1. TOPIC 7 International Trade

2. Definitions: Trade or trading: Trade or trading: refers to the transactions or the exchanges of ownership of goods and services.

3. and, refers to the transactions made domestically among the domestic traders in a country only. Domestic Trade:

4. while, International Trade (IT): refers to transactions made among different countries in the world, whereby involves export and import.

5. Why do countries tend to trade with the rest of the world? Why don’t they become self-sufficient? Why don’t they become self-sufficient?

6. Indeed, large countries like China and America would also like to trade with other nations in the global economy. – they do not want to become self- sufficient: i.e. to produce all goods they consume and restrict foreign goods into their country. While China now tend to become an “open economy” i.e. widely open to their trading partners – allowing exports and imports activities. this explains how important is the International Trade. Indeed, large countries like China and America would also like to trade with other nations in the global economy. – they do not want to become self- sufficient: i.e. to produce all goods they consume and restrict foreign goods into their country. While China now tend to become an “open economy” i.e. widely open to their trading partners – allowing exports and imports activities. this explains how important is the International Trade.

7. International Trade can also be referred as: INTERNATIONAL SPECIALISATION - Specialisation is said as the basis for trade. - The benefit receives from specialisation is that it may improves economic growth. INTERNATIONAL SPECIALISATION - Specialisation is said as the basis for trade. - The benefit receives from specialisation is that it may improves economic growth.

8. M’sia Real GNP with Net Exports Real GNP (RM Billion) 101.7179.8190.3192.8200.6212.2 Net Merchandise Exports (RM Billion) 0.5 73.1 92.6 53.7 51.1 53.1 (source: Malaysia key economic indicators: Malaysian Export Directory of Manufacturers) Real GNP (RM Billion) 101.7179.8190.3192.8200.6212.2 Net Merchandise Exports (RM Billion) 0.5 73.1 92.6 53.7 51.1 53.1 (source: Malaysia key economic indicators: Malaysian Export Directory of Manufacturers) 1999 2000 2001 2002 2003 2004*

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

11. Growth in real GDP and in real exports of goods and services: total OECD countries

12. Growth in GDP

13. Growth in real GDP and in real exports of goods and services: total OECD countries Growth in GDP

14. Growth in real GDP and in real exports of goods and services: total OECD countries Growth in exports of goods and services Growth in GDP

15. Growth in real GDP and in real exports of goods and services: total OECD countries Growth in exports of goods and services Growth in GDP

16. - one country will specialise in a good that she is best at and will trade among them. Specialisation means

17. WHAT ARE THE REASONS or FACTORS FOR COUNTRIES TO TRADE INTERNATIONALLY OR TO DO SPECIALISATION?

18. The factors that may lead these countries to involve in international trading are:

19. The reasons for IT to occur: i.Different factor endowments: raw materials, climate, specialist labour, capital or technology that may caused to produce different types of goods. i.Different factor endowments: raw materials, climate, specialist labour, capital or technology that may caused to produce different types of goods.

20. The reasons for IT to occur: i.Different factor endowments: raw materials, climate, specialist labour, capital or technology that may caused to different types of goods produced. ii. Limited mobility of factors: human capital usually are non-mobile: higher cost of production – costly to produce, so import goods from cheap countries. i.Different factor endowments: raw materials, climate, specialist labour, capital or technology that may caused to different types of goods produced. ii. Limited mobility of factors: human capital usually are non-mobile: higher cost of production – costly to produce, so import goods from cheap countries.

21. The reasons for IT to occur: iii. To obtain the benefit from Specialisation: The theories of specialisation proves that countries which trade internationally (after specialisation) may increase their production, consumption and thus standard of living. 2 types of specialisation to be gained either: i) absolute advantage or ii) comparative advantage. Specialisation improves the volume of production and lower the cost and benefit countries that involves in trading. - This proves that self-sufficient is inefficient. iii. To obtain the benefit from Specialisation: The theories of specialisation proves that countries which trade internationally (after specialisation) may increase their production, consumption and thus standard of living. 2 types of specialisation to be gained either: i) absolute advantage or ii) comparative advantage. Specialisation improves the volume of production and lower the cost and benefit countries that involves in trading. - This proves that self-sufficient is inefficient.

