INTERNATIONAL TRADE Flashcards
FREE TRADE
a market environment where buyers and sellers can make transactions without government intervention
VOLUNTARY TRADE IS MUTUALLY BENEFICIAL x8
lower prices
taking advantage of resources endowments
economies of scale
increased variety/choice
acquisition of needed resources
competition can improve efficiency
political benefits
efficiency and exports = growth and development
KEY ECONOMISTS
Adam Smith–> benefits of specialization
David Ricardo–> comparative advantage theory
Frederic Bastiat–> ridicule of market restrictions
James Ingram–> magic of free trade
ABSOLUTE ADVANTAGE
the situation that occurs in comparative advantage theory
when one country can produce more of a given product
with the same or less resources
than another country
COMPARATIVE ADVANTAGE
when a country produces a good at a lower domestic opportunity cost than another country
COMPARATIVE ADVANTAGE
OUTPUT MODEL
opp cost X= output of Y/ output of X
COMPARATIVE ADVANTAGE
INPUT MODEL
opp cost of X= input of X/ input of Y
WHAT DOES COMPARATIVE ADVANTAGE INDICATE?
what a country ought to specialise in
SOURCES OF COMPARATIVE ADVANTAGE?
resource endowments
- relative abundance of the resource
- value of the good produced from the resource to the world market
LIMITATIONS OF COMPARATIVE ADVANTAGE
- perils of extreme specialization
2. unrealistic assumptions
LIMITATIONS OF COMPARATIVE ADVANTAGE
PERILS OF EXTREME SPECIALIZATION
relative prosperity of a country dependent on the value of the good
if the good is a commodity, the country’s entire income is bound to the price of the commodity
= risk to the population’s well being + volatility
long term concern: will the country be trapped in a certain type of production= limiting its potential for full development
comp ad in agricultural goods…
the kind of structural change necessary for developing might never happen
no dev of industry or service sector
= low standards of living and relative dependency
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
- transport costs are irrelevant to the theory
- goods are assumed to be identical
- perfect information about the availability and prices of all available goods is impossible
- the two- country model is unrealistic
- full employment: a necessary condition of the theory, rarely occurs in practice
- the assumption that countries practice free trade is highly debatable
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
the assumption that countries practice free trade is highly debatable
- -> many countries still protect their markets
- -> with tariffs, quotas, subsidies and bureaucratic barriers
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
full employment: a necessary condition of the theory, rarely occurs in practice
–>dev countries have massive unE and inefficiency
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
the two- country model is unrealistic
- -> making the determination of comparative advantage rather difficult
- ->however multi-country analysis is possible with appropriate mathematical modeling
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
perfect information about the availability and prices of all available goods is impossible
- ->given the vast nature of the global markets
- -> determining one’s one comp ad is v difficult
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
goods are assumed to be identical
- -> goods have some differentiation
- -> esp. in the world of manufactured goods
- -> difficult to assess true comp ad when the goods are not the same
LIMITATIONS OF COMPARATIVE ADVANTAGE
UNREALISTIC ASSUMPTIONS
transport costs are irrelevant to the theory
- ->but cannot be ignored in practice
- -> they can raise costs enough to eliminate a comparative advantage
WTO
only international organization dealing with global rules of trade between nations
its main function is to ensure that trade flows as smoothly, predictably and freely as possible
AIMS OF THE WTO x5
- trade w/o discrimination
- freer trade through negotiation
- predictability through binding and transparency
- promoting fair competition
- encouraging development
FUNCTION OF WTO
- provide forum for trade negotiation
- execute WTO agreements
- evaluate and rule on trade complaints by member countries
- provide technical assistance to dev countries on trade issues
- track changes in member trade policies
AIMS OF THE WTO
1. trade w/o discrimination
all subscribed to “most favoured nation status”
= goods from all WTO member countries are treated equally
a tariff applied to one is a tariff applied to all
no real favourites
foreign goods treated as the same as domestic goods
AIMS OF THE WTO
2. freer trade through negotiation
changes of trade policy are done by direct gradual dealing
affected countries have time to prepare for adjustments
AIMS OF THE WTO
3. predictability through binding and transparency
binding= the commitment among members to keep tariffs at or below certain rates
allows importers to assess markets more accurately and make better decisions about trade
openness about trade rules encourages more trade
AIMS OF THE WTO
4. promoting fair competition
rules against dumping and intellectual property theft are aimed at increasing fair competition
generally the creation of a system of trade rules promotes fair play by establishing some fundamental guidelines for most trade
AIMS OF THE WTO
5. encouraging development
nearly 2/3 of members are dev countries
these countries are granted special trade concessions because it is assumed that their industries need time and space to grow to a level of direct global competition
SUPPORTERS’ VIEW OF THE WTO
