Intro to International Trade

8/9/2019 Intro to International Trade

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In 2008, world exports totaled $19,850 billion.(nearing $20 trillion)

merchandise: $16,070 billion services: $3,780 billion

International trade accounts for about one-third of the world

economy.


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EU Merchandise Trade, 2008Exports Imports

share of world total 15.9% share of world total 18.4%

composition compositionagriculture 6.6% agriculture 7.6%

fuel/mining 8.7% fuel/mining 33.5%manufactures 81.4% manufactures 56.4%

Destination Source

United States 19.1% China 16.0%Russian Federation 8.0% United States 12.0%

Switzerland 7.6% Russian Federation 11.2%China 6.0% Norway 5.9%

Turkey 4.1% Switzerland 5.2%

Source: WTO trade profiles

Top 3 Exporters World Share:1 Germany 9.1%2 China 8.9%3 US 8.0%

Top 3 Importers World Share:1 US 13.2%2 Germany 7.3%3 China 6.9%


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EU Services Trade, 2008

Exports Imports

share of world total 26.8% share of world total 23.5%

composition compositiontransportation 6.6% transportation 7.6%

travel 8.7% travel 33.5%

other 81.4% other 56.4%

Source: WTO trade profiles

Top 3 Exporters World Share:1 US 13.8%2 UK 7.5%3 Germany 6.4%

Top 3 Importers World Share:1 US 10.5%2 Germany 8.1%3 UK 5.6%


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I. Why do nations trade?A. General ReasonsB. A little bit of Trade TheoryC. Trade in Theory and in PracticeD. Trade Pattern

II. The economic effects of international trade

III. Trade as a Policy ToolA. Types of Trade BarriersB. The EU and TradeC. The net effects of a tariff are negative

IV. Measures of TradeA. The Relative Importance of TradeB. The Trade Balance


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I. Why do nations trade?

A. General ReasonsWhy do nations export ?- individuals/firms produce more than can be consumedat home- sellers could receive a higher price in a foreign market- sellers may offer a product that doesnt exist in theforeign market

Why do nations import ?

- some goods cant be produced at home (or not enough)- some goods are produced at a lower cost or moreefficiently elsewhere- consumers like variety


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B. A little bit of Trade TheoryDue to differences in supply conditions , a country may be able to

produce more of a good at a lower cost.- superior technology- large factor (resource) endowments

Absolute advantage is the ability to produce a good at the lowestcost.

It implies a potential trade pattern .ex: tropical countries produce and export bananas

coastal countries produce and export seafood

It gives an incentive to specialize in a good and export it.


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Absolute advantage alone is not sufficient to fully explain

international trade.

- The opportunity cost of producing an item may exceedthe cost of trading for it.

An opportunity cost is the value of everything that must be sacrificed in order to get something.

International trade is based on comparative advantage.

Comparative Advantage is the ability to produce at the lowestopportunity cost.


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Even if a nation has absolute advantage in nothing, it can have acomparative advantage.

When countries specialize in producing goods they havecomparative advantage in, and then trade those goods, they canconsume more goods and services than they could produce ontheir own .

In a nutshell, this is why economists have concluded that

international trade is good and can be good for all countriesinvolved.


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C. Trade in Theory and in Practice

In reality, specialization and trade dont work exactly as thetheories of absolute and comparative advantage suggest:

- no country specializes exclusively in the productionand export of a single product

- countries produce at least some goods that could be produced elsewhere more efficiently

- a lower income country may be able to produce morecheaply than a high income country but may not be ableto identify potential customers or to transport the itemcheaply or quick enough


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H owever, in general

Countries with a relative abundance of low-skilled labor tend tospecialize in and export items having low-skilled labor as amajor cost component.

Countries with a relative abundance of capital tend to specializein and export items having capital as a major cost component.


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D. Trade Pattern(what a country imports and exports and who its trading partners are)

GermanyExports: machinery, vehicles, chemicals, metals and manufactures,foodstuffs, textiles

France 10.2% UK 6.6%US 6.7% Italy 6.3%

Netherlands 6.7%

Imports: machinery, vehicles, chemicals, foodstuffs, textiles, metals

Netherlands 8.5% US 5.9%China 8.2% Italy 5.9%France 8.2%

CIA World Factbook


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Cyprus

Exports: citrus, potatoes, pharmaceuticals, cement, clothingGreece 20%UK 10.8%Germany 6%

Imports: consumer goods, petroleum and lubricants, intermediategoods, machinery, transport equipment

Greece 16.9% Germany 8.3%,Italy 10.7% Israel 8.2%UK 8.7%

CIA World Factbook


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II. The economic effects of international trade

When a nation does not trade , the domestic supply and demandforces will determine the price and quantity sold.