22. The reasons for IT to occur: iv. Wider consumer choice – varieties of goods to choose: may enjoy different types of goods. Differences in taste across countries prompt the global trading and large demand. iv. Wider consumer choice – varieties of goods to choose: may enjoy different types of goods. Differences in taste across countries prompt the global trading and large demand.

23. The reasons for IT to occur: v.To expand the market and may benefits from Economies of Scale – decreasing cost: countries can gain from huge demand of global market by lowering its long run average cost; which declines as the rate of production increases. vi. Increases national income: specialisation helps to increase the volume of exports and raises GDP. v.To expand the market and may benefits from Economies of Scale – decreasing cost: countries can gain from huge demand of global market by lowering its long run average cost; which declines as the rate of production increases. vi. Increases national income: specialisation helps to increase the volume of exports and raises GDP.

24. The reasons for IT to occur: vii. Increases Competition –the benefits from large competition may result to greater efficiency and better quality of goods: Competition among domestic traders is relatively small. Large competition may arise in global trading among countries in the world which may results to perfect competitive market, and thus, might benefit them in terms of both the productive and allocative efficiency. viii. N on-economic advantages – improves relationship and promote political links. ix. Exchanging knowledge and technological advancement. vii. Increases Competition –the benefits from large competition may result to greater efficiency and better quality of goods: Competition among domestic traders is relatively small. Large competition may arise in global trading among countries in the world which may results to perfect competitive market, and thus, might benefit them in terms of both the productive and allocative efficiency. viii. N on-economic advantages – improves relationship and promote political links. ix. Exchanging knowledge and technological advancement.

25. The differences between International and Domestic Trade: 1.Size of market and volume of transactions. 2.Greater specialisation in countries which involves in international trade. 3.Involves the use of different units of currency. 4.Different nations produce varieties of goods as world production. 5.Large competition between nations may lead to better quality of goods. 6.Higher cost of transportation – involves longer distance of journey. 7.Subject to government policy and controls. 1.Size of market and volume of transactions. 2.Greater specialisation in countries which involves in international trade. 3.Involves the use of different units of currency. 4.Different nations produce varieties of goods as world production. 5.Large competition between nations may lead to better quality of goods. 6.Higher cost of transportation – involves longer distance of journey. 7.Subject to government policy and controls.

26. The benefits from Specialisation in INTERNATIONAL TRADE: will specialise in its own best production of goods. TWO TYPES OF SPECIALISATION in international trade: - may gain either through the:  Absolute advantage or  Comparative advantage. will specialise in its own best production of goods. TWO TYPES OF SPECIALISATION in international trade: - may gain either through the:  Absolute advantage or  Comparative advantage.

27. 1. ABSOLUTE ADVANTAGE is the benefit received when one country is relatively more efficient than the other country in a production process: i)either in terms of the ability to produce the same amount of goods is relatively less costly (or using fewer resources) than the other country; ii)or with the same resources, it is beneficial and efficient if one country might be able to produce more goods than the other country. is the benefit received when one country is relatively more efficient than the other country in a production process: i)either in terms of the ability to produce the same amount of goods is relatively less costly (or using fewer resources) than the other country; ii)or with the same resources, it is beneficial and efficient if one country might be able to produce more goods than the other country.

28. Scarcity of resources relative to material human wants permits the use of resources efficiently with larger production. Specialisation able to increase efficiency and volume of production. One country may specialise in production of goods that has relatively lower cost or greater efficiency with higher output. permits the use of resources efficiently with larger production. Specialisation able to increase efficiency and volume of production. One country may specialise in production of goods that has relatively lower cost or greater efficiency with higher output.

29. Mutual Benefit from Absolute Advantage: After specialisation, each of them can benefit from absolute advantage in the production that they are relatively more efficient, then is said to gain from absolute advantage. After specialisation, each of them can benefit from absolute advantage in the production that they are relatively more efficient, then is said to gain from absolute advantage.

30. to understand the theory of specialisation, it is assumes that: i.only two (2) countries trading in the world market. ii.produces two (2) goods only. iii.constant cost of production (resulting to linear production possibility curves) iv.fixed resources v.no transportation cost or trading barriers. i.only two (2) countries trading in the world market. ii.produces two (2) goods only. iii.constant cost of production (resulting to linear production possibility curves) iv.fixed resources v.no transportation cost or trading barriers.

