1. Chapter 28 International trade
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Exports as % of GDP
World trade has grown at an average annual rate of 8 % since 1950.
Between 1960 and 2009, UK exports as a fraction of GNP rose from 18% to 27%.
World exports are now around 20% of world GNP.
Source: OECD, Economic Outlook.
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3. Trade patterns, 1980 -2008 (% of world exports)
Destination
Developed Other Developed Other Origin
Developed
Countries
Other
Source: UNCTAD, Handbook of Statistics, (at
As late as 1980, the developed countries were the origin and destination of 71% of world exports, most of this trade being among themselves.
The rapid growth of emerging market economies and the economic liberalization of the former Soviet Union and Eastern Europe has changed this.
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4. Merchandise trade patterns, 2008, (% of region’s exports)
agriculture fuels, manufactures
minerals
World
N. America
Europe
CIS
Africa
Middle East
Asia
The mature economies of Europe and North America and the Asian economies export mainly manufactures.
The Commonwealth of independent states (ex Soviet Union), Africa, and the Middle East mainly export oil and other minerals.
Sources: GATT, Networks of World Trade, 1955–76;
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Some important issues
Raw materials prices
Less-developed countries (LDCs) have claimed exploitation by industrial countries
e.g. by buying raw materials cheaply & selling manufactures dear
Agricultural protection
farmers in rich countries benefit from both subsidies and tariff protection.
LDCs lose by selling less
and with a restricted market, at lower prices
Manufactured exports from LDCs
some LDCs have had success in exporting manufactures
leading to complaints that jobs are under threat in the industrial countries
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6. Some important issues (2)
Globalisation
Lower transport costs and better information technology are gradually breaking down the segmentation of national markets and increasing competition between countries.
A trend reinforced by a reduction in tariffs
A level playing field?
Poor countries feel that the process is largely dictated by rich countries according to their own self-interest.
Raising the demand for LDC exports, reducing agricultural protection in rich countries would help LDCs substantially. 
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7. Comparative advantage
Trade offers benefits when there are international differences in the opportunity cost of goods.
Opportunity cost of a good
the quantity of other goods sacrificed to make one more unit of that good
The law of comparative advantage
states that countries should specialise in producing and exporting the goods that they produce at a lower relative cost than other countries.
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8. The source of comparative advantage
An important difference between countries is in factor endowments,
which will be reflected in different relative factor prices
e.g. if country A has relatively abundant capital but relatively scarce labour compared with country B,
then A would tend to specialize in capital-intensive goods,
and B would tend to specialize in labour-intensive products.
Comparative advantage may also reflect a relative advantage in technology.
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Gainers and losers
Countries may gain from specialisation and trade
but not all countries may gain equally
Commercial policy
is government policy that influences international trade through taxes or subsidies
e.g. tariffs
or through direct restrictions on imports and exports.
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10. The economic effects of a tariff
DD and SS show the domestic
demand and supply for a good. DD SS
Quantity
Price Pw Qs Qd
Pw+T
Qs'
Qd'
If the world price is Pw,
and there is free trade,
domestic firms supply Qs
domestic demand is Qd
and the difference is imported.
A tariff can stimulate domestic
supply and restrict imports.
At a domestic price Pw+T,
where T is the size of the tariff.
Domestic demand falls to Qd', domestic supply rises to Qs‘ and imports fall.
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11. The welfare costs of a tariffSS
The tariff leads both to transfers and net social losses.
Price
The government raises
revenue – i.e. there is a
transfer to the government,
Pw+T
There is a social cost from production inefficiency, given that the
good could be imported at Pw, and a loss of consumer surplus.
and there is a transfer in
the form of extra profits to
producers.
Qs'
Qd' A B Pw Qs Qd DD
Quantity
A is the amount society spends by producing goods it could import more cheaply.
B is the excess of consumer benefits over social marginal cost that is lost.
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Tariffs
The deadweight burden of a tariff suggests that society suffers from this method of restricting trade.
This is the case for free trade.
Tariffs have fallen substantially under the GATT
General Agreement on Tariffs and Trade
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13. The case for tariffs – good arguments
Optimal tariff
a first-best argument
only valid where the importing country is large enough to affect the world price.
This policy fulfils the principle of targeting
which says that the most efficient way to attain a given objective is to use a policy that influences that activity directly.
Policies that attain the objective, but also influence other activities are second-best, because they distort those other activities.
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14. The case for tariffs – second-best arguments
Way of life
an attempt to preserve ‘traditional’ ways
a production subsidy would be better
Suppressing luxuries
an attempt to curb consumption patterns of the rich in a poor society
better achieved by a consumption tax
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15. The case for tariffs – second-best arguments (2)
Infant industries
an attempt to nurture new activities via learning by doing
a temporary production subsidy probably better
Revenue
tariffs raise government revenue
but there are better ways
Cheap foreign labour
a non-argument – denies benefits of comparative advantage
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16. Other commercial policies
Although tariff rates have fallen under GATT, there has been a proliferation of other trade restrictions
quotas
non-tariff barriers
administrative regulations that discriminate against foreign goods
export subsidies
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An export subsidy Pw
World
price
Under free trade, with the
world price at Pw, Qd
consumers demand Qd S Qs
production is Qs
Exports now rise to AB. A B
Subsidy
With a subsidy, producers
produce Qs’ and supply Qd' to
the domestic market.
Pw+ s
Qd'
Q`s'
exports are GE. G E
and the loss of consumer surplus.
Social costs arise from
production inefficiency
Price DD
Quantity
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