Lecture 2.

INTERNATIONAL TRADE AND WORLD

EQUILIBRIUM OF SUPPLY AND DEMAND
Apalkova Viktoriia
PhD, Associate Professor, Department of International Economics
 Content
1. Motivational factors and indicators of international trade
2. Types and methods of international trade
3. Transformation of the world market of goods and services at the turn of
millennium
4. Features of pricing in the world market
5. Scientific and technological exchange is an efficient mean of international
transfer of knowledge
6. Regulation of international trade
7. State stimulation of export in realizing national interests of countries on the
world market
8. Role of GATT/WTO in the functioning of global trade system
2
1. Motivational factors and indicators of international trade
• Historically, the first form of international economic relations is
international trade, which, having originated in ancient times and having
undergone a long path to its evolution, has turned into the most
developed sphere of the world economy today and it covers more than
80% of all international business transactions.
• Although international trade is inferior to world exports of capital and
international investment activity in value terms and dynamics of
development, it still plays a leading role in the system of international
economic relations.
• An active participation of countries in foreign trade gives them significant
competitive advantages in world markets through the effective use of
the national resource base, adherence to the world's achievements in
science and technology, as well as the possibilities for the structural
adjustment of national economies.

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1. Motivational factors and indicators of international trade
• In the broadest sense, international trade is any interstate exchange activity with goods,
services and other results of human labour or elements of nature and is the material basis of
the global merchandise market.

Relationship of international trade with other forms of IER:

it stipulates the other forms of world economic relations - the export of capital, production cooperation,
scientific and technical cooperation, etc.

international trade in goods determines the dynamics of international exchange of services;

strengthening and deepening of interregional and intergovernmental interconnections is an important

prerequisite for international economic integration;

international trade contributes to further deepening of the international division of labour and the
internationalization of economic relations.

4
1. Motivational factors and indicators of international trade
Table 1. THEORETICAL ARSENAL OF RESEARCH OF THE INTERNATIONAL TRADE INVESTIGATION
Essence
Name of the theory Representatives
Early mercantilism was based on the doctrine of the balance of
payments, that is, the accumulation of money due to the export of
goods due to the prohibition or restriction of the export of money
The theory of late mercantilism was based on the doctrine of] trade
Mercantilism U. Stafford, G. ScaruffiT. Men, A. surplus, which could be ensured through the intensification of foreign
SerraA. Montchretien et al. trade in excess of export earnings in comparison with import costs, as
well as the development of intermediary trade (resale of foreign
goods, provision of transport services, loans for the purpose of
obtaining additional revenues from operations on foreign markets)
It is profitable for the state not only to sell but also to buy goods
The theory of absolute on the foreign market, provided that it specializes in the
preferences A. Smith production of those goods, from which it has the lowest
production costs in comparison with other countries
International trade is determined by the difference in relative
costs that countries have in the production of certain goods. The
The theory of D. Ricardo, J. Mill labour theory of value lies in the basis of the theory of
comparative benefits comparative advantages, and the necessary condition for
merchandise exchange is free trade
Alternative costs are estimated by the amount of products of one
type that will be lost when the limited resources of the economy
The theory of will be redistributed for the production of an additional unit of
alternative costs G. Haberler product of another type. Therefore, the country with the lowest
alternative costs of producing a certain product has comparative
advantage over other countries.
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1. Motivational factors and indicators of international trade
Table 1. THEORETICAL ARSENAL OF RESEARCH OF THE INTERNATIONAL TRADE INVESTIGATION
(continued)

Name of the theory Representatives Essence

Countries export those goods and services that are produced with
the intensive use of surplus factors of production and import
The theory of the ratio products of intensive use of scarce factors. Therefore, an
of factors of E. Heckscher, B. Olin, P. Samuelson international
factors for
exchange by its nature is the exchange of surplus
shortages, and when there is no movement of factors
production of production across national borders, the free interstate
movement of goods greatly reduces the problem of the lack of
certain resources in individual countries
Developed countries with a surplus of capital export labour-
Paradox of V. Leontiev V. Leontiev,Kissing
G. Bowen, E. Litter, D. intensive products, while developing countries with a surplus of
et al. manpower-capital stock, which contradicts the Heckscher-Olin
theory of the ratio of production factors
The objective basis of interstate trade is the existing differences in
the levels of technological development in countries where the
advanced technologies owned by the countries create unique new
goods and services, providing them with leadership positions in
Theory of technological M. Posner the relevant segments of the world market. In general, export-
gap import flows in international trade are formed on the basis of
“flows of innovations”, which asymmetrically arise in different
countries in different industries, therefore, holding positions in the
world market by some countries is possible only under the
conditions of constant innovation activity

