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International Trade The Gains from Trade The law of comparative advantage specialisation absolute advantage comparative the as the basis for trade advantage gains from trade based on comparative advantage Production possibilities for two countries Kilos of wheat Metres of cloth Less developed country Either 2 or 1 Developed country Either 4 or 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 Metres of cloth Less developed country Either 2 or 1 Developed country Either 4 or 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 Metres of cloth Less developed country Either 2 or 1 Developed country Either 4 or 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 Metres of cloth Less developed country Either 2 or 1 Developed country Either 4 or 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 trade competition 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 to comparative advantage 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 world as ‘second best’ multiplier effects retaliation cushions inefficiency bureaucracy Measuring the efficiency loss from protection The cost of protection P Sdom (=MC) S world PW Ddom O Q1 Q2 Q The cost of protection P Sdom (=MC) Area edbc equals loss of consumer surplus a PW + t e Tariff c PW d S world b + tariff S world Ddom O Q1 Q3 Q4 Q2 Q The cost of protection P Sdom (=MC) Area 1 equals gain in producer surplus a Area 3 equals gain in tariff revenue PW + t e Tariff c PW d 1 2 3 4 S world b + tariff S world Ddom O Q1 Q3 Q4 Q2 Q The cost of protection P a PW + t e Tariff c PW Sdom (=MC) Areas 2 + 4 equals net loss d 1 2 3 4 S world b + tariff S world Ddom O Q1 Q3 Q4 Q2 Q World Attitudes towards 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 Real growth rate (%) 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 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Trade Statistics, WTO (www.wto.org) Real growth rate (%) 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 real GDP 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Trade Statistics, WTO (www.wto.org) Real growth rate (%) 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 Growth in real GDP 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: Trade Statistics, WTO (www.wto.org) World Attitudes towards Trade and Protection Re-emergence of protectionism in 1980s the increasing use of non-tariff barriers The Uruguay Round aims of the negotiations problems the in reaching agreement agreement assessing the agreement World Attitudes towards 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 trade from various groups to unfettered 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 certain disadvantages 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 regional Agricultural Policy policy competition tax policy harmonisation social trade policy policy The European Union The single market historical the background Single European Act completing the single market The benefits of the single market trade creation reduction in the direct costs of barriers economies greater of scale 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 effects Market scoreboard of expansion of the EU Trade and Developing Countries Trade strategies primary outward looking secondary inward looking import-substituting secondary possibly looking industrialisation (ISI) outward looking complemented by primary inward Trade and Developing Countries Approach 1: exporting primaries justification exploits a for exporting primaries comparative advantage 'vent for surplus' an 'engine for growth' problems with traditional trade theory comparative benefits trade costs change over time may not flow to nationals 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 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 34 21 224 100 122 Oil World primary commodity prices (1990 = 100) 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 34 21 224 100 122 Oil World primary commodity prices (1990 = 100) 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 34 21 224 100 122 Oil World primary commodity prices (1990 = 100) 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 34 21 224 100 122 Oil Average annual changes in prices of various products 1985–94 1995–2004 1.2 –1.4 Non-oil primary product exports of heavily indebted poor countries –0.4 –1.6 Oil prices –5.7 4.6 5.0 –0.1 Non-oil primary product exports of developing countries Manufactured exports of advanced economies Average annual changes in prices of various products 1985–94 1995–2004 1.2 –1.4 Non-oil primary product exports of heavily indebted poor countries –0.4 –1.6 Oil prices –5.7 4.6 5.0 –0.1 Non-oil primary product exports of developing countries Manufactured exports of advanced economies Trade and Developing Countries Approach 2: ISI justifications problems dynamic of primary exporting potential in manufacturing • infant industries • rapid technological advance patterns of protection selecting tariff industries for protection 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 benefits promotion of manufactured exports 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 Average annual growth in real GDP (%) Share of manufactures in merchandise exports (%) Annual average growth rate of exports (%) 1965–2001 1970 2001 1965–2001 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 All developing countries 4.1 27 65 5.7 Growth rates and export performance of selected secondary outward-looking countries Average annual growth in real GDP (%) Share of manufactures in merchandise exports (%) Annual average growth rate of exports (%) 1965–2001 1970 2001 1965–2001 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 All developing countries 4.1 27 65 5.7 Growth rates and export performance of selected secondary outward-looking countries Average annual growth in real GDP (%) Share of manufactures in merchandise exports (%) Annual average growth rate of exports (%) 1965–2001 1970 2001 1965–2001 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 All developing countries 4.1 27 65 5.7 Growth rates and export performance of selected secondary outward-looking countries Average annual growth in real GDP (%) Share of manufactures in merchandise exports (%) Annual average growth rate of exports (%) 1965–2001 1970 2001 1965–2001 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 All developing countries 4.1 27 65 5.7 Growth rates and export performance of selected secondary outward-looking countries Average annual growth in real GDP (%) Share of manufactures in merchandise exports (%) Annual average growth rate of exports (%) 1965–2001 1970 2001 1965–2001 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 All developing countries 4.1 27 65 5.7 Trade and Developing Countries Approach 3: exporting manufactures (cont.) drawbacks possible of exporting manufactures retaliation from advanced countries • but attitudes of WTO competition vulnerability from other developing countries to world fluctuations • world recessions • speculation trade between developing countries trade blocs of developing countries