LESSON 1: Introduction to International Business &
Trade (History of International Trade Agreements)
From Mercantilism to Trade Liberalization
MERCANTILISM
- dominated the trade policies of the major
European powers for most of the sixteenth
century through to the end of the 18th century.
- The key objective of trade was to obtain a
“favorable” balance of trade, by which the
value of one’s exports should exceed the value
of one’s imports.
- The mercantilist trade policy discouraged trade
agreements between nations.
- Governments assisted local industry through
the use of tariffs and quotas on imports, as
well as the prohibition of exporting tools, capital
equipment, skilled labor or anything that might
help foreign nations compete with the domestic
production of manufactured goods.
BRITISH NAVIGATION ACT OF 1651
- best examples of a mercantilist trade policy
- Foreign ships were prohibited from taking part
in coastal trade in England, and all imports from
continental Europe were required to be carried
by either British ships or ships that were
registered in the country where the goods were
produced.
Adam Smith & David Ricardo
- Doctrine of mercantilism
- both stressed the desirability of imports and
stated that exports were just the necessary cost
of acquiring them.
1823 Reciprocity of Duties Act
- greatly aided the British carry trade and made
permissible the reciprocal removal of import
duties under bilateral trade agreements with
other nations.
Corn Laws Repeal of 1846
- The Corn Laws were tariffs and other trade
restrictions on imported food and corn
enforced in the United Kingdom between 1815
and 1846.
- The word corn in British English denotes all
cereal grains, including wheat, oats and barley.
They were designed to keep corn prices high to
favor domestic producers, and represented
British mercantilism.
- In 1846, the Corn Laws, which had levied
restrictions on grain imports, were repealed, and
by 1850, most protectionist policies on British
imports had been dropped.
The Cobden-Chevalier Treaty of 1860
- was an Anglo-French free trade agreement
signed between Great Britain and France on 23
January 1860.
- The 1860 treaty ended tariffs on the main
items of trade—wine, brandy and silk goods
from France, and coal, iron and industrial
goods from Britain.
- It also included a most favored nation clause
(MFN), a non-discriminatory policy that requires
countries to treat all other countries the same
when it comes to trade.
- This treaty helped spark a number of MFN
treaties throughout the rest of Europe, initiating
the growth of multilateral trade liberalization,
or free trade.
The Deterioration of Multilateral Trade
- The world economy fell into a severe depression
in 1873.
- Lasting until 1877, the depression served to
increase pressure for greater domestic
protection and dampen any previous
momentum to access foreign markets.
- Italy would institute a moderate set of tariffs in
1878 with more severe tariffs to follow in 1887.
- In 1879, Germany would revert to more
protectionist policies with its "iron and rye"
tariff, and France would follow with its Méline
tariff of 1892.
- Only Great Britain, out of all the major Western
European powers, maintained its adherence to
free-trade policies.
The McKinley Tariff Act of 1890
- The tariff raised the average duty on imports to
almost fifty percent, an increase designed to
protect domestic industries and workers from
foreign competition.
TRADE AND WAR
- All of these protectionist measures, however,
were mild compared to the earlier mercantilist
period and in spite of the anti-free trade
environment, including a number of isolated
trade wars, international trade flows continued
to grow.
 - But if international trade continued to expand
despite numerous hurdles, World War I would
prove to be fatal for the trade liberalization that
had begun in the early 19th century.
The League of Nations (1927)
- organize the First World Economic Conference
in 1927 in order to outline a multilateral trade
agreement.
- The economic insecurity and extreme
nationalism of the period created the conditions
for the outbreak of World War II.
Multilateral Regionalism
- The International Monetary Fund (IMF), World
Bank, and International Trade Organization
(ITO) arose out of the 1944 Bretton Woods
Agreement.
- While the IMF and World Bank would play pivotal
roles in the new international framework, the
ITO failed to materialize, and its plan to oversee
the development of a non-preferential
multilateral trading order would be taken up by
the GATT, established in 1947.
The GATT
- The General Agreement on Tariffs and Trade
(GATT), signed in 1947 by 23 countries, is a
treaty minimizing barriers to international
trade by eliminating or reducing quotas,
tariffs, and subsidies. It was intended to boost
economic recovery after World War II.
- While the GATT was designed to encourage the
reduction of tariffs among member nations, and
thereby provide a foundation for the expansion
of multilateral trade, the period that followed
saw increasing waves of more regional trade
agreements.
European Coal & Steel Community (1951)
- what we know today as the European Union
(EU).
- The Treaty would create a common market for
coal and steel among its member states with
freely set market prices, free movement of
products, and without customs duties or taxes,
subsidies, or restrictive practices.
- Serving to spark numerous other regional trade
agreements in Africa, the Caribbean, Central
and South America, Europe’s regionalism also
helped push the GATT agenda forward
The US and Trade
- The U.S. also pursued its own trade negotiations,
forming an agreement with Israel in 1985, as
well as the trilateral North American Free Trade
Agreement (NAFTA) with Mexico and Canada in
the early 1990s. Many other significant regional
agreements also took off in South America,
Africa and Asia.
The World Trade Organization (1995)
- In 1995, the World Trade Organization (WTO)
succeeded the GATT as the global supervisor of
world trade liberalization, following the Uruguay
Round of trade negotiations.
- Whereas the focus of GATT had been primarily
reserved for goods, the WTO went much
further by including policies on services,
intellectual property and investment.
- The WTO had over 145 members by the early
21st century, with China joining in 2001.
LESSON 2: Fundamentals of Trade
International Trade - the exchange of goods and
services between countries.
Export means selling goods and services out of
the country,
Import means goods and services flowing into
the country.
- supports the world economy, where prices or
demand and supply are affected by global
events.
Types of international trade
1. Entrepot trade
- a combination of export and import
trade and is also known as Re-export.
- It means importing goods from one
country and exporting them to another
country after adding some value.
- For instance, The Philippines imports
gold from China to make jewelry and
exports it to other countries.
What’s the need for International Trade?
- Countries go for trade internationally when
there are not enough resources or capacity to
meet the domestic demand. So, by importing
the needed goods, a country can use their
domestic resources to produce what they are
good at. Then, the country can export the
surplus to the international market.
Reasons why Nations Import
1. Price - If foreign companies can produce or
offer goods and services more cheaply, it may
be beneficial to go for foreign trade.
2. Quality - If the companies abroad can offer
goods and services of superior quality.
 3. Availability - Suppose it is impossible to
produce that product domestically, like a special
variety of fruit or a mineral
4. Demand - If a demand for a product or service is
more in a country than what it can domestically
produce, then it goes for import.
Advantages of International Trade
force it to decide that may not be in the national
interest.
4. Pressure on Natural Resources
A country only has limited natural resources.
But, if it opens its doors to foreign companies, it
could drain those natural resources much
quicker.

