CHAPTER 10

FOREIGN TRADE
Foreign trade - the exchange of goods and services between countries.
Barter - people change goods for a different variety of products.
 The Geek civilization and the Roman Empires used to trade with their nearby empires and so
the Chinese (Middle Kingdom) to the world.
 Countries in Asia are aiming to increase their exports and attract more foreign direct
investments (FDIs) to alleviate poverty, improve social reforms, increase life expectancy, and
of course, improve the quality of life.
 Technological innovations led to globalization and made the world seem borderless in terms
of all forms of trading.

HISTORY OF FOREIGN TRADE

 Mercantilism valued balance of trade, exports given to a foreign country must, at any time,
exceed the imports, if not equal. This concept started toward the end of the 17th century.
 In the 18th century, Adam Smith wrote a book, The Wealth of Nations, the time of liberalism
emphasized the role of specialized production to supply the highly increasing demand for
consumption.
 Theory of comparative advantage
 a concept by David Ricardo
 wherein each country specializes in a particular product or set of products and import
everything else for consumption.
 It is the main factor that pushes international trade.
 A country has a comparative advantage in the production of goods and services if that
particular country can produce the same at a lower opportunity cost than other countries.

 In the year 1913, gold and other precious metals were considered a medium of exchange; a
lot of countries considered it valuable and made it possible to trade much easier despite the borders.
 David Ricardo (1772-1823) - a classical economist best known for his theory on wages and
profit, the labor theory of value, the theory of comparative advantage, and the theory of rents.
 League of Nations
 organized the World Economic Conference in 1927
masterminded the multilateral trade agreement between nations
set the regulations to keep up with the ever-evolving international trade
 Profitability is maximized through efficient production and distribution, as well as exchange,
by the use of comparative advantage and regulations that are in place to ensure seamless business
transactions beyond borders.

RISKS OF FOREIGN TRADE

The following are some of the risks that might be encountered in foreign trading by private trading
firms:
 Buyer Risks - it may be challenging to start international trade with the first client; trust will
always be an issue as the possibility to be scammed is great.
 Seller Risks - reputation may be compromised as two factors must always be met, the volume
and the distance of delivery. Hence, the quality as well as the quantity of the products must always
be met, agreement to always be adhered upon.
 Third-party Risks - failure to honor buyer-seller agreements is one of the risks in foreign trade.
In cases of losses of products in transit, the believed insurance may not cover all expenses.

TRADING IN THE ASEAN

 The following are the services sector that is mainly traded by the Association of Southeast
Asian Nations (ASEAN) worldwide
 manufacturing services  Construction
 maintenance and repair  Insurance
 Transport  other Korea financial services
 Travel

 In 2015, the ASEAN Economic Community or the AEC was established to allow free
movement of goods and services among its member countries.
 The ASEAN Trade in Goods Agreement (ATIGA) allows Brunei, Indonesia, Malaysia, the
Philippines, Singapore, and Thailand to eliminate intra-ASEAN import duties on almost all of their
tariff lines, while reducing import duties to 0-5% on almost all tariff lines of Cambodia, Laos,
Myanmar, and Vietnam.
 The ASEAN is composed of the following:
 Brunei  Malaysia  Thailand
 Cambodia  Myanmar  Vietnam
 Indonesia  The Philippines
 Laos  Singapore

 The three additional East Asian members of the ASEAN plus three are China, Japan, and
South Korea, with the addition of some Oceanian members of ASEAN plus six, Australia
and New Zealand.

ASIAN TRADING WITH THE PHILIPPINES

 In April 2021, bulk of the Philippines' exports went to the Asia-Pacific Economic Cooperation
(APEC) member countries by $4.84 billion, then East Asia at $2.88 billion, and the ASEAN at
$956.67 million.
 It is then followed by exports to the European Union and the rest of the world by economic
bloc.
 At the same time by region, the top geographic region is the Eastern Asia, followed by
Southeastern Asia, North America, Western Europe, and the rest of the world.
 At the same time, China
leads the countries in which the Philippines exported products by $1,036.2 million, followed by the
USA, $1,026.8 million, Hong Kong by $875.2 million, Japan by $847.9 million, and then Singapore,
Thailand, Germany, Korea, Germany, Taiwan, Netherlands, and other countries.
PHILIPPINES' BILATERAL AND MULTILATERAL TRADE AGREEMENTS IN ASIA
 Third-wave free trade agreements refer the free trade agreements concluded since the late
1990s.
 Some say that what distinguishes them from earlier agreements is that in many cases, they
are provisions on competition policy, protection of intellectual property rights, government
procurement, etc.
 The Philippines has a number of trade agreements with other countries around the world.
 Here are some of the free trade agreements (FTA) that the country has some level of bargain
that may be under study or consultation: (dire na ada ini kun di na naton ibutang an table)