When a nation opens up to international trade , then the world price will become relevant.

The world price is determined by:

world supply (exports)world demand (imports)


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If the world price is higher than the domestic price:

- domestic sellers will produce more to take advantage of the higher price

- domestic consumers will buy less because the price isnow higher

- with sellers producing more and consumers buying less,there will be a surplus in the domestic market

- the surplus will be exported

Nutshell: good for domestic producers of this good, bad for domestic consumers of this good


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If the world price is lower than the domestic price:

- domestic sellers will produce less because of the lower price

- domestic consumers will buy more because the price isnow lower

- with sellers producing less and consumers buying more,there will be a shortage in the domestic market

- the goods will be imported to satisfy the shortage

Nutshell: good for domestic consumers of this good, bad for domestic producers of this good


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Trade is not a zero sum game both importing and exportingnations can benefit at the same time.

Trade can make countries as a whole better off , but there arewinners and losers among producers and consumers.


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The benefits of trade have been studied and quantified and proventime and time again.

- lower prices- more choice and variety- helps developing nations

- market access- technology transfer / human capital building- access to foreign markets for domestic producers- cheaper inputs for domestic producers


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III. Trade as a Policy Tool

Trade is such a powerful economic tool that governments oftenmanipulate trade to achieve various economic, political, and

diplomatic objectives.

Sometimes this takes the form of erecting trade barriers.

Sometimes this take the form of eliminating trade barriers.


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A. Types of Trade Barriers

1) tariff : tax on imports- raise price of imports / decreases amount of imports- helps domestic producers- domestic government collects revenue

2) export subsidies : involves a transfer of funds from thegovernment to an export producer

- encourages exports- helps domestic industry

- government must spend money

3) non-tariff measures for restricting importsex: quotas or technical barriers


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B. The EU and Trade

H istorically , each European country protected its domestic producers with tariffs and quotas :

- tariffs prevent the import of goods at prices lower thanthe domestic price

- quotas limit the volume of imports to be equal todomestic demand minus domestic production

Countries would basically only import the quantities of goodsthat are not normally supplied by domestic production .


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When domestic industries are protected from competition, theyrarely make substantial efforts to

- reduce production costs- innovate/modernize

Consumers end up with limited choice and high prices for lowquality goods.


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In the EC Treaty (1958), the European Community is based upona customs union.

- prohibits customs duties on imports and exports betweenmembers

- prohibits all charges having an equivalent effect as duties between members

- adopt a common customs tariff for non-members


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Nations were given 12 years to eliminate trade barriers .

January 1, 1958 December 31, 1969

The tariff reductions were actually completed on 1 July 1968.- 18 months ahead of schedule- tariff dismantling did not cause major problems in themember states

- yes, some firms/industries were harmed- many new firms and industries chose toinnovate

(Countries who joined the Community later were given 5 yearsto eliminate tariffs.)


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The economic impact was substantial .

Between 1958 and 1972:- trade between the EC and external countries tripled- intra EC trade was 9 times higher - the larger market stimulated business confidence and so

investment increased- consumers enjoyed falling prices , rising quality and morevariety- standard of living increased dramatically in each of theEC nations


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Even though tariffs were eliminated, other trade barriers remained .

Many of those trade barriers were hidden in regulations , whichvaried across nations. (technical barriers)

- consumer or environmental protection standards

The elimination of non-tariff barriers proved to be much moredifficult .

- completed in 1992


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Today, the members of the EU share a single market and a singletrade policy.

In trade talks, there is one negotiator, the European Commission.

At the end of the negotiation process there is just one agreementinstead of 27 different sets of trade rules.

The EUs trade philosophy toward member nations :- free trade(goods and services can flow freely betweennations without government imposed barriers like tariffsor quotas)


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The EUs trade philosophy toward external nations :

- open its market to trading partners who do likewise

- preferential treatment for developing countries

- maintain a common external tariff (same tariff is paid on products regardless of which EU country is the entry point to the EUmarket)

- after clearing customs, goods can be shipped throughoutthe EU without additional duties


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D. The net effects of a tariff are negative

The Benefits of Protectionism:1. The producers in the specific industry are helped (in the shortrun).

