Miami University Theory of International Trade Essay
Description
We can examine the international trade relationships of all countries in terms of the overall volumes of exports and imports, their overall balance of trade, the direction of trade (with what other countries they trade), and the composition of trade.Moreover, the characteristics of a country’s trade patterns are typically associated with its level of development, with non-oil-exporting less developed countries often specializing in low-skill, labor-intensive, undifferentiated, price-sensitive commodities. The opposite is true of developed countries, which tend to engage heavily in intra-industry trade and whose trend patterns tend to be less concentrated by sector.In this exercise, you will examine a variety of trade indicators for your chosen country in order to briefly evaluate whether the country’s trade patterns are consistent with those of a Developing Country and whether they are becoming more or less so over time. overall volume of exports, 2015-19overall volume of imports, 2015-19balance of trade, 2015-19 (first three should be on the same graph)number of products exported, 2015-19top five exports partners, 2019 only (pie chart)top five import partners, 2019 only (pie chart)service exports, 2015-19service imports, 2015-19balance of trade in services, 2015-19 (last three should be on the same graph)We can examine the international trade relationships of all countries in terms of the overall volumes of exports and imports, their overall balance of trade, the direction of trade (with what other countries they trade), and the composition of trade.Moreover, the characteristics of a country’s trade patterns are typically associated with its level of development, with non-oil-exporting less developed countries often specializing in low-skill, labor-intensive, undifferentiated, price-sensitive commodities. The opposite is true of developed countries, which tend to engage heavily in intra-industry trade and whose trend patterns tend to be less concentrated by sector.In this exercise, you will examine a variety of trade indicators for your chosen country in order to briefly evaluate whether the country’s trade patterns are consistent with those of a Developing Country and whether they are becoming more or less so over time. overall volume of exports, 2015-19overall volume of imports, 2015-19balance of trade, 2015-19 (first three should be on the same graph)number of products exported, 2015-19top five exports partners, 2019 only (pie chart)top five import partners, 2019 only (pie chart)service exports, 2015-19service imports, 2015-19balance of trade in services, 2015-19 (last three should be on the same graph)Provide graphical presentations of each of these indicators, taking note of the instruction above about which ones should be on the same graph. Be sure to label the figures and the axes clearly and include the source of your data immediately below each figure (I know that the data are all from the same source, but this is an opportunity to reinforce good habits). Follow the graphical presentations with a narrative of no more than three paragraphs addressing the issue mentioned above.Data SourcesYou can find all data necessary to complete this exercise in the World Bank’s World Integrated Trade Solution (????????).If you are unfamiliar or rusty with making graphics from data in Excel, a tutorial is available here Excel Quick and Simple Charts Tutorial (????????). Your product should be a professional looking and no longer than three pages, including graphics.Data SourcesYou can find all data necessary to complete this exercise in the World Bank’s World Integrated Trade Solution (????????).If you are unfamiliar or rusty with making graphics from data in Excel, a tutorial is available here Excel Quick and Simple Charts Tutorial (????????). Your product should be a professional looking and no longer than three pages, including graphics.
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Module 8 Presentation
Economics 347
Outline
8. International trade theory and trade policy
8a. Economic globalization
8b. International trade key issues
8c. Traditional theory of international trade
8d. Critique of traditional theory of international trade
8e. US international trade policy and development issues (guest speaker)
8f. Traditional trade strategies and policy mechanisms
1
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8a. Economic globalization
Increased openness and world integration through trade (both goods and
services), portfolio investment, direct investment, foreign aid
Trade fell post-late 2000s financial crisis; trended positive again until COVID-19
Pros: business opportunities, gains from trade, innovation, knowledge transfer
Cons: growing inequality, environmental degradation, dominance by rich nations
2
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8a. Economic globalization
Similar to past waves of globalization, which meant colonialism, slavery?