6
1. Motivational factors and indicators of international trade
Table 1. THEORETICAL ARSENAL OF RESEARCH OF THE INTERNATIONAL TRADE INVESTIGATION
(continued)

Name of the Representatives Essence

theory
The countries specialize in exporting the same product at different stages of its life cycle
in the international exchange. All products represented on the world market are a cycle
consisting of four stages - implementation, growth, maturity and decline. Consequently,
the production of these products moves from country to country depending on the stage
of the cycle. At the implementation stage, developed countries are developing
The theory of R. Vernon, innovations in response to the identified need of the market. At the stage of growth , the
product life cycle V. Gruber, D. Meta innovation country in parallel with domestic production of new goods begins their release
abroad. At maturity stage, the product becomes more standardized, so its production in
developed countries becomes disadvantageous. At the stage of decline, technology and
equipment are so advanced that production of goods no longer requires special
qualifications, and therefore it is completely relocated to developing countries that have
an excess of cheap labour
International trade between countries with identical or similar factors of production is not
M. Kemp, due to specialization on the basis of comparative advantages, but to the presence of a
Theory P. Krugman, growing scale effect (economies of scale) in certain industries. As the growing scale effect
ofscaleeffect K. Lancaster et al. increases with the volume of resources involved in production, the volume of output
increases to a greater extent, hence the cost per unit of manufactured products and its
price are reduced, thus forming competitive advantages

7
1. Motivational factors and indicators of international trade
Table 1. THEORETICAL ARSENAL OF RESEARCH OF THE INTERNATIONAL TRADE INVESTIGATION
(continued)

Name of the Representatives Essence

theory
The largest volumes of international trade fall into countries with close levels of per capita
Cross-demand income, which determine the similarity of preferences of consumers in these countries
theory (likeness of and determine the structure of consumer demand. Therefore, the volume and structure
consumer P. Lindert of interstate intra-industry trade are determined by factors such as a relatively similar
preferences) income per capita of countries, the identity of demand curves; the comparability of
prices, factors and costs of production of differentiated products, approximately the same
level of tariffand non-tariff barriers; as well as the nominal value of transport costs
In order to achieve leadership in the international market, a combination of the firm's
chosen competitive strategy with the competitive advantages of the country is required,
the determinants of which are:
- parameters of factors of production (their availability, hierarchy, mechanisms and
The theory of dynamics of creation)
competitive M. Porter -the level of demand in the domestic market of the country of the company's base
advantages - the presence in the country of the industry-suppliers or other industries that are
competitive in the world market
- the similarity of national models of strategy and firm structure to global parameters
- the level of internal competition, which affects the company's activities in the foreign
market

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1. Motivational factors and indicators of international trade
The amount of export and import value of a country or group of countries over
a specified period of time reflects the indicator of value of external trade (VET):

VET= E + I,
where
E is volume of export (in monetary value);
I is the volume of import (in monetary value).

The volumes of export and import operations of the country do not include:
 supply of goods carried out on a free basis, in particular, humanitarian aid, gifts, etc.;
 goods supplied as contributions to the United Nations technical assistance fund and other international
economic organizations;
 cost of transit goods;
 personal baggage of individuals and private parcels.

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2. Types and methods of international trade

Forms of international trade

are classified on the basis of
such features as
1) object of exchange,
2) specific of the interaction
of subjects of trade
relations
3) the nature of their
regulation

Fig. 1. Forms of international trade

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2. Types and methods of international trade
 Foreign trade operations can be
grouped into two groups: direct
trade and trade through agents (Fig.
2).
 Regarding direct sales, it provides for
free direct trade exchange between
the producer and consumer of
goods or services.
 It is governed by contractual
documents concluded between
exporters and importers in
accordance with the provisions of
the UN Convention on contracts for
the international sale and purchase
Fig. 1. Systematization of methods of international trade of goods.