- firms face less competition- workers do not lose jobs

2. The government collects revenue (which presumably will beused for public projects and not wasted).


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The Costs of Protectionism

1) other domestic industries and workers are harmed- firms must pay more for inputs- workers lose jobs

2) consumers pay higher prices and enjoy less variety

3) resources are spent on lobbying activities

4) taxes are spent

- Buy Local provisions are especially costly


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5) other nations view the EU as very hypocritical

6) the industry receiving protection is often weaker in the long run

- doesnt keep costs down- doesnt innovate

7) the tariff may violate existing trade agreements- end up in court at the World TradeOrganization

(8. In the case of agricultural and commodities,developing nations are harmed)


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WTO Trade Disputes Involving the EU


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IV. Measures of Trade

A. The Relative Importance of TradeFor an individual country, the total trade value as a share of GDPis an indication of how important trade is in the countryseconomy.

total trade value = exports value + imports value

trade value as a share of GDP = total trade value x 100

GDP

Lets do an example:


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In which EUnation is Dr.

Katie? 2 of the 7 towersof the Fishermans Bastion

Statue of Stephen I

Fishermans Bastion is built

overlooking thebank of theDanube on theBuda side of the nationscapital.


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H ungary 2009GDP: 93,086 million

Export value: 72,480 millionImport value: 65,954 million

total trade value:72,480m + 65,954m =

138,434 million

trade value as a share of GDP:138,434m x 100 =93,086m

148.7%

(The total trade value as a share of GDP can be greater than 100%.)


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Lets put this figure into perspective:

year

trade value

% GDP1999 131.42000 147.92001 143.72002 128.22003 125.5

2004 129.72005 133.82006 154.92007 159.12008 161.72009 148.7

H ungarysTrade Value Share

over time

Source: World Bank and eurostat


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50.0

100.0

150.0

200.0

250.0

300.0

350.0

Trade Value as share of GDPEU Nations, 2008

* Data from 2007Source: World Bank


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Sometimes it is useful to look at the export share and import shareseparately.

H ungary 2009GDP: 93,086 millionExport value: 72,480 millionImport value: 65,954 million

Export Share of GDP:72,480m x 100 =93,086m

77.8%

Import Share of GDP:65,954m x 100 =93,086m

70.9%


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B. The Trade Balance

The trade balance is the difference between the value of acountrys exports and the value of its imports. It is also called netexports .

Trade Balance = export value import value

If exports > imports, then there is a trade surplus.

If exports < imports, then there is a trade deficit.

Lets do an example:


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In which EUnation is Dr.Katie?

O fficial residence of thisnations sovereigns.


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UK 2009

Export value: 433,977mImport value: 469,920m

Trade Balance: 433,977m - 469,920m =

- 35,943m

The UK is running a trade deficit.


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-40000

-20000

0

20000

40000

60000

80000

100000

120000

140000

Trade BalanceEU Nations, 2009

(millions of euros)

Source: eurostat


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Factors that influence a countrys trade balance:

1) prices of goods produced domestically- if domestically produced goods are relatively expensive,then a country will import cheaper goods from abroad

2) exchange rates- if a countrys currency is strong against other currencies,then it is cheap to import while its exports areexpensive to other countries

3) trade agreements- when a country signs a Free Trade Agreement, bothits exports and imports will likely increase


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4) trade barriers- if a country imposes tariffs on imports, then importsare reduced- if a country subsidizes exports, then exports will rise

5) the business cycle at home or abroad- in an expansion at home, consumer incomes areincreasing, in general this will increase imports

- in an expansion abroad, consumer incomes elsewhereare increasing so the home country exports more


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Most economists dont believe that trade deficits/surpluses areinherently good or bad .

The economic impact of a surplus or deficit depends on thespecific circumstances surrounding it.


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Summary:The EU is a major player in international trade.

Nations engage in international trade for various reasons.

When the world price is higher than the domestic price, thenation will be an exporter. When the world price is lower thanthe domestic price, the nation will be an importer.

The EU has chosen to eliminate all trade barriers amongmembers, with a very positive result.

The EU has a common set of trade barriers for external nations.

Trade as a share of GDP and the trade balance are two keymeasures of trade in an economy.

Intro to International Trade

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