Republic of the Philippines

University of Antique
College of Business and Accountancy
SIbalom, Antique

INTERNATIONAL TRADE PRACTICES AND POLICIES

ECONOMICS 3

Instructor:
Ms. Cherryville Mejares

Reporters:
Sydrick Jan Rey Labitoria
Jimrose Marie Moscoso
 Honey Freshlyne Nicor
BSA 2 – A
Introduction:
Economics is about trade, and trade crosses boundaries. People trade not only
with people who live in their city, state, or country, but also with people in other
countries. Many of the goods you consume are undoubtedly produced in other
countries. This chapter examines international trade and the prohibitions sometimes
placed on it.

TRADE
Trade broadly refers to the exchange of goods and services, most often in return
for money.
Trade is a basic economic concept involving the buying and selling of goods and
services, with compensation paid by a buyer to seller, or the exchange of goods
or services between parties. Trade can take place within an economy between
producers and consumers.
Trade may take place within a country, or between trading nations.

INTERNATIONAL TRADE
It is a significant component many progressive economies. Enables countries to
produce goods that they can make most efficiently in exchange for goods that
others can produce relatively better.
International trade is referred to as the exchange or trade of goods and services
between different nations. This kind of trade contributes and increases the
world economy. The most commonly traded commodities are television sets,
clothes, machinery, capital goods, food, and raw material, etc.

International trade means trade between the two or more countries.

International trade involves different currencies of different countries and is
regulated by laws, rules and regulations of the concerned countries.

All countries need goods and services to satisfy wants of their people.
Production of goods and services requires resources. Every country has only
limited resources. No country can produce all the goods and services that it
requires. It has to buy from other countries what it cannot produce or can produce
less than its requirements. Similarly, it sells to other countries the goods which it
has in surplus quantities.

The Rules Played by International Trade

 For nation which are chiefly producers of raw materials, trade is the means of
securing manufactured goods.
 Large industrial nation finds trade essential for two reasons, it is the way to get
foodstuffs and raw materials, and it is a means of maintaining a high level of
employment.
  Trade is the only method whereby ‘’have hot’’ nation can secure essential goods.
 Trade enables nation to specialize in goods and services they can produce.

THE NEED FOR TRADE

In today’s world, economic life has become more complex and diversified. No
country can live in isolation and claim to be self-sufficient. Even countries with
different ideologies, culture, and political, social and economic structure have trade
relations with each other. The aim of international trade is to increase production and
to raise the standard of living of the people. International trade helps citizens of one
nation to consume and enjoy the possession of goods produced in some other nation.

Reduced dependence on your local market

Your home market may be struggling due to economic pressures, but if you go global,
you will have immediate access to a practically unlimited range of customers in areas
where there is more money available to spend, and because different cultures have
different wants and needs, you can diversify your product range to take advantage of
these differences.

Increased chances of success

Unless you’ve got your pricing wrong, the higher the volume of products you sell, the
more profit you make, and overseas trade is an obvious way to increase sales. In
support of this, UK Trade and Investment (UKTI) claim that companies who go global
are 12% more likely to survive and excel than those who choose not to export.

Increased efficiency
Benefit from the economies of scale that the export of your goods can bring – go global
and profitably use up any excess capacity in your business, smoothing the load and
avoiding the seasonal peaks and troughs that are the bane of the production
manager’s life.

Increased productivity
Statistics from UK Trade and Investment (UKTI) state that companies involved in
overseas trade can improve their productivity by 34% – imagine that, over a third more
with no increase in plant.

Economic advantage
Take advantage of currency fluctuations – export when the value of the pound sterling
is low against other currencies, and reap the very real benefits. Words of warning
though; watch out for import tariffs in the country you are exporting to, and keep an
eye on the value of sterling. You don’t want to be caught out by any sudden upsurge
in the value of the pound, or you could lose all the profit you have worked so hard to
gain.

Innovation
Because you are exporting to a wider range of customers, you will also gain a wider
range of feedback about your products, and this can lead to real benefits. In fact, UKTI
statistics show that businesses believe that exporting leads to innovation – increases
in break-through product development to solve problems and meet the needs of the
wider customer base. 53% of businesses they spoke to said that a new product or
service has evolved because of their overseas trade.

Growth
The holy grail for any business, and something that has been lacking for a long time in
our manufacturing industries results to more overseas trade equals increased growth
opportunities, to benefit both your business and our economy as a whole.