CONCEPTS OF FOREIGN TRADE

Balance of Trade
 is the summary of the economic transactions of a country with the rest of the world for a
specific period.
 serves as an accounting statement on the economic dealings between residents of the
country and nonresidents.
 the balance between all payments out of country within a given period and all payments into
the country is an outgrowth of the mercantilism theory of balance of trade.
 includes all payments between a country and its trading partners, private foreign loans and
their interest, loans and grants by governments/international organizations, and movements of
gold.

Trade Surplus and Deficits

Trade surplus- when a country exports more than its imports. This can lead to an inflow of foreign
currency and can indicate economic strength and competitiveness in international trade.
Trade deficit- is when there are more imports than exports. This can lead to an outflow of domestic
currency and may indicate that the country is relying heavily on imports or experiencing challenges
in its trade balance.

Benefits
- benefits such as variety of choices, better ideas, healthy competition, and economies of scale.
Variety of choices - allows countries to access goods and services that may not be available
domestically.
Better ideas - different countries interact through trade, they share knowledge, innovations, and best
practices, which leads to better ideas.
Healthy Competition- because it exposes domestic producers to a broader market, encouraging
them to improve efficiency, quality, and innovation to remain competitive.
Economies of scale - allows businesses to take advantage of economies of scale by accessing
larger markets beyond their domestic borders.
Comparative Advantage
- wherein each country specializes in a particular product or set of products and import everything
else for consumption.

Foreign Exchange Market

- wherein the foreign currency is being traded.
Types
1. Currency appreciation - when a currency increases in value compared to another currency.
2. Currency devaluation - when a currency decreases compared to another currency.

GAINS ROM TRADE

Perks of foreign trade:
1. Production costs - raw materials in certain countries are cheaper than the others, making the
production costs lower.
2. Competition - the liberalization of trade and investment stimulates healthy competition.
Two main reasons for an examination of the relationship between trade and competition:
 First, there is an increasing recognition that the benefits of international trade liberalization
may be negated by domestic measures inimical to an open, competitive market environment.
 Second, there are cases where the use of either trade policy or competition policy could lead
to differing results, depending on which policy was given priority.
3. Product variation - some people in less developed countries enjoy the benefits of electronic
devices and machines like computers, mobile phones, home appliances, etc., even if they are not
producing them because of the foreign trading. This somehow makes life for them easier and
increases their standard of living.
4. Surplus Market - this benefit is particularly for those producer countries of agricultural products or
other perishable goods that may have surpluses and would be willing to exchange these for other
products that are useful to them.
5. Market Efficiency- seasonal fluctuations of products affect some companies that may lose the
opportunity to do business when their product is in low demand.

EFFECTS OF FOREIGN TRADE

World Price- refers to the prevailing market price of goods and services on the international market
• Importation- the act of bringing goods or services into one country from another country.
• Domestic Consumption- the total of amounts of goods and services consumed within a
country.
• Equilibrium Trade- the quantity of good or service that a country exports is equals to the
quantity that it imports.
• Domestic Production- refers to the output of goods and services produced within a country’s
border.
Tariff- is a tax or duty imposed by the government on imported goods and services.
• World Price with Tariff- it is the price of goods and services on the international market with
additional cost imposed by a tariff when the goods are imported.
• Revenue from Tariff- can be a source of income for governments and can be used to fund
various programs and services.
• Deadweight Loss- is a loss of economic efficiency that occurs when the equilibrium of goods
and services are not achieved due to tariffs.
• QD and QS with tariff- when a tariff is imposed, it affects the quantity demanded and quantity
supplied of that good.
• Equilibrium with Tariff- the imposition of a tariff affects the supply and demand of goods,
leading to changes in the equilibrium of price and quantity traded.