If it is different, it will depend on international rules of game in trade, I, aid
This is where WTO (formerly, GATT) comes in
Moving backward? China and WTO, protectionist US Administration(s?), Brexit
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8a. Economic globalization
Trade policy & domestic support in developed countries still problem. Do more to:
Open developed country markets
Reduce protection and support of domestic sectors in developed countries
Limit applicability of property rights to poor countries
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8a. Economic globalization
Doha Round latest round of WTO trade negotiations (2001-) based on Doha
Declaration about the centrality of development to this round:
We shall continue to make positive efforts designed to ensure that developing
countries, and especially the least-developed among them, secure a share in the
growth of world trade commensurate with the needs of their economic
development. In this context, enhanced market access, balanced rules, and well
targeted, sustainably financed technical assistance and capacity-building
programmes have important roles to play.
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8a. Economic globalization
Doha Round latest round of WTO trade negotiations (2001-) based on Doha
Declaration about the centrality of development to this round, but
The Doha round of talks has not been primarily successful because of the
invariable differences between the developed and developing countries on the
WTO settings, and about the rules and regulations of the IMF and World Bank. The
developing countries mostly argue that the current rules and regulations in most of
the global financial bodies are more in favour of the developed or industrialised
countries.
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8b. International trade key issues
E. Asian countries grew rapidly through export expansion
But many DCs remain dependent on export of fossil fuels or other primary commodities
(e.g., cashews, cacao, vanilla)distortions, vulnerability to shocks
Service dependence also exists, mostly on tourism in SIDS; vulnerability
DCs usually import raw materials, machinery, capital goods, producer & consumer goods
Outcome often large trade and current account deficits and foreign debt problems
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8b. International trade key issues
Five basic questions:
How does trade affect rate, structure, and character of economic growth?
How does it affect distribution of income & wealth within/among nations?
When can trade help nation achieve development objectives?
Can DC determine on own how much it trades & of which products/services?
Outward-looking policy, inward-looking one, or some combination?
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8b. International trade key issues
Statistical issues: look at table on p. 624
Observations: (i) merchandise exports as % of GDP are often higher for DCs,
holding size of economy constant; (ii) DC exports generally less diversified than
those of developed countries; (iii) food exports important in some countries (BI,
CI, GH); fuels in others (DZ, NG); ores and metals (BO, PE); manufactures (BR,
CN, EG, ID, IN, MX, MY, NI, VN)
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8b. International trade key issues
DCs tend to specialize in primary products, and income elasticity of world
demand for such products is typically low
Price elasticity of demand for primary products also typically low
First two bullet points mean export earnings instability
Trade in services becoming more important over time, even in DCs (WTO)
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8b. International trade key issues
Terms of trade (ToT): PX/PM, where PX =export price index, PM = import price index
If ToT deteriorate, country must sell more of X to pay for given value of M
Over time, commodity ToT have deteriorated for non-petroleum-exporting DCs
Prebisch-Singer hypothesis (1950s): predicted is this due to price and income
elasticities of demand for primary products
This led to attempts at import substitution, also success of E Asian Tigers
But DC manufactures have also seen ToT fall (esp. textiles, low-skill electronics)
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8c. Traditional theory of international trade
People trade — including barter — because they have different preferences and
different factor endowments
Comparative advantage (CA): production of commodity at lower opportunity cost
than any alternate commodities that they could produce
Specialization: concentrating resources in producing relatively few goods (due to CA)
Neoclassical model: relative factor endowments and international specialization
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8c. Traditional theory of international trade
Based on 2 assumptions: (i) different products require productive factors in different
relative proportions & (ii) countries have different factor endowments
Look at slides 14 and 15
Implications: (i) all countries gain from trade and world output increases; (ii) given
increasing opportunity costs associated with resource shifting, complete
specialization will not occur; (iii) factor price equalization; (iv) economic returns to
owners of abundant resources rise as those factors more intensively used; (v) trade
stimulates economic growth
13
Trade with Variable Factor Proportions and Different Factor Endowments
14
Trade with Variable Factor Proportions and Different Factor Endowments
(continued)
15
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8c. Traditional theory of international trade
Main conclusion: all countries gain from trade & world output is increased thereby
Other conclusions:
Due to increasing opportunities costs associated with resource shifting among
commodities, there will be no complete specialization
Given identical productive technologies, equalization of domestic price ratios
leads to factor price equalization among trading countries
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8c. Traditional theory of international trade
Other conclusions (cont.):
Given identical productive technologies, factor price equalization leads to rise in
economic return to owners of abundant factor.
