International Trade

International Economics
Overview

of Theories of International

Trade
Benefits

from trade Pattern of trade Government Policy

Trade

Reforms in India WTO and its impact on Indian economy

Introduction
Relevance and Scope of International Economics

Patterns and Trends in International Trade

Popular Sayings

"When America sneezed, Japan and Europe used to catch a cold "No nation is immune to economic events that occur in far away places "Surely there is no closed economy in the real-world, except the world economy!"

Examples
"When East and West Germany were united, the cost was high for West Germany. It had to borrow money extensively from international sources, raising interest rates. This caused high interest rates all over the Europe.

Examples
"As Toyotas flooded the US market, producers in the US faced a hard choice: to either trim their budgets or close their doors. Many workers lost their jobs, and louder and louder calls for 'protection from ruinous foreign competition' were heard. As a result, the country that championed free trade in the world economy had second thoughts about the benefits of free trade.
And how about the impact of China and India in many industries today!
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International Economics

The study of international economics has never been as important as it is now

At the beginning of the 21st century, nations are more closely linked through trade in goods and services, through flows of money, and through investment in each others economies than ever before

International Economics

International Economics studies how a number of distinct economies interact with one another in the process of allocating scarce resources to satisfy human wants Whereas economic theory deals with the problems of a single closed economy, International Economics focuses on the problems of two or more economies
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Why is the trade between Finland and Japan different from the trade between Helsinki and Oulu districts of Finland?

TWO reasons:
1) Since international trade crosses national borders, governments can monitor this trade

CAN impose taxes or quotas on goods imported from Japan - Have to decide whether to do so or not!

2)International trade involves the use of different national currencies!

Finns will pay in Euros for Japanese cars but Japanese want to be paid in Yens - we have created international payments
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Two branches

International Economics can be divided into two major branches:

International International

Trade Finance

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Two branches
International

Why and What is traded? Trade flows Trade policy

Trade

International Finance
Exchange rates Balance of payments problems

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Two branches
International

Trade is the exchange of goods and services among residents/ companies of different countries

the approach is microeconomic in nature; long run focus

International Finance deals with the foreign exchange market and the balance of payments

the approach is mainly macroeconomic in nature; short run focus

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Economic Interdependence

US remained the strongest nation and over time, integrated itself with the rest of the world
1950-European Community (now EU) 1960s -Rise in importance of MNCs 1970s- Market power enjoyed by the OPEC 1990s & 21st Century- Global economic interdependence became more sophisticated Advocated free trade to solve economic crises-LDCs, and DCs

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International Trade-Effects
US importing PC-components EU/Japanese companies buying US financial assets By consuming more than what it produces, US remained a net borrower in 1980s and 1990s Global trading day is on for 24-hours Leading nations like US have 250 foreign banks India also has about 15 leading foreign banks

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Trends in Global Trade

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Absolute Advantage Comparative Advantage Factor price equalization Life cycle Theory New Trade Theory National Competitive Advantage theory

No nation was ever ruined by trade.

Benjamin Franklin
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Country Focus
1.

Ghana and South Korea Crawfish Wars Free trade and RE Inc

2.

3.

4.

Nokia

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1. Ghana Vs. South Korea

1970 Ghana ($250) and South Korea ($260) PCY 1998, Ghana ($360) South Korea ($8630) Korea followed open trade policies; Ghana adopted restricted trade policies

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2. Craw fish Wars

Consumers in Louisiana (US) use crawfish in their diet Local US producers prices $5-8 per pound Chinese imports posed a threat to domestic producers (by pricing it at $2-3 per pound) and benefited by cost reduction to US consumers International Trade Commission in 1997 levied 110-123% duty on Chinese fish imports; nullifying cost difference.
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3. Free Trade and REInc

Free trade benefited Recreational Equipment Inc US Cooperative worked well for 33 years 1993 NAFTA between US and Mexico tariffs removed Shifted production to Mexico for cost saving US operations shut down, job losses in REI Consumers benefited from NAFTA

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4. Nokia Mobile
Finland Nokia Mobile phones (Motorola, Nokia and Erickson) Initially Finland was a country manufacturing tires, paper, consumer electronics, and telecommunications By the year 2000 focused on telecom equipment increased its sales to $24 bln and earnings $4.5bln (contd)

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Nokia Mobile

History, geography and political economy Nordic nations, sparsely populated in cols areas Laying a land line costly Sweden, Norway and Finland first take wireless telecom It costed $ 800 per subscriber to put wirelines $500 per person for wireless (contd)

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Nokia concld.
By 1994 12% of Scandinavians owned wireless phones compared to 6% in US By mid 2000, 70% are connected while it was 30% in US Competitive edge, pragmatism, no national monopoly made it succeed and have operating margins of Nokia 20% in 2000, compared to 6.4% for Motorola

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Absolute Advantage
One country is said to have an absolute advantage over another country in the production of a particular good if it can produce that good using smaller quantities of resources. Eg: England produces Textiles; France Wine

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Limitation of the Absolute Advantage Theory

What if one trading nation has absolute advantage in both & the other has in neither Still, trade is possible according to the Comparative Cost theory by Ricardo The weaker nation would specialize production of that good where the disadvantage is lower Post-trade, the weaker nation would improve efficiency due to economies of scale

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Comparative Advantage
One country is said to have a comparative advantage over another country in the production of a particular good if it produces that good with lower opportunity costs. Two countries can mutually benefit from trade even if one country is at an absolute advantage relative to another country in the production of every good.

