World of International Trade

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World of International Trade Prehistoric
timesArchaeological evidence of trade between
communities 100s and even 1000s of kms.
apart - value creation - salt, tin -beauty -
sea shells, amber, gems, porcelain Historic
times Roman Empire traded from China to
England Mediaeval Arabs dominated Silk route,
spice islands, Africa (East coast and
Sahara) Rome conquered England to secure grain
for the Roman mob - policy of bread and
circuses..and perhaps the desertification of
Libya was already underway International Trade
is good for producers increases
demand increases prices International trade
is good for consumers increases
supply, decreases price
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Where my shirts have been made
Poland U.S.A. England Canada Italy Thailand Z
imbabwe Korea Ghana India Vietnam Hong
Kong Mauritius Bahrain
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Going International has its downside 1.
Increases risk - changes in both of supply and
demand - changes in exchange rates -
increased variability of sales and
profits 2.Macroeconomic effects - Destruction
(restructuring) of domestic industry by
imports - effect on employment - effect on
communities 3. Producers diversify away from
dependence on local markets and become
dependent on a (relatively) few and specialized
export/supplier markets
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Two fundamental issues 1. Economic Theory vs.
Practice - Economic Theory says free trade is a
good thing But it costs jobs, industries,
disruption, so societies react with
various kinds and degrees of protectionism 2.
History - The Great Depression must never be
allowed to happen again - collapse of
international trade - collapse of international
foreign exchange markets At the end of WW II the
UN was founded (wars must not be allowed to
happen again) and three parallel economic
institutions established - IMF - lender of last
resort to keep foreign exchange markets liquid -
IBRD (World Bank) - finance development -
eliminate poverty - GATT - liberalize trade
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Success of all three has been at best
partial IMF - an institution to save the western
banks from the consequences of bad
lending? IBRD - Forced poorer countries into a
kind of debt trap? - Economic development has
been partial at best GATT - slow, partial,
series of bilateral agreements -Uruguay round
and founding of WTO was an attempt to make
a frontal attack on ALL trade But more limited
endeavours of a regional nature seem to have had
most success - EEC - Mercosur - Auto Pact /
NAFTA
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Characteristics of International Trade 1. In
1970s expansion, Trade grew faster than world
GDP in 1980s recession international trade fell
faster than world GDP 2. Increasing Dominance
of USA in world trade 12.6 of exports 16.1
of imports (difference largely accounted for by
petroleum) 3. Impact of changes in X.C rates -
1980s US devalued - easier for US to
export 1990s US appreciated - easier for US to
import 4. Debtor/creditor position US trade
deficit now running 32 billion per month 1965
US was worlds largest creditor nation -400
bn 2000 US is worlds largest debtor nation -
900 bn 5. US paying by selling assets net
capital flow from EU to US in 1999 was 68 bn
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6. US response protectionism - about 24 of US
imports getting some form of protection, e.g.
Canadian potatoes, lumber, shell fish, steel 7.
Agriculture subsidized and/or protected just
about everywhere 8. Many products subject to
quotas, especially labour intensive items
like textiles, clothing, footwear. 9.
Importance of MNEs - about 1/3 of world trade
is intra-firm, i.e. companies selling to
themselves
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Dimensions of the Struggle Protectionism vs.
Free trade Agriculture vs. Industry Developed
countries vs. Less Developed Countries Regional
arrangements vs. Global arrangements Framework
for Analysis of International Trade Political )
Economic ) Social ) Technological )
environment Competitive (absolute) advantage and
comparative advantage
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Absolute Advantage Country Output Output/man
hr. Total labour hrs. X Y X Y A 16 4 2 1
8 4 12 B 4 4 1
2 4 2 6 Total output (no trade) 20 8 Now
suppose each specializes in the product in which
it has absolute advantage A makes only X and B
makes only Y Then total output of X 12 x
2 24 an Increase of 4 and total output of Y
6 x 2 12 an Increase of 4
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Comparative Advantage Country Output
Output/man hr. Ratio Total labour hrs.
X Y X Y A 12 4 4 2 21 32 5 B 7
7 1 1 11 77 14 Total
output (no trade) 19 11 Now suppose each
specializes in the product in which it has
comparative advantage A makes only X and B
makes only Y Then total output of X 4 x 5
20 an Increase of 1 and total output of Y
14 x 1 14 an Increase of 3 It still pays to
specialize and trade even though B has no
absolute advantage in either product
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Problems unresolved by economics 1. What
price? 2. How to distribute the benefits? 3. How
to cushion the costs of change? Which is why
International Trade negotiations are so drawn out
and complex!
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Traditional Theorems of International Trade 1.
Trade improves the welfare of the factors used
most intensively 2. Welfare of producers
improves in exporting sector relative
to producers in importing sector 3. Welfare of
consumers in importing sector improves relative
to consumers in exporting sector 4. Exports
are biased towards resource abundance 5. Trade
brings about equalization of incomes, interest
rates and rents among all countries - in the
long run But in the long run we are all dead
(Lord Keynes). The last point shows the
limitations of economic theory, because large
scale inequalities persist around the world
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Newer Theories of International Trade 1.Old
theories are for homogeneous products. Today we
have branding and product differentiation (But
note the weak position of unbranded commodities
such as oil, gas, wheat, copper, sugar, coffee,
bananas) 2. Importance of clustering
(agglomeration) - coming together of groups of
industries which are mutually supportive, e.g.
Silicon Valley (Sometimes fostered by the coming
together of critical resources) Points up the
importance of externalities - things outside the
firm but which affect the companys balance
sheet 3. Modern determinants of success are not
costs or factors of production but design,
quality, marketing skills SUMMARY Trade is a
good thing!
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Beyond comparative and competitive advantage
Differences in exchange rates are determined by a
variety of factors - differences in inflation
rates - capital movements - -FDI -
portfolio investment - savings rates -
transfers - terms of trade - I.e. relative
commodity prices - natural resource endowment
and development Lags - it took 5 to 7 years for
the oil price shock of the 1970s to work
its way through the economic system to the
recession of the 1980s Business cycles are not
coincident around the world MORAL If you are in
foreign trade, you need a long time horizon
- its not an in-and-out affair