Download MBAW5 - Trinity College Dublin

Globalisation and Free Trade
(ch 17)
MBA Session 5
Professor Dermot McAleese
Trinity College Dublin
OUTLINE
 Trends in global trade
 Gains from foreign trade
 Quantifying the gains from trade
 Why protection failed
 Competitiveness and Globalisation
WHERE ECONOMICS BEGAN
Adam Smith, Wealth of Nations, 1776
 Productivity the key to wealth of nations (not gold, not balance of trade
surplus)
 Productivity enhanced by specialisation
 Dexterity
 Saving of time
 Machinery invented by workmen
 Specialisation increased by enlarging the extent of the market
 Extent of market limited by
 Trade barriers
 Monopoly
 ‘Invisible hand’ will even look after the poor!
‘in a well-governed society, opulence extends itself to the lowest ranks of
the people’
TRENDS IN GLOBAL TRADE
 Growth in trade
 Composition of trade
 Trade regimes (GATT, Uruguay Round, WTO)
Two Core Principles of WTO
• Non-discrimination
• National Treatment (banks, insurance,
gasoline stations etc)
THE FUNCTIONS OF THE WTO
 Administration and implementation of the 29 multilateral
agreements which make up the WTO ( incl agriculture, textiles,
GATS, government procurement)
 A forum for multilateral trade negotiations
 Resolving trade disputes (200 cases outstanding)
 Reviewing national trade policies (142 members to date)
 Co-operating with other global economic policy institutions
Table 1. Trade and GDP, 1900-2000
(average annual percentage change in volume)
Merchandise trade
Gross domestic product
1900-13
1913-50
1950-73
1973-00
4.3
2.5
0.6
2.0
8.2
5.1
4.7
2.8
Source: WTO, Regionalism and the World Trading System (Geneva,
April 1995); International Trade Statistics (1995); own estimates
Table 1a. Value of world exports, 2000 (US$ billion)
World merchandise exports
Commercial services
Total
Source: WTO and own estimates
6180
1415
7595
Table 2. Leading exporters and importers in
merchandise trade in 2000
Exporters
Rank Country
$US bn
% share
Importers
Rank Country
$US bn
1
2
3
4
5
6
7
8
9
10
US
Germany
Japan
France
UK
Canada
CHINA
Italy
Netherlands
Hong Kong
782.4
552.0
479.0
298.1
280.1
277.2
249.2
234.6
211.7
202.4
12.3
8.7
7.5
4.7
4.8
4.2
3.9
3.7
3.3
3.2
1
2
3
4
5
6
7
8
9
10
US
Germany
Japan
UK
France
Canada
Italy
CHINA
Hong Kong
Netherlands
1
EU 15
855.4
17.2
2
EU15
Source: WTO, press release, 6 April 2000.
% share
1,258.0
500.1
379.5
331.7
305.4
249.1
233.3
225.1
214.0
197.0
18.9
7.5
5.7
5.0
4.6
3.7
3.5
3.4
3.1
3.0
959.2
18.2
Table 3. How important is trade?
Country
Exports as a % of GDP
(1998)
The least trade-dependent nations
Rwanda
Brazil
Albania
Uganda
Argentina
India
Peru
Iran
Bangladesh
5
7
9
10
10
11
12
13
14
Major industrial economies (G7 nations)
US
Japan
China
Germany
France
UK
Italy
Canada
12
11
22
27
27
29
27
41
The world's most trade-dependent nations
Singapore
Hong Kong
Malaysia
Ireland
Estonia
Belgium
153
125
114
80
80
73
Source: World Development Indicators, The World bank (2000).
GAINS FROM TRADE
 Traditional gains
comparative advantage
variety of products
 Modern extensions
competition and contestability
economies of scale and scope
innovation and R&D (imports)
product and quality improvement
ON FOREIGN TRADE
‘No extension of foreign trade will
immediately increase the amount of value in
a country, although it will very powerfully
contribute to increase the mass of
commodities, and therefore the sum of
enjoyments.’
David Ricardo, Principles of Political Economy and Taxation 1821,
Chapter VII
The gains from trade liberalization should not
only be seen through a narrow economic lens.
Trade has also been a vehicle for promoting
broader political objectives, especially peace and
stability. Trade establishes mutually beneficial
links among nations, creating interest in
cooperation. It cements relationships among
disparate peoples and societies, lessening the risk
of conflict, and it strengthens the commitment of
governments to rules in the place of realpolitik.
World Trade Organization, Annual Report, 1998
Table 4. Developing countries: trade orientation and economic performance
1974-85
1986-92
Strongly outw ard-oriented
Real GDP growth
Real per capita GDP growth
Total factor productivity
8
6.1
2.6
7.5
5.9
3.8
Moderately outw ard-oriented
Real GDP growth
Real per capita GDP growth
Total factor productivity
4.3
2.2
0.9
4.8
2.5
2.4
Moderately inw ard-oriented
Real GDP growth
Real per capita GDP growth
Total factor productivity
4.4
1.8
1.3
2.4
-0.1
0.3
Strongly inw ard-oriented
Real GDP growth
Real per capita GDP growth
Total factor productivity
2.3
-0.3
-0.4
2.5
-0.1
0.3
All developing countries
Real GDP growth
Real per capita GDP growth
Total factor productivity
4.1
1.7
0.8
3.8
1.5
1.4
Source: IMF, World Economic Outlook (May 1993), p. 76.