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Ricardian Law of Comparative Advantage

When

countries differ in relative labor productivity (comparative advantage):

Each

country can increase its welfare

by:

Specializing in production of those goods for which it has a comparative advantage

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Heckscher-Ohlin Theory
Comparative advantage arises from the differences in Factor endowments The abundance of factor makes its cost low Hence a country exports those goods that make intensive use of factor that is abundantly present It imports goods that require intensive use of factors that are locally scarce. US exports capital-intensive goods China exports labor-intensive

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The Product Life-Cycle Theory

US dominance (1945-75) in new product innovations New Product developed and sold in local market and also exported demand for export increases and production facilities shift to other countries (Raymond Vernon)

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The New Trade Theory

Based on economies of scale that helps in unit cost reduction World market may be able to support only limited number of firms that enter first gain advantage Aerospace example Boeing and Airbus Dominance of US and Europe

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The New Trade Theory

Developing cost $ 5 bln For producing 100 aircrafts

Fixed costs $ 50 mln ($5 bln/100) Variable costs $ 80 mln, Total cost $ 130 mln If we increase to 500 FC will come down to $10 mln and total cost to $90 mln (10+80) Economies of scale, learning effects

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National Competitive Advantage Theory

Porters Diamond
Factor endowments Demand conditions Related and supporting industries Firm strategy, Structure and Rivalry

Implications for business

Locational First mover Policy implications

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Tariffs and Quotas

Importing countries can reduce trade by setting tariffs or quotas.

Tariff = tax on imports Quota = ceiling on the volume of imports

How

Tariffs and Quotas Work

Both tariffs and quotas raise the price of imports reduce the quantity of imports
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INTERNATIONAL TRADE POLICY

Free

Trade Versus Protectionism Trade Barriers: Tariffs, Subsidies and Quotas

Other Commercial Policies

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Next we will consider different commercial policies We will also show how to analyze the costs and the benefits of tariffs as well as other types of trade restrictions Doing so we will move from positive economics to normative economics

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Most Common Trade Barriers

Trade barriers -obstacles to trade- take many forms, three most common ones are: Tariffs: import duty (a tax on imports)
Can also be an export duty, but that is less common.

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Most Common Trade Barriers

Export Subsidies:

Government payments made to domestic firm to encourage exports

can also act as a barrier to trade

Closely related to subsidies is the practice of dumping

Dumping takes place when a firm or an industry sells products on the world market at price below the cost of production
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Most Common Trade Barriers

Quotas and Voluntary Export Restraints (VERs):

A limit on the quantity of imports

Can be mandatory or voluntary, and can be legislated or negotiated with foreign governments

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Trade Reforms in India

The transition during the 1990s has been made possible with the following measures.
1. 2. 3. 4. 5.

Market-determined exchange rate Dismantling trade restrictions Current Account Convertibility Liberal flows of capital Gradual liberalization of private capital

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India and WTO

India is one of the founding members of the GATT (1947) and WTO (1995) India grants the Most Favoured Nation status to all its trading partners. Advocates Special and Differential Treatment provisions for Developing Countries
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India and WTO

Post Cancun WTO consultations

Agriculture Market access for non-agricultural products Singapore issues Cotton Formulas worked out for tariff reduction 3 negotiating papers were put forth

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India and WTO

Framework agreement adopted by the WTO General Council on August 1,2004 Elimination of all forms of subsidies on agriculture by end date Reduction in trade distortions Flexibility to developing countries for subsidies

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To sum up
International Trade has strong theoretical bases as explained by the trade theories Last 2 decades, international trade has been liberalised Loss of employment in select areas is leading to agitations against globalization Trade negotiations must yield mutually beneficial results and take long time

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Books/ References

Carbaugh Robert J. : International Economics, South-Western College Publishing, Cincinnati, US, 2000, Ch 1 Charlie WL Hill, International Business, TMG, Delhi, 2003 RBI: Handbook of Statistics on Indian Economy 2004-05 (www.rbi.org.in ) IMF: International Financial Statistics, Monthly (www.imf.org) CMIE: Economic Intelligence Service, Monthly 44 www.wto.org

THANK YOU

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