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2. Types and methods of international trade
 Direct trade contacts between participants of export and import agreements give the
following advantages:
 savings on transaction costs, primarily due to lack of commission fees to an intermediary;
 reduction of risk and dependence of business results from possible unfairness or lack of
competence of the intermediary organization;
 the use of advantages of direct contact with consumers and the possibility of obtaining
reliable information about their needs, as well as the state and trends of the development of
foreign markets on the basis of organization of logistics and marketing activities.

 However, the application of this method of trade requires qualified personnel with
experience of commercial activity and a significant delay in the financial resources of the
manufacturer company for market research and promotion of their products to foreign
markets. Therefore, despite the high economic efficiency of direct trade relations between
exporters and importers, the prevailing share of international merchandise exchange is
nevertheless realized with the participation of intermediary structures

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2. Types and methods of international trade
Table 2. STAGES OF THE INTERNATIONAL TENDER
1. Preparation of the tender 2. Submit of proposals 3. Election of a winner 4. Conclusion of the
agreement

 determination of the
auction organizer
 formation of the
tender committee  opening of
 development of a  preparation of envelopes(in the
package of tender offer by the offerer presence of
documentation participants of the
Sending documents  conclusion of a
 agreement of  to the Tender
auction or in their
formal
documents with the absence)
Committee before  agreement
customer-importer the specified date analysis of
proposals based on  official signing
 preparation and making a “deposit of of the contract
publication of an open  reliability" by the
selected criteria
tender and methodology
offerer  election of a
 invitations to pre-
selected participants in winner
closed bidding
 distribution (sale) of
tender documentation

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2. Types and methods of international trade

 The world economy is the sphere of functioning of the international

economic system.
 It should be understood as a set of main subsystems (national economic
systems) and elements of the world economy in their interaction on the
basis of international economic activity and international economic
relations with the appropriate regulatory mechanism.
 Relative agents of the international economic system are the national
economies of the countries, which, interacting with each other, form links for
the exchange of resources in the process of implementing the international
division of labour in order to realize national economic interests.
 In the process of such interaction, integrative features and peculiarities
inherent in this system are formed, and its functioning and development are
based on its immanent laws and principles.
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2. Types and methods of international trade

 In general, depending on the nature

of interaction between the exporter
and the reseller, as well as the
functions of the latter there are
commission, agent and brokerage
operations, as well as resale
transactions.
 Regarding commission operations,
during their implementation the
resellers (commissioners) receive
the right to search for consumers of
goods and sign contracts with them
on their own behalf, but at the
expense of sellers or buyers
(consigners) who take on
commercial risks .

Fig. 3. Types of international agency operations 15

3. Transformation of the world market of goods and services at the turn of millennium

Table 3. REGIONAL STRUCTURE OF WORLD EXPORT OF GOODS DURING 1948-2012

Year The dynamic liberalization of foreign trade of

Region
1948 1953 1963 1973 1983 1993 2003 2007 2012 countries and the gradual elimination of trade
North America barriers between them, the active development
including 28.1 24.8 19.9 17.3 16.8 18.0 15.8 13.6 12.9
of transnational structures and the expansion
USA 21.7 18.8 14.9 12.3 11.2 12.6 9.8 8.5 8.4 of export-oriented sectors of national
South and Central
America 11.3 9.7 6.4 4.3 4.4 3.0 3.0 3.7 4.1 economies have provided a fairly steady rate
Europe including of growth of international exchange for the
35.1 39.4 47.8 50.9 43.5 45.4 45.9 42.4 34.7
EU-27 … … 27.5 38.6 38.6 38.6 42.7 39.1 31.5
last fifty years.
CIS countries … … … … … 1.5 2.6 3.7 4.4 So, since the signing of the GATT, during
Africa 7.3 6.5 5.7 4.8 4.5 2.5 2.4 3.1 3.4 1948-2012, the value of world exports of goods
Middle East 2.0 2.7 3.2 4.1 6.8 3.5 4.1 5.6 7.3 increased more than 300 times - from 59 to
Asia including 14.0 13.4 12.5 14.9 19.1 26.1 26.2 27.7 33.2 18,401billion USD. At the same time, the
China 0.9 1.2 1.3 1.0 1.2 2.5 5.9 8.9 11.1 period from 1973 to 1983 reflected the highest
Japan 0.4 1.5 3.5 6.4 8.0 9.9 6.4 5.2 4.3 rates of its growth, which led to a tripling of
Total, billion USD,
% 5910 8410 1571 5791 1838 3675 7375 1361 1840 its value volumes - from 579 to 1,838 billion
0 0 00 00 100 100 100 9100 1100 USD
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3. Transformation of the world market of goods and services at the turn of millennium