Trade will stimulate economic growth, by giving DCs access to capital and
consumer goods in countries with more skilled labor forces
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Theory based on 5 assumptions:
All productive resources fixed in quantity, constant in quality, and fully employed
Productive technology is fixed or similar & freely available to all nations; consumer
preferences fixed & independent of influence of producers (consumer sovereignty)
Within lands, perfect factor mobility between activities and perfect competition
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Theory based on 5 assumptions (cont.):
Demand and supply set int. prices; no government role in int. economic relations
Trade balanced for each country & all nations can adjust to changes in int. prices
Gains from trade benefit nationals from that country
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 1: All productive resources fixed in quantity, constant in quality, fully employed
World economy: rapid change, factors (physical capital, entrepreneurship, R&D
capacity) not fixed
International specialization often determines factor endowments, comparative costs
This has led to North-South trade models (e.g., Krugman) that assume 1 country is
rich, other poor
Initial higher endowments in North generate external economies and higher profit in
manufacturing; this plus monopoly power lead to cumulative comparative advantage
20
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 1: All productive resources fixed in quantity, constant in quality, fully employed
Add differential income elasticities of demand and capital flight: trade pessimism
Of course, E. Asian tigers somehow escaped this fate
Michael Porter: standard theory applies only to basic factor of production (e.g.,
unskilled labor, natural resources); countries can create advanced factors
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 1: All productive resources fixed in quantity, constant in quality, fully employed
Initial higher endowments in North generate external economies and higher profit in
manufacturing; this + monopoly power lead to cumulative comparative advantage
Add differential income elasticities of demand and capital flight: trade pessimism
Vent for surplus idea: fact that resources (land, labor) are unemployed in DCs
bigger gains to trade (slide 23).
22
Vent-for-Surplus Theory of Trade
23
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 2: Fixed, freely available technology and consumer sovereignty
Synthetic substitutes (for rubber, wool, cotton, sisal, jute, hides and skins, vanilla)
But new technologies developed in West allow NICs to capitalize on Western R&D
Also doubts about consumer sovereignty: multinationals create demand for their
products in DCs
24
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 3: Internal factor mobility, perfect competition, and uncertainty
In DCs, production structures are often rigid and resource reallocation difficult
Infrastructure, credit, and marketing reflect dominant primary product sector
Structural rigidities: product supply inelasticities, few intermediate products,
fragmented money markets, limited forex, government licensing, export controls,
skilled and managerial labor shortages
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 3: Internal factor mobility, perfect competition, and uncertainty
And when DCs manage to produce industrial products, they face protectionism
Multinationals and other big firms benefit from increasing returns to scale
Monopolistic or oligopolistic control of internationally traded commodities
Risk and uncertainty: primary products have volatile prices
Imbs & Warcziag: U-shaped sectoral concentration vs. income per capita (slide 27)
26
27
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 4: Absence of national governments in trading relations
National governments can have regional policy (e.g., growth poles), but there is no
effective international government
E. Asian Tigers use industrial policy to create comparative advantage in sectors
Commercial policy: tariffs, import quotas, export subsidies, manipulation of
commodity prices
Rich countries influence gains from trade via domestic and international policies
28
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8d. Critique of traditional theory of international trade
Ass. 5: Balanced trade and international price adjustments
In H-O theory, trade balances (X=M) and there are no international K movements
But in real world, there are balance of payments deficits, depletion of forex
Ass. 6: Trade gains accrue to nationals
In enclave economies (mining, plantations), foreigners pay low rent, bring in foreign
K and skilled and managerial L, hire local unskilled workers at subsistence wages
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Traditional distinction: inward- vs. outward-looking development policies
Inward-looking policy=import substitution: initially substitute domestic production of
previously imported simple consumer goods, then substitute through domestic
production of more sophisticated industrial goods, behind high tariff and quota wall