- promotes peace
- place to handle disputes
- based on rules rather than power
- cuts the cost of living
- greater consumer and variety
- trade boosts income
- trade increases economic growth
- WTO system encourages efficiency/simplicity
- shield country from narrow interests
- same rules create good incentives for better government
SUPPORTERS’ VIEW OF THE WTO
1. promotes peace
by increasing trade relationships between countries
WTO help reduce conflict ‘sales people rarely fight their customers’
1930s Europe competed to raise barriers, which contributed to WW1
post WW1 Europe has grown increasingly integrated by trade and its peace
SUPPORTERS’ VIEW OF THE WTO
2. place to handle disputes
providing a dispute process with a schedule of negotiation as part of the early stages
WTO encourages compromise
SUPPORTERS’ VIEW OF THE WTO
3. based on rules rather than power
WTO often judges rich countries to be violators of trade policy
rule based system helps protect smaller, poorer trade partners
SUPPORTERS’ VIEW OF THE WTO
4. cuts the cost of living
when countries produce based on efficiencies and comparative advantage
the cost of food, clothes and other necessities are cheaper
WTO notes that rich countries primarily the EU and the US sub their farmers with 1 billion dollars a day
SUPPORTERS’ VIEW OF THE WTO
5. greater consumer and variety
trade gives consumers worldwide access to goods
meaning any consumer can shop according to their preferences
more luxury goods are available
as well as a variety of cheaper consumer goods
SUPPORTERS’ VIEW OF THE WTO
6. trade boosts income
1929 uruguay round increased Y from $109-510 billion
income can be used by gov
to improve services and infrastructure
however producers protest when inefficient industries face competition
SUPPORTERS’ VIEW OF THE WTO
7. trade increases economic growth
increase in employment depends on the countries transitional policies
SUPPORTERS’ VIEW OF THE WTO
8. WTO system encourages efficiency/simplicity
certainty about trade rules
transparency about the rules
and predictability about the trading environment
all encourage trade and efficiency
SUPPORTERS’ VIEW OF THE WTO
9. shield country from narrow interests
when asked to enact forms of protectionism
national gov resist as they want to be seen as playing by international rules
govs are better off to ignore special interest groups
SUPPORTERS’ VIEW OF THE WTO
10. same rules create good incentives for better government
short term
special interest lobbying and corruption
are more difficult to enact when everyone knows the rules (transparency)
and the gov is pledged to support them
CRITICS’ VIEW OF THE WTO x9
- favour rich countries
- trade between rich countries
- poor countries can’t afford trade representatives
- rich countries get richer faster
- uruguay round has not addressed tariff escalation
- agricultural subsides in rich countries have not been reduced
- the protection of intellectual property rights
- bureaucratic barriers
- commercial interests in mind
CRITICS’ VIEW OF THE WTO
1. favour rich countries
despite the claims to equalize trade environment
these countries bring large groups of trade negotiators, far more than smaller countries
many agreements are made w/o consultation of smaller countries
G20 formed by Brazil and India to rep dev countries
CRITICS’ VIEW OF THE WTO
2. trade between rich countries
negating the claim that trade benefits everyone
CRITICS’ VIEW OF THE WTO
3. poor countries can’t afford trade representatives
no representation in trade negotiations
CRITICS’ VIEW OF THE WTO
4. rich countries get richer faster
oxfam international ‘with only 14% of the world’s population, high income countries account for 75% of global GDP’ which is approximately the same share as in 1990’
CRITICS’ VIEW OF THE WTO
5. uruguay round has not addressed tariff escalation
developed countries have kept tariffs on raw materials and primary goods imported
while maintaining much higher tariffs on the semi-processed and higher value goods made from the raw materials
= keeps low cost competition from LDCs in the semi-processed and higher value industries
prevents LDCs from diversifying their production
increasing the risk of overspecialization
CRITICS’ VIEW OF THE WTO
6. agricultural subsides in rich countries have not been reduced
despite pledges by countries signing up to the uruguay round
these subs depress world prices and reduce production in developing markets that would otherwise export to the developed world
CRITICS’ VIEW OF THE WTO
7. the protection of intellectual property rights
keeps innovation form spreading quickly to dev countries
CRITICS’ VIEW OF THE WTO
8. bureaucratic barriers
as tariffs are dropped by successive rounds of trade agreements
rich countries appear to be resorting to bureaucratic barriers
e.g. product standards to keep goods out
CRITICS’ VIEW OF THE WTO
9. commercial interests in mind
WTO agreements ignore cases of worker exploitation, rights and issues
WTO does little to encourage environmental protection
the promotion of trade empowers MNCs to campaign for relaxed environmental protection and worker standards
RICHER ECONOMIES THAT ARE OPEN TO TRADE GROW FASTER..
poor countries grow richer when more open to trade, as recent successes in India and China have helped to demonstrate
RICH COUNTRIES ARE MORE PROTECTIONIST THAN POOR ONES..
not true, since poor countries tend to have higher av tariffs than rich ones
AGRICULTURAL PROTECTIONISM IN THE RICH WORLD WORSENS GLOBAL POVERTY…
if subs were removed, food prices will rise
these increases could hurt nutrition levels in some poor countries that rely on food imports
