Week 3: Trade integration Flashcards
Trade Theories
- Ricciardo Model
Absolute and comparative advantage (because of productivity differences)
Example:
Better in producing A&B
Not so good in producing A&B
–> by trading with each other (1) has absolute advantage, but (2) will have comparable advantage. Since, by trading with each other they are both better off, even the one who has absolute advantage (take constraints as labor etc. Into account) - Heckscher-Ohlin theory
Comparative advantage because of differences in factor endowment.
Example:
Factors as labor or capital–> countries usually specialize in one.
Historically, China was cheaper in labor, but Germany in capital (producing resources as cars, chemicals etc.). - New Trade Theory
increasing returns to scale, diminishing average costs
Transaction costs
Size of Countries, Distance etc.
Trade Theory Suggests the Following Trade Effects
- Static Gains
(efficiency gains)
->Specialization and division of labor
->Economies of scale - Dynamic Gains
->Increased competition; erosion of monopolist positions
->Increased incentive for innovation
2 kinds of tariffs
- Specific tariff
Levied as a fixed charge for each unit of imported goods. - Ad valorem tariff
Levied as a fraction of the value of imported goods.
Local content requirement
A local content requirement is a regulation that requires a specified fraction of a final good to be produced domestically.
Other trade policies than tariff or quota
*A voluntary export restraint-
works like an import quota, except that the quota is imposed by the exporting country rather than the importing country.
*Export credit subsidies
A subsidized loan to exporters. So-called Export-Import Banks subsidize loans to national exporters exporters.
*Government procurement
Government agencies are obligated to purchase from home suppliers, even when they charge higher prices (or have inferior quality)
*Bureaucratic regulations (red tape) (NTB: non-tariff barriers)
Safety, health, quality, or customs regulations can act as a form of protection
Further Effects of Import Tariffs (and Protectionism)
- High costs for processing industries
- Administrative costs for government might be sizeable
- Encourages lobbying
- Danger of retaliation (potentially leading to a level shift in protectionism)
Popular Arguments in Favour for Protectionism
- Protecting jobs and industries
- National security (including technology transfer issues)
- Security of (national) supply of critical goods (food and agricultural goods, medical products, energy etc.)
- Health and security standards
- Retaliation against unfair actions of competitor countries
- Infant industry argument (for developing economies)
Regional economic integration
Regional economic integration is concerned with the:
discriminatory (resp., preferential) removal of all trade impediments between at least two participating nations and with the establishment of certain elements of cooperation and coordination between them.
*Negative integration: act of removal of impediments to trade.
*Positive integration: relates to the modification of existing instruments and institutions, and to the creation of new ones; directs at proper functioning of the integrated market and broader policy aims.
Different stages of integration
- Free trade area
- Customs union
- Common market
- Economic and monetary union
- Political union
WTO Rules
Non-discrimination in application of tariffs →
“Most Favored Nation Principle”
Potential effects of FTA (trade liberalization)
- Trade creation
Takes place through the elimination of trade barriers between two or more countries. Trade is facilitated if previously domestic production is
abandoned in favour of cheaper imports from partner countries. - Trade diversion
Will occur when imports from the efficient or cheap producer “world market” are replaced by imports from a higher-cost (or less efficient) producer partner countries (substitution effect).
Trade deflection and its solutions
Tariff cheats between FTA and no agreement are
Slide 34 diagram.
Solution: Rules of origin
Rules of Origin
If one can not determine the origin, because parts were made all around the world (fragmentation of production process), one uses the country where:
!the last substantial transformation took place!
To avoid tariff cheats.
European Single Market
*Objective:
–>4 freedoms
*Principles:
- reduction oof monopoly power
- incentive for innovation
- economies of scale
- increase in the division of labor and specialization in comparative advantages
*Effects:
- access to larger market
- increase efficiency
-firms can be more competitive outside Europe