Table 4. MERCHANDISE STRUCTURE OF THE WORLD EXPORT DURING 1990-2012

Year Characteristics of the merchandise

Merchandise group
1990 1995 2000 2008 2012
Agricultural products 12.2 11.7 8.9 8.5 9.0 structure of world export (Table 4) allows
Fuel and production of the extractive
14.3 10.8 13.6 22.3 22.5
us to find out that the largest share falls
industry
now for industrial goods - 62.4% in
Industrial products including 70.4 74.1 74.9 66.4 62.4
— iron and steel 3.1 3.1 2.3 3.7 2.6
2012, and in this merchandise group - for
— chemical products 8.7 9.7 9.3 10.6 10.6 high-tech products: office and
— office and telecommunication telecommunication equipment (9.1%)
equipment 8.8 12.1 15.4 10.0 9.1
— automotive products and electric, non-electric and electric
9.4 9.2 9.2 7.9 7.0
— electric, non-electric and electric generating machines (12.4%). This is due
generating machines … … 13.3 12.4 12.4
to the dynamic growth of manufacturing
— textile 3.1 3.0 2.5 1.6 1.6
— clothes
industry in most countries, the significant
3.2 3.2 3.1 2.3 2.3
— scientific and control tools … … 1.9 2.0 2.1 expansion of the range of products
Total 100 100 100 100 100 produced and the ever-increasing
demand for products in the industry.

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4. Features of pricing in the world market

 Among the factors that determine the multiplicity of world prices, we note the main:

differences in trade policy with regard to both specific markets and to some importers;

state and interstate foreign exchange policy;

level of protectionism;

differences in the methodology and methods for calculating prices.

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4. Features of pricing in the world market
 In the process of preparation and
conclusion of foreign trade
agreements, the establishment of their
prices on the basis of analysis of
market conditions and the basic prices
for one or another group of goods is
important.
 Basic prices are the basis for reaching
an agreement between the exporter
and the importer to determine the
actual price of the transaction, which
is legally fixed in an international
commercial contract.
 It is a legal document that provides
for the mutual rights and obligations
of counterparties from different
countries regarding the objects of
exchange and their quantitative and
qualitative conditions, as well as
prices, terms of supply and payments.
Fig. 5. Classification of prices in international trade

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4. Features of pricing in the world market

BASIC CONDITIONS OF INCOTERMS-2010

 Given that in the process of international movement of
Characteristics of the Delivery goods delivery costs can reach 50-60% of the price for
category condition
EXW goods in the destination country, and if air transport is used
Е Shipping of goods for delivery, they may even exceed the initial purchase
FCA price, the correct definition basis of delivery under
F Main transportation, not FAS Incoterms conditions is especially relevant in the design of
paid by the exporter FOB a foreign trade agreement.
CFR  Since its introduction, Incoterms have been subject to
CIF editing repeatedly due to the need to respond to the ever-
C Main transportation, CIP increasing scale and diversification of international trade
paid by the exporter
CPT relations. In particular, changes to Incoterms were carried
out in 1953, 1967, 1976, 1980, 1990, 2000, and 2010. The
DAT latest edition of Incoterms-2010 came into force on January
DAP 1, 2011.
D Delivery
DDP

20
5. Scientific and technological exchange is an efficient mean of international transfer of
knowledge
 The subjects of international scientific and technological exchange are national firms, universities,
research institutions, business centres, venture companies, technology poles, TNCs, states, integration
groups, international organizations.
 Mechanisms by which today the international scientific and technological exchange is implemented, one
can distinguish the following forms:

- purchase and sale of patents, licenses, know-how, information packages, using paper and electronic media;

- purchase and sale of high-tech goods;

- delivery of technological equipment in the process of implementation of international projects of production and investment
cooperation;

- contributions of participants of international enterprises to the statutory fund in the form of technologies, know-how;

- international migration of highly skilled scientific and technical personnel.

