Importing
country
Export tariffs
Subsidies to exporters
Voluntary export restraints
Subsidies to domestic producers
Government incentives to exportoriented industries
Exporting
country
Import tariffs
Import quotas
Non-tariff barriers
Health and safety rules
Local content rules
Figure 6.8: Financial support for agricultural producers, 2005
Source: OECD (2006) Producer
Support Index,
http://www.oecd.org
WTO and multilateral agreements
• WTO seeks to liberalize trade through multilateral
agreements.
• GATT legacy included the most-favoured nation principle
(MFN): A country’s trade terms for all members are equivalent
to the most preferential.
• WTO’s dispute resolution procedure is used to resolve trade
disputes between member countries.
• Doha Round of WTO, dating from 2001, aimed to be a
‘development’ round, liberalizing trade in agricultural products,
which would benefit the least-developed countries.
However, breakdown in 2008 indicated gap in perspective
between the developed and developing countries.
Implications of the growth in
bilateral agreements
• Bilateral agreements are growing in number.
• They cover investment as well as trade.
• They are outside the WTO framework, often including
onerous conditions on the weaker country, which the WTO
framework would not permit.
• The multiplication of bilateral agreements has resulted in a
‘spaghetti bowl’ effect for international business.
• The export-processing zone (EPZ) gets round complex
trading rules, but export zones do not necessarily benefit the
wider economy.
Regional integration
• Regional trade agreements (RTAs) – seek to liberalize
trade among members.
• The world’s regions vary in levels of intra-regional trade.
Nafta (the US, Canada and Mexico) has facilitated tariff-free
exports into the US, benefiting US consumers. But a backlash
has developed, accusing NAFTA of exporting US jobs.
• Asian economic integration has been limited – Asean
members vary in levels of economic development and goals;
Apec is a large group of diverse countries, which aspire to
trade liberalization.
European integration
• The European Free Trade Area (Efta) preceded the EU and its
members have extensive ties with the EU.
• The European Union (EU) is the world’s most highly
integrated regional grouping.
• Constitutional reform hinged on a new constitutional
treaty, but was set back by ‘no’ votes in some countries
which held referendums.
• The eurozone has facilitated cross-border trade and
investment.
Figure 6.9:
Share of intraregional trade
flows in each
region’s total
merchandise
exports, 2006
Source: WTO (2007) International Trade
Statistics, www.wto.org
Asia
Middle East
Africa
CIS
Europe
South & Central America
N. America
0%
20%
40%
60%
80%
Share of intra-regional trade flows in 2006, as %
of the region’s total merchandise exports
Figure 6.10: Levels of
regional economic
integration
Figure 6.11:
Merchandise
exports of
Mercosur countries
by destination,
2006
Source: WTO (2007) International Trade Statistics,
www.wto.org
Figure 6.12: Merchandise exports of Nafta countries by
destination, 2006
Figure 6.13: EU trade among member states and with
major non-EU trading partners, 2006
Source: WTO (2007) International Trade
Statistics, www.wto.org
Figure 6.14:
Africa’s regional
exports by region, 2006
Source: WTO (2007) International Trade Statistics, www.wto.org
Conclusions
• Trade ties generate wealth for countries and businesses, and satisfy
consumer needs for products and services.
• Emerging countries are now gaining on the established developed
countries in their share of world trade.
• Governments have at their disposal a number of policy tools, such
as tariffs and quotas, which promote national objectives.
• The WTO has fostered multilateral trade liberalization, but has
encountered protectionist resistance among members.
• Regional trade agreements have aimed to liberalize intra-regional
trade, benefiting businesses and consumers. However, national
interests remain a strong force.
• For international business, complex bilateral and regional
frameworks create challenges.