1. Comparative Advantage
It allows countries to specialize in producing
only those goods and services which it is good
at and hence provide a comparative advantage.
2. Economies of Scale
If a country wants to sell its goods in the
international market, it will have to produce
more than what is needed to meet the domestic
demand. So, producing higher volume leads to
economies of scale, meaning the cost of
producing each item is reduced.
3. Competition
Selling goods and services in a foreign market
also boosts the competition in that market. In a
way, it is good for local suppliers and consumers
as well. Suppliers will have to ensure that their
prices and quality are competitive enough to
meet the foreign competition.
4. Transfer of Technology
International trade often leads to the transfer of
technology from a developed nation to a
developing nation. Govt. in the developing
nation often lay terms for foreign companies
that involve developing local manufacturing
capacities
5. More Job Creation
An increase in international trade also creates
job opportunities in both countries. That’s a
major reason why big trading nations like the
US, Japan, and South Korea have lower
unemployment rates.

Disadvantages of International Trade

1. Over-dependence
Countries or companies involved in foreign trade
are vulnerable to global events. An unfavorable
event may impact the demand for the product
and could even lead to job losses. For instance,
the recent US-China trade war adversely affects
the Chinese export industry.
2. Unfair to New Companies
New companies or start-ups that don’t have
much resources and experience may find it
difficult to compete against the big foreign
firms.
3. Threat to National Security
If a country is over-dependent on the imports
for strategic industries, then exporters may