21
5. Scientific and technological exchange is an efficient mean of international transfer of
knowledge
 Objects of international scientific and technological exchange:

inventions; know-how; utility models;

industrial technical
trademarks;
samples; documentation;

programs for
databases, etc.
computers;

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5. Scientific and technological exchange is an efficient mean of international transfer of
knowledge
CLASSIFICATION OF OBJECTS OF INTERNATIONAL SCIENTIFIC AND TECHNOLOGICAL EXCHANGE
The object of Share in the
international scientific Criteria of security Security The term of legal formation of
Object of legal protection price of the
and technological capacity document protection, years
object of  The greatest influence
exchange
 computer
exchange on the modern
 creative During the life of the
Objects of copyright
programsdatabasesR&D
contribution origina- Notneeded author and 70 years 5 international scientific
resultslectures on personnel
training
lity after his death and technological
Trademarks  logosemblems  novelty Certificate
10 with the possibility
of lengthening every 15
exchange is made by
10 years those objects which
 product process new  noveltylevel
Inventions application of a known product or ofinventors industria Patent 20 27 directly concern
process l applicability
 product process new
scientific, technical and
 novelty industrial
Utility models application of a known product or
applicability
Patent 10 10 industrial spheres and
process
rationalization
 product or process  novelty for the
Depending on the
form the cost of
improvement organizational enterprise economic Certificate 20
proposals
decisions or social effect
usage period innovative projects,
Industrial designs
 the result of creative activity in
 novelty Patent 10 10 namely: Trademarks,
the field of artistic design
 fixed on a material carrier inventions, utility
spatially-geometric placement of
Layout (topography)of
a set of elements of integrated  origina-lity Certificate 10 3 models, innovative
integralchips
circuits and connections between offers and industrial
them
Production secrets and  processing modes warehouses  inaccessiblefor third
Not needed Indefinitely 5
designs
know-how of materials processing time parties
 methods of organization of
 inaccessiblefor
Commercial secrets production business
third parties
Not needed Indefinitely 5 23
plans financial documents
6. Regulation of international trade
 World practice shows that the foreign trade policy of countries, as a system of principles,
methods and instruments of state regulation of foreign trade of countries, which ensures
the realization of their national economic interests, is based on two fundamental
doctrines - free trade and protectionism - and depends on specific conditions and
characteristics of the economic state countries at one or another historical stage of its
development. The notion of free trade means the policy of minimal state interference in
foreign trade, developing on the basis of free market forces of demand and supply. Such
a policy is based on eliminating any obstacles to the import and export of foreign and
domestic goods.

 The basis of the policy of free trade consists of the process of liberalization of foreign
trade as the expansion of freedom of economic action and elimination of any
restrictions on foreign trade activities of national business entities, as well as
simplification of access to the domestic market for foreign entities.

24
6. Regulation of international trade
 Key components of foreign trade policy remain unchanged, namely:

nature of export-import activity of domestic business entities (value of foreign trade, its merchandise and
regional structure, dynamics);

system of customs taxation (elements of the customs tariff, methods of determining the country of
origin of goods, types and level of rates of customs duties, composition and level of customs taxes);

quantitative restrictions of foreign trade (types, contingents, level);

non-tariff regulation of foreign trade instruments (technical barriers, administrative formalities,

currency and credit regulation, etc.);

measures of state support of domestic exports (financial and credit, tax, currency and credit, organizational
and technical, etc.).

25
6. Regulation of international trade
Fig. 6. Levels and tools of international trade regulation system
System for regulating the international exchange of
goods and services covers the following levels (Fig. 6):
— branded, in which firms and companies
enter into agreements between them on the distribution
of raw materials markets, materials, sales of goods,
spheres of influence, etc. In this way, the market
behaviour of enterprises and their associations is formed
in order to achieve and maintain leading positions in one
or another segment of the world market;
— national, in which the foreign trade of
each country is implemented in accordance with the
national legal framework for regulation of foreign
economic activity;
— intergovernmental, manifested in the
conclusion of relevant agreements between states and
their groups;
— supranational, which corresponds to the
implementation of the international community's
strategy and measures to regulate international trade
through the creation of international special institutional
structures, relevant agreements (GATT/WTO system,
International Chamber of Commerce, etc.).
26
6. Regulation of international trade

