Unit 1: International

Trade
 I. Overview of International trade

1. International trade: Purchase, sale, or

exchange of goods and services across
national borders.
2. Foreign Direct Investment (FDI): Purchase
of physical assets or a significant amount of
the ownership of a company in another
country to gain a measure of management
control.
3. Foreign Portfolio Investment (FPI):
Investment that does not involve obtaining a
degree of control in a company.
 JVC/JVE

• 30-70% JVC
• Capital contribution:
Foreign partner : capital, technology and equipment,
know-how, brand name
Local partner: land ( over- priced land)
 II. Benefits of International
trade
• Open doors to new entrepreneurial opportunity
across nations.
• Provide a country’s people with greater choice of
goods and services.
• An important engine for job creation in many
countries.
• 1986:
• 1985:
 III. Theories of International trade

1.Mercantilism: Trade theory holding that nations

should accumulate financial wealth, usually in the
form of gold, by encouraging exports and
discouraging imports.
2. Absolute advantage: Ability of a nation to produce
a goods more efficiently than any other nations
(rest of the world – ROW)
 III. Theories of International trade

3. Comparative advantage: Inability of a nation to

produce a goods more efficiently than other
nations, but an ability to produce that good
more efficiently than it does any other goods.
4. Factor proportions theory: Trade theory
holding that countries produce and export
goods that require resources (factors) that are
abundant and import goods that require
resources in short supply.
 Factors of production

• Land
• Labour
• Capital
 Vietnam

• Export

• Import
 MDCs vs LDCs

• Export structure of LDCs: primary commodities

- Agriculture
- Aqua- culture
- Raw materials
• Import structure of LDCs: intermediate/manufactured
- Finished products
- Semi finished products
 Gain or loss?
• Orthodox economists tended to argue that this structure
of production and trade was consistent with the LDCs’
comparative advantage and that they enjoy significant
gains from trade. The critics of this view, however,
maintain that the gain from trade were more likely, for
variety of reasons, to be appropriated by the developed
capitalist economies. The unequal exchange thesis espoused
by some neo-Marxists, went further and suggested that
trade was actually carried out at the expense of the
LDCs , producing the condition of under development
and poverty.
 Terms of trade

Terms of trade or TOT is the relative prices of a

country's export to import (TOT=PE /PI)
An improvement in a nation's terms of trade(the
increase of the ratio) is good for that country in the
sense that it has to pay less for the products it
imports, that is, it has to give up fewer exports for
the imports it receives.
• TOT >1: GAIN
• TOT < 1: LOSS
 Gain from trade

• According to the orthodox economists: All

countries have its own comparative advantage and
they gain from trade
• According to the neo-Marxists (TOT): the LDCs
lost from trade
• Comparative advantage explains how trade can
create value for both parties even when one can
produce all goods with fewer resources than the
other. The net benefits of such an outcome are
called gains from trade. It is the main concept of
the pure theory of international trade.
 IV. The balance of trade (NX)

 Visible trade consists of all those goods which

can be seen and touched such as machines,
televisions, motorcycles, refrigerators, food, raw
materials (tangible commodity)
 Invisible trade refers to all those items which we
export, which cannot be seen or touched such as
sales of insurance, banking services, airline seats
or sea cargo (intangible commodity)
 The balance of trade is the difference in value
between imports and exports of goods over a
particular period.
• Value of import > value of export: Trade deficit
• Value of import < value of export: Trade surplus

• Balance of trade - NX
 V. The balance of payments
• In economics, the balance of payments
(BOP) measures the payments that flow
between any individual country and all
other countries.
• It is used to summarize all international
economic transactions for that country
during a specific time period, usually a year.
• The balance of payments comprises the
current account, the capital account, and
the financial account. "Together, these
accounts balance in the sense that the sum
of the entries is conceptually zero.”
 1. Current account

 Current account is a national account that

records transactions involving the import and
export of goods and services, income receipts
on assets abroad, and income payments on
foreign assets inside the country
 Current account surplus (a trade surplus):
When a country exports more goods, services,
and income than it imports.
 Current account deficit (a trade deficit): When
a country imports more goods, services and
income than it exports.
 2. Capital account

• Capital account: A national account that records

transactions involving the purchase or sale of assets
 3. Financial account

• The financial account records transactions that

involve financial assets and liabilities and that take
place between residents and nonresidents.
• A balance of payments equilibrium is defined as
a condition where the sum of debits and credits
from the current account and the capital and
financial accounts equal to zero; in other words,
equilibrium is where
Current account + (Capital + Financial account) =
0
• This is a condition where there are no
changes in Official Reserves. When there is
no change in Official Reserves, the balance
of payments may also be stated as follows:
Current account = - (Capital + Financial
account)
Or
Current account deficit (or surplus) = Capital
and Financial account) surplus (or deficit)
 Balance of payments identity

• Current Account = Capital Account + Financial

Account + Net Errors and Omissions
 VI. Exporting

1. Export procedures
-Transport the goods to the docks or airport
-Pass them through customs
-Clear them through another set of customs on arrival
-Present them to the correct customers
 2. Export documents

