MANAGERIAL ECONOMICS

Reported by Elsa Gutierrez

Trinity University of Asia

INTERNATIONAL TRADE

Definition

 International trade are economic transactions that are made between countries.

 International trade allows countries to expand their markets for both goods
and services that otherwise may not have been available domestically.

 International trade gives rise to a world economy, in which supply and

demand, and therefore prices, both affect and are affected by global events.

 International trade and the accompanying financial transactions are generally

conducted for the purpose of providing a nation with commodities it lacks in
exchange for those that it produces in abundance; such transactions,
functioning with other economic policies, tend to improve a nation’s standard
of living.

Historical Overview

The barter of goods or services among different peoples is an age-old practice,

probably as old as human history. International trade, however, refers specifically to
an exchange between members of different nations, and accounts and explanations of
such trade begin (despite fragmentary earlier discussion) only with the rise of the
modern nation-state at the close of the European Middle Ages. As political thinkers
and philosophers began to examine the nature and function of the nation, trade with
other countries became a particular topic of their inquiry. It is, accordingly, no surprise
to find one of the earliest attempts to describe the function of international trade within
that highly nationalistic body of thought now known as mercantilism.

Mercantilism

 Mercantilism was based on the conviction that national interests are inevitably
in conflict—that one nation can increase its trade only at the expense of other
nations.
 The trade policy dictated by mercantilist philosophy was accordingly simple:
encourage exports, discourage imports, and take the proceeds of the
resulting export surplus in gold.
 A typical illustration of the mercantilist spirit is the English Navigation Act of
1651, which reserved for the home country the right to trade with its colonies
and prohibited the import of goods of non-European origin unless transported
in ships flying the English flag. This law lingered until 1849. A similar policy
was followed in France.
Liberalism
 A strong reaction against mercantilist attitudes began to take shape toward the
middle of the 18th century.
 In England, economist Adam Smith demonstrated in his book The Wealth of
Nations (1776) the advantages of removing trade restrictions.
 Economists and businessmen voiced their opposition to excessively high and
often prohibitive customs duties and urged the negotiation of trade
agreements with foreign powers.
 A triumph for liberal ideas was the Anglo-French trade agreement of 1860,
which provided that French protective duties were to be reduced to a
maximum of 25 percent within five years, with free entry of all French products
except wines into Britain. This agreement was followed by other European
trade pacts.

COMPARATIVE-ADVANTAGE Analysis

Adam Smith, The Wealth of Nations (1776)

 emphasized the importance of specialization as a source of increased output
 treated international trade as a particular instance of specialization
 each nation should specialize in the production of goods it is particularly well
equipped to produce; it should export part of this production, taking in
exchange other goods that it cannot so readily turn out

David Ricardo, On the Principles of Political Economy & Taxation (1817)

 developed the Principle of Comparative-Advantage
 challenged the idea that the purpose of trade was merely to accumulate gold
or silver
 argued in favor of industry specialization and free trade. He suggested that
industry specialization combined with free international trade always
produces positive results.

Comparative Advantage: Increased Efficiency of Trading Globally

Example: Country A and Country B both produce cotton sweaters and wine.
Country A produces ten sweaters and six bottles of wine a year while Country B
produces six sweaters and ten bottles of wine a year. Both can produce a total of 16
units. Country A, however, takes three hours to produce the ten sweaters and two
hours to produce the six bottles of wine (total of five hours). Country B, on the other
hand, takes one hour to produce ten sweaters and three hours to produce six bottles
of wine (a total of four hours).

But these two countries realize that they could produce more by focusing on those
products with which they have a comparative advantage. Country A then begins to
produce only wine, and Country B produces only cotton sweaters. Each country can
now create a specialized output of 20 units per year and trade equal proportions of
both products. As such, each country now has access to 20 units of both products.

Benefits of Trading Globally

International trade not only results in increased efficiency but also allows countries to
participate in a global economy, encouraging the opportunity for foreign direct
investment (FDI), which is the amount of money that individuals invest into foreign
companies and assets. In theory, economies can therefore grow more efficiently and
can more easily become competitive economic participants.

For the receiving government, FDI is a means by which foreign currency and expertise
can enter the country. It raises employment levels, and theoretically, leads to a growth
in gross domestic product. For the investor, FDI offers company expansion and
growth, which means higher revenues.

BARRIERS
Trade barriers are government-induced restrictions on international trade,
which generally decrease overall economic efficiency. Man-made trade barriers come in
several forms, including:

 Tariffs
 Non-tariff barriers to trade
 Export Licenses
 Import Quotas
 Subsidies
 Voluntary Export Restraints
 Local Content Requirements
 Embargo
 Currency Devaluation
 Trade Restriction

TARIFFS

- Tariffs are a type of protectionist trade barrier that can come in several forms.
- Tariffs are paid by domestic consumers and not the exporting country, but they
have the effect of raising the relative prices of imported products.
- While tariffs may benefit a few domestic sectors, economists agree that free
trade policies in a global market are ideal.

Why are Tariffs & Trade Barriers Used?

Tariffs are often created to protect infant industries and developing economies but
are also used by more advanced economies with developed industries.

Additional Reasons:

• Protecting Domestic Employment

• Protecting Consumers
• Infant Industries
• National Security
• Retaliation
How Do Tariffs Affect Prices?

Tariffs increase the prices of imported goods. Because of this, domestic producers are
not forced to reduce their prices from increased competition, and domestic consumers
are left paying higher prices as a result.

Tariffs also reduce efficiencies by allowing companies that would not exist in a more
competitive market to remain open.

Who Benefits from Tariffs?

The benefits of tariffs are uneven. Because a tariff is a tax, the government will see
increased revenue as imports enter the domestic market. Domestic industries also
benefit from a reduction in competition, since import prices are artificially inflated.
Unfortunately for consumers - both individual consumers and businesses - higher
import prices mean higher prices for goods. If the price of steel is inflated due to tariffs,
individual consumers pay more for products using steel, and businesses pay more for
steel that they use to make goods. In short, tariffs and trade barriers tend to be pro-
producer and anti-consumer.

WORLD TRADE ORGANIZATION

 Intergovernmental organization
 regulates international trade between nations
 Officially commenced on January 1, 1995
 Marrakesh Agreement, signed by 23 nations on April 15, 1994

What is the WTO?

The World Trade Organization (WTO) is the only global international
organization dealing with the rules of trade between nations. At its heart are the WTO
agreements, negotiated and signed by the bulk of the world’s trading nations and
ratified in their parliaments. The goal is to help producers of goods and services,
exporters, and importers conduct their business.

What does it do?

The WTO deals with regulation of trade in goods, services and intellectual
property between participating countries by providing a framework for negotiating
trade agreements and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements, which are signed by representatives of member
governments and ratified by their parliaments.
Accomplishments of WTO for the past 20 years
 33 new member countries
 WTO accession negotiations have taken on average 9 years and a half.
 Triggered and anchored domestic reforms
 Lowering barriers and increasing trade opportunities
 More funding and more accountability