Fig. 7. Modern instruments for regulating international trade

27
7. State stimulation of export in realizing national interests of countries on the world market

Almost all the countries of the world today are actively stimulating the
export activity of domestic actors on macro- and meso- level, using such
instruments as
 export lending,
 export subsidies,
 export credit insurance
 dumping.
Export lending refers to the provision of loans to foreign firms or state-owned enterprises by exporting
enterprises, banks and the government for the purchase of goods in the creditor country for a different
period. Typically, export credits are provided under government guarantees to eliminate export risks not
covered by commercial insurance, and include measures for:
— lending to national exporters by state banks at preferential lending rates lower than
market rates;
— government loans to foreign importers, subject to their obligation to buy goods only from
firms of the country;
— insurance of commercial and political export risks of national exporters.

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7. State stimulation of export in realizing national interests of countries on the world market

Insurance of export credits from political risks is widely used by developed countries as a method of
stimulating the penetration of private capital into foreign markets. Export credit insurance contracts are
subject to political risks in the event of losses of exporters due to the following reasons:
adoption in the importing country of regulations that restrict the importer's ability to fulfil its obligations;

the breach by the importer of the contract as a result of unforeseen actions of state bodies;

military actions, riots, revolts, revolutions, sabotage, and terrorism, which made it impossible for the exporter to participate in the deal or deprived the importer of the
opportunity to pay;
confiscation, nationalization of the importer's property;

the introduction of import or export licensing or the abolition of import or export licenses;

imposing an embargo on import or export;

introduction in the country of the importer of taxes, fees, commissions relating to the activities of the exporter in accordance with the insured contract;

non-payment or delay in payment by the importer due to the impossibility of converting national currency of the importing country into the currency of contract or the
introduction of restrictions on the transfer of currency from the buyer's country;
failure of the state buyer to fulfil the terms of the contract.

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8. Role of GATT/WTO in the functioning of global trade system

• After the Second World War, the world community faced the need
to develop such a system of world economic management that
would take into account the national economic interests of
countries, prevent a dominant position in the world markets of
individual countries, and also establish a new economic order on
the principles of non-discrimination and equality.
• During this period, active interstate negotiations began on the
establishment, along with international monetary and credit
organizations, of organization on the regulation of international
trade relations, which ended in 1947 by the signing by eight
states: Austria, Belgium, France, Luxembourg, the Netherlands,
the United Kingdom, the United States and Cuba - of the General
Agreement on Tariffs and Trade (GATT).

30
8. Role of GATT/WTO in the functioning of global trade system

• The GATT was a multilateral trade agreement

between the countries, based on the application of
the principle of maximum trade facilitation, and
provided for an appropriate institutional mechanism.
It consisted in exercising control over the fulfilment by
member states of their commitments and the
organization of multilateral trade negotiations, which
addressed the most important issues of international
trade and settled disputed issues.
• Each contracting party had the right to make any
question that belonged to its competence to the open
discussion of the GATT session.

31
8. Role of GATT/WTO in the functioning of global trade system

• On the basis of its documents in 1994 in the city of Marrakesh

(Morocco) the creation of the World Trade Organization (WTO) as
an institution and at the same time a set of legal documents
defining the rights and obligations of national governments in the
field of international trade in goods and services was proclaimed.
• The agreement on founding of the WTO contained three
documents: updated GATT Agreement, General Agreement on
Trade in Services (GATS) and Agreement on Trade-related Aspects
of Intellectual Property. The basis of the General Agreement on
Trade in Services is a general obligation (applicable to all WTO
member countries and all types of services), a number of annexes
(regulating trade in certain types of services: telecommunications,
financial, air transport services, etc.), as well as specific
commitments (specific commitments made by the countries as a
result of the negotiations).

32
8. Role of GATT/WTO in the functioning of global trade system
• The key areas of WTO activity are:

control over the adoption of decisions and the application of multilateral trade agreements that constitute
the legal basis of the WTO;

implementation of the role of forum for multilateral trade negotiations;

settlement of trade disputes between member states;

control over trade policy of member countries;

collecting, summarizing and disseminating information on development and use of international trade and
trade policy mechanisms.

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Thank you for your attention!

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