Uneven Distribution of Natural Resources

Natural resources of the world are not evenly divided among the nations of the world.
Different countries of the world have different amount of natural resources and they
differ with each other in regard to climate, minerals and other factors.

Division of Labor and Specialization

Due to uneven distribution of natural resources, some countries are more suitably
placed to produce some goods more economically than other countries. But they are
geographically at a disadvantageous position to produce other goods. They specialize
in the production of such goods in which they have some natural advantage in the
form of availability of raw material, labor, technical know-how, climatic conditions,
etc. and get other goods in exchange for these goods from other countries.

Differences in Economic Growth Rate

There are many differences in the economic growth rate of different countries. Some
countries are developed some are developing, while there are some other countries
which are under-developed: these under-developed and developing countries have to
depend upon developed ones for financial help, which ultimately encourages
international trade.

Mercantilism Theory of International Trade

Mercantilism is an economic theory where the government seeks to regulate the
economy and trade in order to promote domestic industry – often at the expense of
other countries. Mercantilism is associated with policies which restrict imports,
increase stocks of gold and protect domestic industries.

Mercantilism stands in contrast to the theory of free trade – which argues

countries economic well-being can be best improved through the reduction of tariffs
and fair free trade. Mercantilism involves:
 Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
 Accumulation of foreign currency reserves, plus gold and silver reserves. (also
known as bullionism) In the sixteenth/seventeenth century, it was believed that
the accumulation of gold reserves (at the expense of other countries) was the
best way to increase the prosperity of a country.
 Granting of state monopolies to particular firms especially those associated with
trade and shipping.
 Subsidies of export industries to give a competitive advantage in global
markets.
 Government investment in research and development to maximize the efficiency
and capacity of the domestic industry.
 Allowing copyright/intellectual theft from foreign companies.
 Limiting wages and consumption of the working classes to enable greater profits
to stay with the merchant class.
 Control of colonies, e.g. making colonies buy from Empire country and taking
control of colonies wealth.
Criticisms of Mercantilism

 Adam Smith’s “The Wealth of Nations” (1776) – argued for benefits of free trade
and criticized the inefficiency of monopoly.
 Mercantilism is a philosophy of a zero-sum game – where people benefit at the
expense of others. It is not a philosophy for increasing global growth and
reducing global problems. Trying to impoverish other countries will harm our
own growth and prosperity. By contrast, if we avoid zero-sum game of
mercantilism increasing the wealth of other countries can lead to selfish
benefits, e.g. growth of Japan and Germany led to increased export markets for
UK and US.
 Mercantilism which stresses government regulation and monopoly often lead to
inefficiency and corruption.

Basis of International Trade

 Absolute Advantage – refers to the greater efficiency a particular country has as

compare to another country with which it can trade, in the production of a
specific commodity.
 Comparative Advantage – pertains to the higher level of efficiency a country has
in the production of a particular goods are compare to another product it can
also produce with the same resources.
 Specialization – different motions specialize in the production of those goods
and services for which their resources are best suited.

TRADE PRACTICES AND POLICIES

Trade policy refers to the agreements and regulations surrounding imports and
exports between different countries. It is used to promote economic growth and
competitiveness.
A product that is sold to the global market is called an export, and a product
that is bought from the global market is an import. Imports and exports are
accounted for in the current account section in a country's balance of payments.

Global trade allows wealthy countries to use their resources—for example,

labor, technology, or capital—more efficiently. Different countries are endowed with
different assets and natural resources: land, labor, capital, and technology, etc. This
allows some countries to produce the same good more efficiently—in other words,
more quickly and at lower cost. Therefore, they may sell it more cheaply than other
countries. If a country cannot efficiently produce an item, it can obtain it by trading
with another country that can. This is known as specialization in international trade.

Types of Trade Agreements

 Unilateral Trade Agreement

These occur when a country imposes trade restrictions and no other

country reciprocates. A country can also unilaterally loosen trade restrictions,
but that rarely happens because it would put the country at a competitive
disadvantage. The United States and other developed countries only do this as a
type of foreign aid in order to help emerging markets strengthen strategic
industries that are too small to be a threat. It helps the emerging market's
economy grow, creating new markets for U.S. exporters.
  Bilateral Trade Agreements

Bilateral agreements involve two countries. Both countries agree to

loosen trade restrictions to expand business opportunities between them. They
lower tariffs and confer preferred trade status on each other. The sticking point
usually centers around key protected or government-subsidized domestic
industries. For most countries, these are in the automotive, oil, or food
production industries. The Obama administration was negotiating the world's
largest bilateral agreement, the Transatlantic Trade and Investment
Partnership with the European Union, but this stalled under the Trump
administration.

