11. International Trade

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 comparative advantage

• The law of comparative advantage

– specialisation as the basis for trade

– absolute advantage

– comparative advantage

– the gains from trade based on comparative advantage

Production possibilities for two countriesProduction possibilities for two countries

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 comparative advantage

• The limits to specialisation and trade

• The law of comparative advantage

– specialisation as the basis for trade

– absolute advantage

– comparative advantage

– the gains from trade based on comparative advantage

• The limits to specialisation and trade

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 comparative advantage

• The limits to specialisation and trade

• The terms of trade

• The law of comparative advantage

– specialisation as the basis for trade

– absolute advantage

– comparative advantage

– the gains from trade based on comparative advantage

• The limits to specialisation and trade

• The terms of trade

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 comparative advantage

• The limits to specialisation and trade

• The terms of trade

–PX/PM

• The law of comparative advantage

– specialisation as the basis for trade

– absolute advantage

– comparative advantage

– the gains from trade based on comparative advantage

• The limits to specialisation and trade

• The terms of trade

–PX/PM

The Gains from TradeThe Gains from Trade

• Other reasons for gains from trade

–decreasing costs

–differences in demand

– increased competition

– trade as an ‘engine of growth’

–non-economic advantages

• Other reasons for gains from trade

–decreasing costs

–differences in demand

– increased competition

– trade as an ‘engine of growth’

–non-economic advantages

Arguments for Restricting TradeArguments for Restricting Trade

• Methods of restricting trade

– tariffs

–quotas

– administrative barriers

–other

• Arguments for restricting trade

– infant industry argument

– changing comparative advantage

– to prevent dumping

• Methods of restricting trade

– tariffs

–quotas

– administrative barriers

–other

• Arguments for restricting trade

– infant industry argument

– changing comparative advantage

– to prevent dumping

Arguments for Restricting TradeArguments 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 (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 TradeArguments for Restricting Trade

• Problems with protection

–protection as ‘second best’

–world multiplier effects

– retaliation

– cushions inefficiency

–bureaucracy

• Problems with protection

–protection as ‘second best’

–world multiplier effects

– retaliation

– cushions inefficiency

–bureaucracy

World Attitudes towardsTrade and Protection

World Attitudes towardsTrade 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

• History of protection

–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT

• the growth in world trade

Growth in real GDP and in real exports of goodsand services: total OECD countries

Growth in real GDP and in real exports of goodsand services: total OECD countries

Growth in GDP

Growth in real GDP and in real exports of goodsand services: total OECD countries

Growth in GDP

Growth in real GDP and in real exports of goodsand services: total OECD countries

Growth in exports of goods and services

Growth in GDP

Growth in real GDP and in real exports of goodsand services: total OECD countries

Growth in exports of goods and services

Growth in GDP

World Attitudes towardsTrade and Protection

World Attitudes towardsTrade 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

–Re-emergence of protectionism in the 1980s

• History of protection–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT• the growth in world trade

–Re-emergence of protectionism in the 1980s

World Attitudes towardsTrade and Protection

World Attitudes towardsTrade 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

–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers

• History of protection–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT• the growth in world trade

–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers

World Attitudes towardsTrade and Protection

World Attitudes towardsTrade 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

–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers

–The Uruguay Round

• History of protection–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT• the growth in world trade

–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers

–The Uruguay Round

World Attitudes towardsTrade and Protection

World Attitudes towardsTrade 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

–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers

–The Uruguay Round• aims of the Uruguay round negotiations

• History of protection–Pre-war growth in protection

–Post-war reduction in protection and the role of GATT• the growth in world trade

–Re-emergence of protectionism in the 1980s• the use of non-tariff barriers

–The Uruguay Round• aims of the Uruguay round negotiations

World Attitudes towardsTrade and Protection

World Attitudes towardsTrade and Protection

• The Uruguay Round settlement and the creation of the WTO

–problems in reaching agreement

– the agreement

– the work of the WTO

• dispute settlement

• conflicting interests in trade disputes

– efficiency in trade versus environmental and social interests

– international protests

• The Uruguay Round settlement and the creation of the WTO

–problems in reaching agreement

– the agreement

– the work of the WTO

• dispute settlement

• conflicting interests in trade disputes

– efficiency in trade versus environmental and social interests

– international protests

Trading BlocsTrading 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

• 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 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

Trading BlocsTrading Blocs

• Preferential trading in practice

– the EU

–NAFTA

• differences between the EU and NAFTA

–other examples

• Preferential trading in practice

– the EU

–NAFTA

• differences between the EU and NAFTA

–other examples

The European UnionThe European Union

• Historical background

• From customs union to common market

–Common Agricultural Policy

– regional policy

– competition policy

– tax harmonisation

– social policy

• Historical background

• From customs union to common market

–Common Agricultural Policy

– regional policy

– competition policy

– tax harmonisation

– social policy

The European UnionThe European Union

• The single market

–historical background

– the Single European Act

– completing the single market

–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

–benefits of the single market

• trade creation

• reduction in the direct costs of barriers

• economies of scale

• greater competition

The European UnionThe European Union

• The single market (cont.)

– criticisms of the single market

• radical economic change is costly

• adverse regional multiplier effects

• development of monopoly/oligopoly power

• trade diversion

– evidence

– the future of the EU

• effect of new members

• The single market (cont.)

– criticisms of the single market

• radical economic change is costly

• adverse regional multiplier effects

• development of monopoly/oligopoly power

• trade diversion

– evidence

– the future of the EU

• effect of new members

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 inward looking

• Trade strategies

–primary outward looking

– secondary inward looking

• import-substituting industrialisation (ISI)

– secondary outward looking

• possibly complemented by primary inward looking

Trade and Developing CountriesTrade and Developing Countries

• 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

Trade and Developing CountriesTrade 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

• 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

Trade and Developing CountriesTrade and Developing Countries

• 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

Trade and Developing CountriesTrade 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

• 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 CountriesTrade and Developing Countries

• 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 with comparative advantage

• increased competition

• increased investment

• more employment and greater equality

• faster growth

• 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 with comparative advantage

• increased competition

• increased investment

• more employment and greater equality

• faster growth

Growth rates and export performance ofselected secondary outward-looking countries

Growth rates and export performance ofselected secondary outward-looking countries

Trade and Developing CountriesTrade and 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

• 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