-Bill of lading (BL): containing details of the goods being

shipped, their destination and which ship they will be
traveling.
-Export invoice: The ‘bill’ to the customer, requiring
payment once he has received the goods.
-Certificate of origin: To prove the goods have come from
UK for example and are not being imported under false
pretences from a different country whose goods might
be prohibited from entry.
-Certificate of value: To prove the goods are worth what
the invoice says they are worth.
Marine Bill of lading: to order vs straight

28
Shipped on board

29
Clean bill of lading

30
Airway bill

31
Road consignment note

32
Rail consignment note

33
 2. Export documents

-Bill of lading (BL): containing details of the goods being

shipped, their destination and which ship they will be
traveling.
-Export invoice: The ‘bill’ to the customer, requiring
payment once he has received the goods.
-Certificate of origin: To prove the goods have come from
UK for example and are not being imported under false
pretences from a different country whose goods might
be prohibited from entry.
-Certificate of value: To prove the goods are worth what
the invoice says they are worth.
 2. Export documents

-Declaration of dangerous goods: Required by

international law for certain classes of goods
such as explosives or volatile chemicals.
-Certificate of insurance: Needed by the shipping
company, or airline, or by your customer, so
that they can be assured that the value of the
goods is covered should an accident happen.
-Health certificate: Needed for drugs and similar
products and for transport of animals.
-Import licence: Permission to import your goods.
Needed for certain countries and products.
 VII. Reasons for governmental
intervention in trade
• Cultural motives
-The cultures of countries are slowly altered by
exposure to the people and products of other
cultures.
-Cultural influence of the United States: the United
States, more than any other nations, is seen as a
threat to national cultures around the world.
 Reasons…

2.Political motives
-To protect jobs
-To preserve national security
-To respond to ‘unfair’ trade
-To gain influence
 Reasons…

3. Economic motives
-To protect infant industries
-To pursue strategic trade policy
 Protectionism
 Protectionism is the economic policy of restraining trade
between nations, through methods such as tariffs on imported
goods, restrictive quotas, and a variety of other restrictive
government regulations designed to discourage imports, and
prevent foreign take-over of local markets and companies.
This policy is closely aligned with anti-globalization, and
contrasts with free trade, where government barriers to trade
are kept to a minimum. The term is mostly used in the context
of economics, where protectionism refers to policies or
doctrines which "protect" businesses and workers within a
country by restricting or regulating trade with foreign nations.
 Quota

 An import quota is a type of protectionist trade

restriction that sets a physical limit on the quantity of a
good that can be imported into a country in a given
period of time. Quotas, like other trade restrictions, are
used to benefit the producers of a good in a domestic
economy at the expense of all consumers of the good
in that economy. Critics say quotas often lead to
corruption (bribes to get a quota allocation),
smuggling (circumventing a quota), and higher prices
for consumers. In economics, quotas are thought to be
less economically efficient than tariffs which in turn
are less economically efficient than free trade.
 Tariff

 A tariff is a tax imposed on goods when they are

moved across a political boundary. They are
usually associated with protectionism, the
economic policy of restraining trade between
nations. For political reasons, tariffs are usually
imposed on imported goods, although they may
also be imposed on exported goods.
 VIII. Methods of restricting trade

1. Tariffs: Government tax levied on a product as it

enters or leaves a country.
-To protect domestic producers
-To generate revenue
2. Quotas: Restriction on the amount (measured
in units or weight) of a good that can enter or
leave a country during a certain period of
time.
-Reasons for import quotas:
+To protect domestic producers by placing a
limit on the amount of goods allowed to enter
the country.
+To force companies of other nations to compete
against one another for the limited amount of
imports allowed.
-Reasons for export quotas:
+To maintain adequate supplies of a product in the
home market.
+To restrict supply on world markets, thereby
increasing the international price of the good.
3. Embargoes: Complete ban on trade (imports and
exports) in one or more products with a particular
country.

4. Local content requirements: Laws stipulating that a

specified amount of a good or service be supplied
by producers in the domestic market.
5. Administrative delays: Regulatory control or
bureaucratic rules designed to impair the rapid flow
of imports into a country.

6. Currency controls: Restrictions on the

convertibility of a currency into other currencies
 IX. Organizations in international
trade
1. The International Monetary Fund (IMF)- set up
in 1974 to ensure that the world’s currencies
were kept at reasonably stable rates against
each other.
2. The United nations Conference on Trade and
Development (UNCTAD) - set up in the mid-
1960s.
3. The General Agreement on tariffs and trade
(GATT) – set up after World War II
4. World Trade Organization (WTO)
 • (1) Countries import some goods and services from abroad, and export others to the
rest of the world. Trade in (2) raw materials and goods is called visible trade in Britain and
merchandise trade in the US. Services, such as banking, insurance, tourism, and technical
expertise, are invisible imports and exports. A country can have a surplus or a deficit in its
(3) difference between total earnings from visible exports and total expenditure on visible
imports, and in its (4) difference between total earnings from all exports and total
expenditure on all imports. Most countries have to pay their deficits with foreign currencies
from their reserves, although of course the USA can usually pay in dollars, the unofficial
world trading currency. Countries without the currency reserves can attempt to do
international trade by way of (5) direct exchanges of goods without the use of money. The
(imaginary) situation which a country is completely self sufficient and has no foreign trade
is called autarky
Thank you for your attention!