 Multilateral Trade Agreements

These agreements among three countries or more are the most difficult to
negotiate. The greater the number of participants, the more difficult the
negotiations are. By nature, they are more complex than bilateral agreements,
as each country has its own needs and requests. Once negotiated, multilateral
agreements are very powerful. They cover a larger geographic area, which
confers a greater competitive advantage on the signatories. All countries also
give each other most-favored-nation status—granting the best mutual trade
terms and lowest tariff.

Imports are the goods and services that are purchased from the rest of the
world by a country’s residents, rather than buying domestically produced items.
Imports lead to an outflow of funds from the country since import transactions involve
payments to sellers residing in another country.
Exports are goods and services that are produced domestically, but then sold to
customers residing in other countries. Exports lead to an inflow of funds to the seller’s
country since export transactions involve selling domestic goods and services to
foreign buyers.
The difference between the value of the goods a nation sells (exports) on one hard
and the value of the Goods it buys (imports) is called the balance of trade.

International Trade Barriers

Free trade between nations presupposes beneficial results to traders, so it is expected
that no trade restrictions are imposed.

Tariff is a tax to be paid for importing or exporting goods.

Export Tariff – one that is collected by the exporting country.

Transit Tariff – one that is collected by the country through which the goods have
passed

Import Tariff – one that is collected by the importing country.

Non-Tariff Barriers
Direct price influences:
1. Subsidies – money from government for domestic producers, making it harder
for importers to compete.
2. Customs valuation – is a custom procedure applied to determine the customs
value of imported goods. The process where customs authorities assign a
monetary value to a good or service for the purpose of import or export.
3. Other direct price influences – examples: embargoes and natural barriers such
as distance and language.

Quantity Controls
1. Quotas – are limits placed on the quantity of specified products allowed to be
imported into or exported out of country. Import quotas guarantee that local
producers will have access to a certain percentage of the local market.
Example:
For example, the US may limit the number of Japanese car imports to 2
million per year.
2. ‘’Buy local’’ legislation – are those design by the government to give preference
to locally made goods.
3. Standard – refers to classification, labeling, and testing set by a country in a
manner that allows the sale of domestic product but restricts the sale of
imported goods.
4. Specific permission requirement – are forms of controlling trade whereby the
country requires potential importers or exporters to secure permission from the
government before engaging in foreign trade.
5. Administrative delays – are sometimes intended to make it hard for importers
and exporters to engage in international trade. This contributes to lower volume
of sales.
6. Reciprocal arrangements – refers to ones that require exporters to accept
merchandise as payment for the exported goods. As many exporters are in a
position to handle the merchandise payments, they refuse to be involved in
such deals, and trading is effectively reduced.
7. Restriction on services – refers to the arrangements whereby an importer and
exporter is required to use the services of domestics companies in moving the
goods from country to country. The services include transportation, consulting,
insurance, and banking.

A tariff may be assessed using any of the following basis:

1) Specific Duty – assessment on the basis of the tax per unit.

2) Ad valorem Duty – assessment as a percentage of the value of the item.
3) Compound Duty – a combination of a specific and ad valorem duties.

BALANCE OF PAYMENTS
It is a comprehensive national statement which shows all the sources of income
and expenditures of the country over a period of time, usually a year.
 The balance of payments (BOP), also known as the balance of international
payments, is a statement of all transactions made between entities
in one country and the rest of the world over a defined period, such as a
quarter or a year. It summarizes all transactions that a country's individuals,
companies, and government bodies complete with individuals, companies, and
government bodies outside the country.

The balance of payments (BOP) transactions consist of imports and exports of

goods, services, and capital, as well as transfer payments, such as foreign aid
and remittances. A country's balance of payments and its net international
investment position together constitute its international accounts.

By structure, a balance of payments is composed of three major parts:

 Current Transactions – we have merchandise transactions, like commodity

imports and exports, as well as services, like banking, insurance, and tourist
expenditures, immigrant remittances, royalties, and so forth.

 Capital Movement – we have loans and investments. This includes foreign

investments going into the country or out of the country.

 Gold Movement – this is rarely observed if at all. However, when a country, in

spite of a considerable lapse of time, is unable to discharge its international
obligation, the only alternative for her is through an actual shipment of gold.