31. Production possibilities for two countries For Example: country product Furniture (units) Computers (units) MALAYSIA18002500 JAPAN15003000 TOTAL33005500 Production Before Specialisation

32. In Malaysia; 1 unit of furniture = 2500/1800 = 1.4 units of computers (has to be forgone) In Japan; 1 unit of furniture = 3000/1500 = 2 units of computers. In this case, Malaysia has a lower opportunity cost for the production of furniture than Japan. Therefore, Malaysia will specialize in the production of furniture. country product Furniture (units) Computers (units) MALAYSIA 18002500 JAPAN 15003000 TOTAL33005500 The Opportunity Cost or Relative Price of furniture versus computers:

33. In Malaysia; 1 unit of computer = 1800/2500 = 0.7 units of furniture. (has to be forgone) In Japan; 1 unit of computer = 1500/3000 = 0.5 units of furniture. In this case, Japan has a lower opportunity cost for the production of computers, therefore Japan will specialize in the production of computers. country product Furniture (units) Computers (units) MALAYSIA 18002500 JAPAN 15003000 TOTAL33005500 The Opportunity Cost or Relative Price of computers versus furniture :

34. The Relative Prices can be scheduled as: Country Opportunity cost (units) 1 furniture1 computer MALAYSIA1.4 computers0.7 furniture JAPAN2 computers0.5 furniture The Opportunity Cost

35. PRODUCTION AFTER SPECIALISATION country product Furnitures (units) Computers (units) MALAYSIA3600xx JAPANxx6000 TOTAL36006000 After specialization, total production of both goods in the world increases. World production before: furniture= 3300, computers= 5500. World production after : furniture= 3600, computers= 6000.

36. PRODUCTION AFTER SPECIALISATION country product Furnitures (units) Computers (units) MALAYSIA3600xx JAPANxx6000 TOTAL36006000 After specialization, total production of both goods in the world increases. World production before: furniture= 3300, computers= 5500. World production after : furniture= 3600, computers= 6000.

37. Terms of Trade refers to: the ratio of exchange between two commodities traded. refers to: the ratio of exchange between two commodities traded.

38. Terms of Trade can be stated by looking at the opportunity cost of two countries; In Malaysia; 1 unit of furniture = 1.33 units of computers. In Japan; 1 unit of furniture = 2 units of computers. So, Terms of Trade agreed can be: 1 unit of furniture : 1.5 unit of computers OR 1 unit of furniture : 0.8 units of computers OR 1 unit of furniture : 1.33 < computers < 2 OR 1 unit of furniture: 1.33 + 2 = 1.67 computers. 2 can be stated by looking at the opportunity cost of two countries; In Malaysia; 1 unit of furniture = 1.33 units of computers. In Japan; 1 unit of furniture = 2 units of computers. So, Terms of Trade agreed can be: 1 unit of furniture : 1.5 unit of computers OR 1 unit of furniture : 0.8 units of computers OR 1 unit of furniture : 1.33 < computers < 2 OR 1 unit of furniture: 1.33 + 2 = 1.67 computers. 2

39. CONSUMPTION AFTER SPECIALISATION country product Furnitures (units) Computers (units) MALAYSIA21003000 JAPAN15003000 TOTAL36006000 With Terms of Trade (TOT); 1 FURNITURE : 1.5 COMPUTERS

40. Can these countries trade, if only one country has the absolute advantage in producing both goods?

41. still they can benefit from specialisation through comparative advantage. If absolute advantage does not exist for both countries that trade still they can have the mutual benefit from trading. If absolute advantage does not exist for both countries that trade still they can have the mutual benefit from trading.

42. 2. COMPARATIVE ADVANTAGE The law of or benefit from comparative advantage: –is the ability of a country to specialise and produce goods at a relatively less opportunity cost than another country, even though only one country has the absolute advantage in all goods. The law of or benefit from comparative advantage: –is the ability of a country to specialise and produce goods at a relatively less opportunity cost than another country, even though only one country has the absolute advantage in all goods.

43. Instead, when only one country was more efficient at producing both goods, specialization still may gain both countries; (provided that one country has a greater comparative advantage of one good.) - thus, one country will specialize in the good that she has relatively greater comparative advantage. when only one country was more efficient at producing both goods, specialization still may gain both countries; (provided that one country has a greater comparative advantage of one good.) - thus, one country will specialize in the good that she has relatively greater comparative advantage.

