Annual growth in volume of world merchandise exports and GDP Source: based on data in Statistics Database (WTO) and World Economic Outlook (IMF ) Note: 2009 and 2010 forecasts

Share of world merchandise exports, by value (2008) Source: Based on data in WTO Statistics Database

Growth in Chinese export volumes and real GDP (%) Source: data drawn from World Development Indicators (World Bank) and Outlook 2009 (Asian Development Bank)

Source: data drawn from World Development Indicators 2005 (World Bank); Handbook of Statistics 2008 (UNCTAD) World real (inflation adjusted) primary commodity prices (2000 = 100)

Average annual growth in real GDP (%) Share of manufactures in merchandise exports (%) Average annual growth rate of merchandise exports 1960–901991– –901991–2008 Brazil Malaysia South Korea Singapore Hong Kong China All developing countries Sources: data drawn from Handbook of Statistics (UNCTAD) and World Development Indicators (World Bank). Growth rates and export performance of selected secondary outward-looking countries

GAINS FROM TRADE International specialisation as basis for trade - economies of mass production can be obtained through concentration within a limited number of countries Law of Absolute Advantage - e.g. if A can produce food more efficiently than B, and B in turn can produce cars more efficiently than A, then A should concentrate on food and B on cars with trade taking place between both countries Law of Comparative Advantage - even if with reference to the previous example one country - say A - is more efficient at producing both products, then specialisation should still take place in terms of relative advantage. So if A is even more efficient at producing both cars than food then A should specialise in car production and B in food - means that every country, however poor, can be involved in trade

GAINS FROM TRADE (con) However there are limits to specialisation so for example if Ireland was to completely specialise in agriculture, people with no talent for farming would have to be employed in the sector leading to inefficiency Other Reasons for Trade - differences in demand e.g. if the French like Irish lamb then it makes sense to specialise - growing competition from imports can increase competitiveness thus stimulating efficiency - trade opens up the possibility - as in Ireland - for rapid economic growth - there are strong political and cultural benefits from fostering increased trade (as in EU)

TERMS OF TRADE The law of comparative advantage suggests that overall production will increase through specialisation. However it does not state how gains should be distributed between nations. This is where terms of trade are important It is defined as: Average price of exports X 100 Average price of imports So for example if there is a sharp increase in the price of oil, (other things being equal) the terms of trade would deteriorate for Ireland as the average price of imports would rise more rapidly than that of exports, as Ireland imports all its oil In general terms of trade are poor for the developing nations as the demand for what they produce e.g. food and raw materials does not rise as rapidly as industrial goods CSO Weblink CSO - Statistics: Volume, Price and Terms of Trade Indices CSO - Statistics: Volume, Price and Terms of Trade Indices

METHODS OF RESTRICTING TRADE Tariffs (customs duties) - tax or levy on imports; has a number of effects on consumer, producer, government and distribution Quotas - quantitative limitations on imports Exchange Controls - limits on taking foreign currency out of country Export Restrictions and Export Taxes Export Subsidies and other supports Administrative Barriers Procurement Policies

The government raises revenue – i.e. there is a transfer to the government There is a social cost from production inefficiency, given that the good could be imported at P w. There is also a loss of consumer surplus. and there is a transfer in the form of extra profits to producers The welfare costs of a tariff DD SS Quantity Price PwPw QsQs QdQd P w + T Qs'Qs' Qd'Qd' The tariff leads both to transfers and net social losses

Social costs arise from production inefficiency and consumer surplus. An export subsidy DD S Quantity Price PwPw World price Under free trade, with the world price at P w, QdQd consumers demand Q d QsQs production is Q s exports are GE. G E Subsidy With a subsidy, producers supply Q d ' to the domestic market and produce Q s '. P w + s Qd'Qd' Q `s ' Exports are now AB. A B 33.15

ARGUMENTS IN FAVOUR OF RESTRICTING TRADE The infant industry argument - industries may need to be protected to enable them to grow sufficiently to achieve economies of scale To prevent "dumping" and other unfair trade practices - dumping refers to below cost selling To prevent the establishment of a foreign-based monopoly To reduce reliance on goods with little dynamic potential To spread the risks of fluctuating markets To reduce the influence of trade on consumer tastes To prevent the importation of harmful goods To take account of externalities

ARGUMENTS IN FAVOUR OF RESTRICTING TRADE (con) The exploitation of monopoly power To protect declining industries Non-economic arguments - to preserve the production of a wide range of products in case of war - refusal to trade with certain countries because of political disagreements - to preserve a traditional way of life - to maintain as diverse a society as possible

PROBLEM WITH PROTECTIONISM There may be better ways of helping industry World multiplier effects - as one country's imports represents another country's exports reducing imports ultimately reduces export opportunities Retaliation - generally when one country imposes restrictions the other country imposes retaliatory measures Protection may encourage inefficiency with respect to production Bureaucracy - protectionism can lead to large administrative costs

TYPES OF TRADING AGREEMENTS Free Trade Area - where countries remove tariffs and quotas against each other but are free to restrict imports from non-member countries Customs Union - a free trade area where countries adopt a common external tariff (and quotas) with respect to non-members Common Market - where member countries operate a single market, implying similar taxes, similar laws and regulations, free movement of labour capital and materials and common policies in different economic areas Economic and Monetary Union (EMU) - fixed exchange rates leading to common currency - common Central Bank - common macroeconomic policies Economic and Political Union - common defence policy - centralised decision-making

DIRECT EFFECTS OF CUSTOMS UNION Trade Creation - where consumption shifts from high cost to low cost producer Trade Diversion - where consumption shifts from lower cost to high cost producer Advantages of Customs Union - increased market size - external economies of scale - increased bargaining power of whole customs union - increased competition between member countries Disadvantages of Customs Union - loss of sovereignty - possible diseconomies of scale - increased bureaucracy - uneven effects throughout union Examples of Customs Union - EU, NAFTA, ASEAN etc

THE EUROPEAN UNION The European Union No. of countries - formerly 15 members Germany, France, Britain, Ireland, Italy, Spain, The Netherlands, Belgium, Luxembourg, Portugal, Denmark, Greece, Sweden, Austria, Finland New Member countries Now increased to 27 members - joined May 2004; Poland, Hungary, The Czech Republic, Estonia, Latvia, Cyprus, Malta, Slovakia, Slovenia, Lithuania - joined 2007; Bulgaria and Romania - to join Western Balkan states – Croatia and Macedonia Turkey also wants to join; however opinion is divided among existing member countries as to whether it should be allowed to join

FROM CUSTOMS UNION TO COMMON MARKET Common Agricultural Policy - artificial high prices set for farm food Regional Policy - EU regional policy provides grants to firms and local authorities in depressed regions of the union Competition Policy - EU controls restrictive policies and monopoly Harmonisation of Taxation - this has been carried out with respect to VAT