EXCHANGE RATE
An exchange rate is the rate at which one currency can be exchanged for
another between nations or economic zones. It is used to determine the value of
various currencies in relation to each other and is important in determining trade and
capital flow dynamics.
Foreign Exchange – refers to collective term which includes all negotiable claims
expressed in terms of foreign money.

Rates of exchange – refers to the price which must be paid in terms of local money for
a unit of foreign currency.

Exchange rates are defined as the price that one nation or economic zone’s currency
can be exchanged for another currency. The rates are impacted by two factors:

 The domestic currency value

 The foreign currency value
In addition, the rates can be quoted either directly or indirectly or with the use of
cross-rates.

Exchange Rate Policies

A country may eliminate its deficit by adopting any of the following exchange
rates policies:
  Pegged exchange rates – under this kind of exchange rate, the government is
prepared to defend the fixed price of the dollar by increasing the supply of
dollar if the demand for dollars’ decreases, the government buys dollars to
make up for the decline in the for dollars.

 Free-floating or flexible exchange rates – the price of the foreign exchange

like a U.S. dollar is determined by the free interaction between demand and
supply of dollars. When demand for dollars is greater than the supply of dollars,
the price of dollar increases. If the supply of dollar is greater than the demand
of dollars, the price of dollar decreases.

 Managed floating exchange rates – the exchange rates are also determined by
the market forces of demand and supply, but the central bank intervenes to
smooth out disorderly or erratic fluctuation of exchange rates. The government
can stabilize the price of the dollar by engaging in the buy and sell of dollars.

Direct Quotation vs. Indirect Quotation

Direct quotation of exchange rates involves quoting the price of a unit of foreign
currency directly in terms of the number of units of domestic currency that are
exchanged.
Indirect quotation of exchange rates involves expressing the price of a domestic
currency in terms of the number of units of foreign currency that are exchanged.
Cross Rates
Cross rates are a method of quoting exchange rates in which various foreign currency
exchange rates are used to imply a domestic exchange rate, e.g., if you wanted to
determine the EUR/USD exchange rate but can’t access a direct quote. You could use
the EUR/CAD exchange rate and the CAD/USD exchange rate to infer the EUR/USD
rate.
Importance of Exchange Rates
Exchange rates capture a lot of economic factors and variables and can fluctuate for
various reasons. Some of the reasons that exchange rates can fluctuate include:
1. Interest Rates
Changes in interest rates impact currency value and exchange rates. All else being
equal, a higher interest rate in a domestic country will increase the demand for a
domestic currency since more foreign investors will seek to invest at the higher
interest rate, thereby investing foreign capital into the domestic currency. However, in
practice, it is balanced out by inflationary pressures.
 
2. Inflation Rates
Changes in inflation rates impact currency value and exchange rates. All else being
equal, a higher inflation rate in a domestic country will decrease the demand for the
domestic currency since the value of the currency depreciates relatively faster over
time than other foreign currencies.
 
3. Government Debt
Government debt is the amount of debt owed by a federal government. It impacts
currency value and exchange rates since a country with higher debt is less likely to
acquire foreign capital, which, in turn, leads to inflation. It puts downward pressure
on the domestic currency and decreases its value in exchange rates.
4. Political Stability
The political state of a country influences the currency value and exchange rates since
a country with higher political turmoil is less likely to attract foreign investors.
Political instability fosters more risk for investors, as they are unsure of whether they
will see their investments protected via fair market practices or a strong legal system.
 
5. Export or Import Activities
A country’s net exports or imports impact currency value and exchange rates. A
domestic country that exports more goods than it imports will experience a higher
demand for its currency, and thereby, will see its exchange rate increase relative to
other foreign currencies.
 
6. Recession
A country that experiences a recession is less attractive to foreign investors. Firstly, it
is due to the increased risk of investing in an economy with a poor economic outlook.
Secondly, when a recession occurs, interest rates typically decrease, which decreases
the foreign demand for domestic currency.
 
7. Speculation
If a country’s currency is expected to rise for any reason, investors will demand more
of the currency to realize a profit based on that expectation. It can cause immediate
demand increases for domestic currency relative to foreign currencies.
 
8. Special Considerations
There are other special considerations when exchange rates are determined. For
example, various “safe-haven” currencies are believed to be stable and attract foreign
capital when the global economic outlook is uncertain. It includes currencies such as
the U.S. dollar, euro, Japanese yen, and Swiss franc.
Another special consideration for the U.S. dollar is that it is the global federal reserve
currency, which increases the baseline demand for the U.S. dollar relative to other
currencies.
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