44. So … what’s the difference between Absolute and Comparative Advantages. Absolute Adv: is the benefit enjoyed in the production process when one country can produce more than the other country with the same resources used. Comparative Adv: is the benefit enjoyed in the production process when one country can produce at a lower opportunity cost in terms of the other goods than the other country. Absolute Adv: is the benefit enjoyed in the production process when one country can produce more than the other country with the same resources used. Comparative Adv: is the benefit enjoyed in the production process when one country can produce at a lower opportunity cost in terms of the other goods than the other country.

45. Production possibilities for two countries Example of Comparative Advantage: country product Vegetable (units) Fish (units) INDONESIA200150 THAILAND300400 TOTAL500550 Production Before Specialisation

46. The Opportunity Cost or Relative Price of vegetables versus fish: country product Vegetable (units) Fish (units) INDONESIA200150 THAILAND300400 TOTAL500550 In Indonesia; 1 unit of vegetable = 150/200 = 0.75 units of fish (has to be forgone) In Thailand; 1 unit of vegetable = 400/300 = 1.33 units of fish. In this case, Indonesia has a lower opportunity cost for the production of vegetable than Thailand. Therefore, Indonesia will specialize in the production of vegetable.

47. The Opportunity Cost or Relative Price of fish versus vegetables : In Indonesia; 1 unit of fish = 200/150 = 1.33 units of vegetable. (has to be forgone) In Thailand; 1 unit of fish = 300/400 = 0.75 units of vegetable. In this case, Thailand has a lower opportunity cost for the production of fish, therefore Thailand will specialize in the production of fish. country product Vegetable (units) Fish (units) INDONESIA200150 THAILAND300400 TOTAL500550

48. The Relative Prices can be scheduled as: country Opportunity cost (units) 1 vegetable1 fish INDONESIA 0.75 fish 1.33 vegetable THAILAND 1.33 fish 0.75 vegetable The Opportunity Cost

49. PRODUCTION AFTER SPECIALISATION country product Vegetable (units) Fish (units) INDONESIA400xx THAILANDxx800 TOTAL400800 After specialization, total production of goods in the world increases. World production before: vegetable= 500, fish = 550. World production after : vegetable= 400, fish = 800.

50. Terms of Trade looking at the opportunity cost of two countries. In Indonesia; 1 unit of fish = 1.33 units of vegetable. In Thailand; 1 unit of fish = 0.75 units of vegetable. So, Terms of Trade agreed can be: 1 unit of fish : 1 unit of vegetable. OR 1 unit of fish : 0.8 units of vegetable OR looking at the opportunity cost of two countries. In Indonesia; 1 unit of fish = 1.33 units of vegetable. In Thailand; 1 unit of fish = 0.75 units of vegetable. So, Terms of Trade agreed can be: 1 unit of fish : 1 unit of vegetable. OR 1 unit of fish : 0.8 units of vegetable OR 1 unit of fish : 1.33 > vegetable > 0.75

51. Trading/exchange will occur: country product Vegetable (units) Fish (units) INDONESIA200 THAILAND200600 TOTAL400800 Total Consumption after specialization (Indonesia exports 200 vegetables to Thailand and instead receives 200 fish in return as imports from Thailand, since the TOT is 1Veg : 1 Fish If the Terms of Trade agreed is: 1 unit of fish = 1 unit of vegetable

52. The Terms of Trade (TOT) can also be stated as: » P X / P M The terms of trade can be stated also as the ratio of prices of exports to imports.

53. LET’S HAVE A 5 MINUTES BREAK ….and LET’S TRY ONE EXERCISE (Q1) IN THE “Question to Ponder.”

54. QUESTION 1 COUNTRY COMMODITY SHOES (units) CLOTHS (units) INDIA4002000 CHINA12002400 BEFORE SPECIALISATION

55. Table of Opportunity Cost COUNTRY COMMODITY 1 SHOE1 CLOTH INDIA5 CLOTH0.2 SHOE CHINA2 CLOTH0.5 SHOE b)COMPARATIVE ADVANTAGE OF PRODUCING SHOES AND CLOTHS.

56. COUNTRY COMMODITY SHOES (units) CLOTHS (units) INDIAxx4000 CHINA2400xx AFTER SPECIALISATION c)Which country specialise in Cloth?

