1. International Trade

2. International trade is the exchange of capital, goods, and services across international borders or territories. [1] capitalgoodsservices international borders [1] In most countries, such trade represents a significant share of gross domestic product (GDP).gross domestic product 1. dictionary.reference.com

3. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.tradeSilk RoadAmber Road

4. International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.economicsinternational finance international economics

5. International trade is, in principle, not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not.domestic trade

6. The main difference is that international trade is typically more costly than domestic trade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or culture.tariffs

7. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries.factors of productionlabor

8. Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Trade in goods and services can serve as a substitute for trade in factors of production.

9. New Trade Theory New Trade Theory tries to explain empirical elements of trade that comparative advantage-based models above have difficulty with.

10. These include the fact that most trade is between countries with similar factor endowment and productivity levels, and the large amount of multinational production (i.e., foreign direct investment) that exists.foreign direct investment

11. New Trade theories are often based on assumptions such as monopolistic competition and increasing returns to scale.monopolistic competitionreturns to scale One result of these theories is the home- market effect, which asserts that, if an industry tends to cluster in one location because of returns to scale and if that industry faces high transportation costs, the industry will be located in the country with most of its demand, in order to minimize cost.home- market effect

12. The 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

13. Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

14. Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

15. Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

16. Production possibilities for two countries Pre-trade exchange ratios Less developed country:2 wheat for 1 cloth Developed country:1 wheat for 2 cloth International trade exchange ratios Less developed country:1 wheat for 1 cloth Developed country:1 wheat for 1 cloth (LDC exports wheat: DC exports cloth)

17. The Gains from Trade The limits to specialisation and trade The terms of trade P X /P M Other reasons for gains from trade decreasing costs differences in demand increased competition trade as an ‘engine of growth’ non-economic advantages

18. Arguments 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

19. Arguments 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

20. Arguments for Restricting Trade Problems with protection protection as ‘second best’ world multiplier effects retaliation cushions inefficiency bureaucracy Measuring the efficiency loss from protection

21. The cost of protection O P Q S dom (=MC) Q1Q1 Q2Q2 S world PWPW D dom

22. O P Q S dom (=MC) S world + tariff S world a d e cb Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom Area edbc equals loss of consumer surplus The cost of protection

23. O P Q S dom (=MC) S world + tariff S world a d e cb 1 2 3 4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom Area 3 equals gain in tariff revenue Area 1 equals gain in producer surplus The cost of protection

24. O P Q S dom (=MC) S world + tariff S world a d e cb 1 2 3 4 Q1Q1 Q2Q2 Q3Q3 Q4Q4 Tariff P W + t PWPW D dom Areas 2 + 4 equals net loss The cost of protection

25. World Attitudes towards Trade 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

26. Growth in world real GDP and world merchandise exports Source: Trade Statistics, WTO (www.wto.org)

27. Growth in world real GDP and world merchandise exports Growth in real GDP Source: Trade Statistics, WTO (www.wto.org)

28. Growth in world real GDP and world merchandise exports Growth in real GDP Growth in merchandise exports Source: Trade Statistics, WTO (www.wto.org)

29. World Attitudes towards Trade and Protection Re-emergence of protectionism in 1980s the increasing use of non-tariff barriers The Uruguay Round aims of the negotiations problems in reaching agreement the agreement assessing the agreement

30. World Attitudes towards Trade and Protection The World Trade Organisation WTO more powerful than GATT WTO rules non-discrimination reciprocity general prohibition of quotas fair competition binding tariffs attitudes of the WTO WTO activity in recent years resistance from various groups to unfettered trade

31. Trading 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

32. Trading 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

33. Preferential Trading in Practice Preferential trading in practice the EU the EEA NAFTA the advent of NAFTA experience to date proposals to extent to an all Americas free trade area the Asia-Pacific Economic Co-operation forum (APEC) other free trade areas / customs unions

34. The European Union Historical background The economic nature of the EU Development of common EU policies Common Agricultural Policy regional policy competition policy tax harmonisation social policy trade policy

35. The European Union The single market historical background the Single European Act completing the single market The benefits of the single market trade creation reduction in the direct costs of barriers economies of scale greater competition

36. The European Union Criticisms of the single market radical economic change is costly adverse regional effects development of monopoly / oligopoly power trade diversion political objections: loss of sovereignty Developments of the single market evidence of economic benefits eliminating remaining barriers Internal Market scoreboard effects of expansion of the EU

37. Trade and Developing Countries Trade strategies primary outward looking secondary inward looking import-substituting industrialisation (ISI) secondary outward looking possibly complemented by primary inward looking

38. Trade 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

39. Trade 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

40. World primary commodity prices (1990 = 100)

44. Average annual changes in prices of various products

46. Trade 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

47. Trade 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

48. Trade 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 more closely with comparative advantage increased competition increased investment more employment and greater equality

49. Growth rates and export performance of selected secondary outward-looking countries

54. Trade 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