1. International Tra
Dec 16, 2015
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
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 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