Outward-looking policy=export promotion: benefits of free trade and competition,
substituting world markets for domestic ones
Successful E. Asian countries have employed mixed strategy, not one or the other
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Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Export promotion, pitfalls
5 demand-side factors against rapid expansion of primary product exports from DCs
Low income elasticities of demand for ag foodstuffs and raw materials
Developed population growth rates at or near replacement levels
Low price elasticities of demand for primary commodities
Development of synthetic substitutes
Growth of ag protection in developed countries
31
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Export promotion, pitfalls
Supply rigidities hamper rises in primary good production in DCs
Dualistic ag structures mean any growth in export earnings benefits larger farms
Role of ag marketing boards serving as middlemen
Similar for manufactured exports: developed country protectionism (quotas,
voluntary export restraints, antidumping, trade diversion from regional trade pacts)
Pacts like AGOA or EUs Everything But Arms politicized and need periodic renewal
32
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Import substitution and theory of protection (slide 34):
domestic price w/o trade P1
allowing trade makes good available at P2 (perfectly elastic supply)
helps domestic consumers, hurts domestic producers (& their workers)
imports: Q3Q2
now (lower graph): tariff makes good available domestically at Pt>P2
producers expand production from Q2 to Q4, quantity demanded falls from Q3 to Q5
government earns box cdef in tariff revenue
33
Import Substitution
and Theory of
Protection
34
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Results in practice of import substitution
protected industries inefficient and costly to operate
main beneficiaries: foreign firms who profit from tax and investment incentives
made possible by importation of capital goods and intermediate products
often accompanied by overvalued exchange rates
infant industries, often state-owned, or parastatals never grow up
35
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Tariff structures and effective protection
nominal vs. effective rates of protection (rop): effective rate of protection based on
value-added, not prices (slide 37)
why do economists favor effective rates?
DCs pursue import substitution, emphasizing local production of final consumer
goods and drawing resources from intermediate goods to protected final goods
in DCs with industries that add little value, effective rop>nominal rop
36
Nominal tariff rate, t, is
where
Effective tariff rate, ?, is
where
p? is the tariff-inclusive price
p is the free trade price
v? is the value added per unit of output
inclusive of the tariff
v is the value added per unit of output
under free trade
37
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Tariff structures and effective protection
Argument for high tariffs in DCs
raise government revenue
respond to current account and debt problems
want to foster scale economies, positive externalities, self-reliance
reduce dependence, lure foreign direct I to import-substituting industries
38
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Traditional trade strategies and policy mechanisms
Exchange rate issues
Developing country currencies often overvalued (local demand>available exchange)
This is because official price of foreign exchange is held at Pa, below equilibrium price
Pe, so there is excess demand for foreign currency of M-M (slide 39)
options for DC: (i) devalue currency; (ii) draw down foreign exchange reserves; (iii)
curtail excess demand through taxes, tariffs, dual exchange rates; (iv) use exchange
controls; (v) switch to freely convertible forex regime
Countries now mostly using managed float (IMF, 1976)
39
Free-Market and Controlled Rates of Foreign Exchange
40
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Trade optimist and trade pessimist arguments (on own pp. 663-65)
Pessimist
Limited growth of world demand for primary exports
Secular deterioration in terms of trade
Specializing in comparative advantage inhibits industrialization, skills accumulation,
and entrepreneurship
Rise of new protectionism; WTO benefits limited in practice
41
Module 8 Presentation
Economics 347
8. International trade theory and trade policy
8f. Trade optimist and trade pessimist arguments (on own pp. 663-65)
Optimist
Promotes competition and efficiency
generates pressure for product improvement
accelerates overall growth
attracts foreign capital and expertise
generates foreign exchange for food imports if ag lags or there is natural catastrophe
eliminates distortions caused by government interventions (corruption, rent-seeking)
promotes equal access to scarce resources
enables DCs to take full advantage of reforms under WTO
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Explanation & Answer:
600 words
Tags:
Sri Lanka
developing country
productions
international
trade
lowskill activities
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