57. d) Suggestion for TERMS OF TRADE 1 SHOE : 2 < CLOTH < 5 OR 1 CLOTH : 0.2 < SHOE < 0.5 1 SHOE : 2 < CLOTH < 5 OR 1 CLOTH : 0.2 < SHOE < 0.5

58. THANK YOU And Try to solve a few more questions in the “Question To Ponder” AND ALSO Questions in MODEL ANSWER BOOK page 189…. Q4, 5 and 6. THANK YOU And Try to solve a few more questions in the “Question To Ponder” AND ALSO Questions in MODEL ANSWER BOOK page 189…. Q4, 5 and 6.

59. PROTECTIONISM

60. Sometimes too much freedom to the International Trade is not advisable. Some restrictions has to be imposed on International Trade. Sometimes too much freedom to the International Trade is not advisable. Some restrictions has to be imposed on International Trade.

61. PROTECTIONISM / TRADE BARRIERS Methods of restricting trade: (Protectionist Policy): – tariff – quota – embargo – foreign exchange control – import licences – export subsidies and grants – administrative barriers Methods of restricting trade: (Protectionist Policy): – tariff – quota – embargo – foreign exchange control – import licences – export subsidies and grants – administrative barriers

62. Arguments for Restricting Trade (Reasons for protectionism):  To protect infant and local industries.  To reduce the deficit in BOP.  To diversify economy.  To prevent dumping.  To control recession and unemployment.  To increase government revenue.  For retaliation purposes. (Reasons for protectionism):  To protect infant and local industries.  To reduce the deficit in BOP.  To diversify economy.  To prevent dumping.  To control recession and unemployment.  To increase government revenue.  For retaliation purposes.

63. Trading Blocs Types of preferential trading arrangement –Free Trade Areas (e.g. NAFTA) –customs unions (e.g. European Union) –common markets Reasons: internal and external economies of scale better terms of trade increased competition between members etc. Types of preferential trading arrangement –Free Trade Areas (e.g. NAFTA) –customs unions (e.g. European Union) –common markets Reasons: internal and external economies of scale better terms of trade increased competition between members etc.

64. Trading Blocs Free Trade Areas (FTA) The launching of the FTA negotiations for a Malaysia-US FTA hope to pave the way for stronger investment and trade. -FTA were expected to focus on:. Liberalisation of trade in goods, services and investment,. Promote and facilitate trade and investment flows.. Cooperation to address impediments to trade in the areas of intellectual property rights, standards, and conformance and development of Mutual Recognition Arrangements.. Collaborate to enhance competitiveness in specific sectors such as tertiary education, healthcare and tourism, capacity building and technical assistance. Free Trade Areas (FTA) The launching of the FTA negotiations for a Malaysia-US FTA hope to pave the way for stronger investment and trade. -FTA were expected to focus on:. Liberalisation of trade in goods, services and investment,. Promote and facilitate trade and investment flows.. Cooperation to address impediments to trade in the areas of intellectual property rights, standards, and conformance and development of Mutual Recognition Arrangements.. Collaborate to enhance competitiveness in specific sectors such as tertiary education, healthcare and tourism, capacity building and technical assistance.

65. LET’S LOOK AT YOUR EXERCISES!

66. MODEL ANSWER: ANY PROBLEMS?

67. THANK YOU HAVE A NICE DAY! THANK YOU HAVE A NICE DAY!

68. PRODUCTION POSSIBILITY CURVE MALAYSIA JAPAN Furniture (units) Computers (units) 1800 2500 3000 1500

69. PRODUCTION POSSIBILITY CURVE MALAYSIA JAPAN Furniture (units) Computers (units) 1800 2500 3000 1500

70. 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 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

71. Arguments 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

72. 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 History of protection –Pre-war growth in protection –Post-war reduction in protection and the role of GATT the growth in world trade

73. 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 –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

74. 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 –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

75. 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 –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

76. 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 –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

77. World Attitudes towards Trade 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

78. 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 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

79. 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 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

80. Trading 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

81. The 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

82. The 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

83. The 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

84. 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 Trade strategies –primary outward looking –secondary inward looking import-substituting industrialisation (ISI) –secondary outward looking possibly complemented by primary inward looking

85. 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 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

86. 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 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

87. 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 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

88. 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 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

89. 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 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

90. 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 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