Estimated Annual Income Gains form
the Uruguay Round ($bn)
US
EU
Japan
Developing economies
China
Chinese Taipei
Other
122
164
27
116
19
10
52
Total
510
COMPARATIVE ADVANTAGE
‘nations should concentrate on what they are best at
producing’
International Trade Theory
 A country can have an absolute disadvantage in all goods and
yet gain from trade with the more efficient partner
 The gain is realised through imports
 Trade involves mutual gains (trade is a positive sum game)
 The total gain from trade may be unevenly shared
X-EFFICIENCY AND FREE TRADE
Wine
T’
T
0
T
T’
Clothing
QUANTIFYING THE GAINS FROM TRADE
 gains from free trade vs. autarky
 gains of incremental movement towards freer trade
 comparative analysis
TRADE POLICY AND PROTECTION
Sources of possible distortion:
 Unemployment and the capacity to adjust
 Foreign monopoly power
 Failure of prices to signal future changes in
comparative advantage
 Neglect of environmental effects
WHY FREE TRADE MIGHT NOT
ALWAYS BE BEST POLICY (Adam
Smith, Box 17.4)
 Defence of the country
 Level playing field
 Retaliation
 Transitional protection
MODERN ARGUMENTS FOR
PROTECTION
optimum tariff
infant industry
income distribution
strategic trade theory
WHY PROTECTION FAILED
• Protected industries started well but became
inefficient
• Downward pressure on prices for food
products (bad for farmers, good for the
consumer)
• Protection discouraged exports, thus
missing out on economies of scale
• Protected industries were poor innovators
• Protection gave incentive to corruption
What determines comparative
advantage? What can we export?
‘Comparative advantage is no longer
seen as divine inheritance…
…nor are market structures and
rivals’ behaviour set in tablets of
stone’
Cecchini, P., The European Challenge 1992, (Aldershot:
Wildwood House, 1988), p. 85
PORTER’S DIAMOND
Chance
Firm Strategy
Structure and Rivalry
Factor
Conditions
Demand
Conditions
Related and
Supporting
Industries
Government
Source: Michael Porter, The Competitive Advantage of Nations (London: Macmillan, 1990)
TRADE POLICIES AND NEW TRADE ISSUES
 how to cope with the losers (Box 17.5)
 how to maximise the gains
 trade agreements and the WTO
 new forms of protection
Case Study: Effects of China’s entry into
WTO (Dec 2001)
•
•
•
•
•
Some concessions on agriculture
Improved access to global market
Textiles and clothing agreement
Strong foreign investment effect
Spur to efficiency in import-competing
firms
• Underpins market reform process
Effects of China’s entry into
WTO – Short run costs
•
•
•
•
Job losses in state operated enterprises
Pressure on agriculture
Cost of intellectual property agreement
Exposure to any downturns in the world
economy
China’s trade by area 2000
• Exports
US
Hong Kong
Japan
Korea
EU
$bn
52
45
42
11
%
21
18
17
5
18
•
•
•
•
•
•
Imports
Japan
Taiwan
S Korea
US
EU
$bn
42
26
23
22
%
18
11
10
10
15
Higt tech=
computers,
telecom,electron
ics Sitc 77
High tech Exports (% of total exports to
OECD)
BIS annual
report 2001 p.43
•
•
•
•
•
•
•
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
20
30
9
41
58
60
77
Thailand 34
Taiwan
50
China and WTO – the view from
Geneva
There is no doubt that China’s decision to join the
WTO is particularly momentous. Opening its
markets to foreign trade and investment will make
China more prosperous, and commtting China to
world trade rules will foster and consolidate
market-based reforms. WTO Members stand to
gain by better access to an economy of 1.3 billion
consumers, which was growing at 8% in 2000.
WTO Annual Report 2001
Class Exercise
What has the WTO done for the
developing countries?
NEW TRADE ISSUES
 Services (GATS)
 Intellectual property (TRIPS)
 Environment
 Direct foreign investment
 Fair trade and competition
 Labour standards
 Bribery and corruption
 Trade and development in the least developed
countries
FREE TRADE AND UNEMPLOYMENT
Wine
A
P
P*
T
Clothing
Note: If free trade brings the economy from A to P* instead of to P, there will be
unemployment. P* is certainly a worse point than P: it could also be wore than A
‘In the past comparative advantage was function of
natural-resources endowments and factor proportions
(capital-labour ratios). Cotton was grown in the
American south because the climate and soil were right.
Slavery provided abundant labour. Cotton was spun in
New England because it had the capital to harness
available waterpower. Each industry has its natural
location.
Consider what are commonly believed to be the seven key
industries of the next few decades – microelectronics,
biotechnology, the new materials industries, civilian
aviation, telecommunications, robot plus machine tools,
and computers plus software. All are brainpower
industries. Each could be located anywhere on the face of
the globe. Where they will be located depends upon who
can organise the brainpower to capture them. In the
century ahead comparative advantage will be man-made.’
Lester Thurow, Head to Head: The Coming Economic Battle Among Japan,
Europe and America (1992).