Unit 1 INTERNATIONAL TRADE theo International trade: Purchase, sale, or exchange of goods and services across national borders. Exporting: Sending goods to another country for sale or trade Importing: Bringing in goods from another country for sale or trade Theories of International trade Mercantilism: Trade theory holding that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports. Absolute advantage: Ability of a nation to produce a good more efficiently than any other nation. 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 good. 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. Terms of trade: Terms of trade or TOT is the relative prices of a country's export to import (TOT=PE /Pl) The balance of trade: The balance of trade is the difference in value between imports and exports of goods over a particular period. The balance of payments: A detailed record of all financial and economic transactions between the residents of two countries. 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.”Balance of payments identity Current Account = Capital Account + Financial Account + Net Errors and Omissions 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. 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. A tariff is a tax imposed on goods when they are moved across a political boundary. B. Vocabulary Match up these words and expressions with the definitions below 1. trade in goods A. autarky 2. trade in services (banking, insurance, tourism, and | _B. deficit sorony C. quotas 3. direct exchanges of goods, without the use of D.balincschpymend money E. dumping 4, the difference between what a country receives and pays for its exports and imports of goods esurplus 5. the difference between a country’s total earnings | G: balance of trade from exports and its total expenditure on imports | H. invisible imports 6. the (impossible) situation in which a country is and expores completely self-sufficient and has no foreign 1. tariffs rade K. visible trade (GB) 7. a positive balance of trade or payments or merchandise 8, a negative balance of trade or payments trade (US) 9. selling goods abroad at (or below) cost price L. barter or counter- trade 10. imposing trade barriers in order to restrict imports M. protectionism11. taxes charged on imports 12. quantitative limits on the import of particular products or commodities Write your answer here: t 2. 3. 4, 5. 6. 7. 8. 9. 10. 1. 12. Reading 1: Read the text and answer the following questions: 1. Why do most economists oppose protectionism? 2. Why do most governments impose import tariffs and/ or quotas? 3 Why were many developing countries for a long time opposed to GATT? 4. Why have many developing countries recently reduced protectionism and increased their international trade? 11PROTECTIONISM AND FREE TRADE The majority of economists believe in the comparative cost principle, which Proposes that all nations will raise their living standards and real income if they specialize in the production of those goods and services in which they have the highest relative productivity. Nations may have an absolute or a comparative advantage in producing goods and services because of factors of production (notably raw materials), climate, division of labour, economies of scale, and so forth. This theory explains why there is international trade between North and South, e.g. semiconductors going from the USA to Brazil, and coffee going in the opposite direction. But it does not explain the fact that over 75% of the exports of the advanced industrial countries go to other similar advanced nations, with similar resources, wage rates, and levels of technology, education, and capital. It is more a historical accident than a result of natural resources that the US leads in building aircraft, semiconductors, computers and software, while Germany makes luxury automobiles, machine tools and cameras. However, the economists who recommend free trade do not face elections every four or five years. Democratic governments do, which often encourages them to impose tariffs and quotas in order to protect what they see as strategic industries- notably agriculture-without which the country would be in danger if there was a war, as well as other jobs. Abandoning all sectors in which a country does not have a comparative advantage is likely to lead to structural unemployment in the short (and sometimes medium and long) term. Other reasons for imposing tariffs include the following: © to make imports more expensive than home-produced substitutes, and thereby reduce a balance of payments deficit; © as a protection against dumping (the selling of goods abroad at below cost price in order to destroy or weaken competitors or to earn foreign currency to pay for necessary imports); © to retaliate against restrictions imposed by other countries;© to protect ‘infant industries’ until they are large enough to achieve economies of scale and strong enough to compete internationally. © with tariffs, it is impossible to know the quantity that will be imported, because prices might be elastic. With quotas, governments can set a limit to imports. Yet unlike tariffs, quotas provide no revenue for the government. Other non tariff barriers that some countries use include so-called safety norms, and the deliberate creation of customs, difficulties and delays. The General Agreement on Tariffs and Trade (GATT), an international organization set up in 1947, had the objectives of encouraging international trade, of making tariffs the only form of protectionism, and of reducing these as much as possible. The most favored nation clause of the Gatt agreement specified that countries could not have favored trading partners, but had to grant equally favorable conditions to all trading partners. The final Gatt agreement- including services, copyright, and investment, as well as trade in goods- was signed in Marrakech in 1994, and the organization was superseded by the World Trade Organization. It took nearly 50 years to arrive at the final Gatt agreement because until the 1980s, most developing countries opposed free trade. They wanted to industrialize in order to counteract what they rightly saw as an inevitable fall in commodity prices. They practised import substitution (producing and protecting goods that cost more than those made abroad), and imposed high tariff barriers to protect their infant industries. Nowadays, however, many developing countries have huge debts with Western commercial banks on which they are unable to pay the interest, let alone repay the principal. Thus they need to rollover (or renew) the loans, to reschedule (or postpone) repayments, or to borrow further money from the International Monetary Fund, often just to pay the interest on existing loans. Under these circumstances, the IMF imposes severe conditions, usually including the obligation to export as much as possible. Quite apart from IMF pressure, Third World governments are aware of the export successes of the East Asian ‘ Tiger’ economies ( Hong Kong, Singapore, South Korea and Taiwan), and of the collapse of the Soviet economic model. They were afraid of being excluded from the work trading system by the development of trading blocks such as the European Union, finalized by the Maastricht Treaty, and the North American Free Trade Agreement (NAFTA),both signed in the early 1990s. So they tended to liberalize their economies, lowering trade barriers and opening up to international trade. 1 Factors of production, most importantly raw materials, but also labor and capital, climate, economies of scale, and so on. 2. Because it doesn’t explain why the majority of the exports of advanced industrialized country go to other very similar countries. 33 A recently developed one that has not yet grown to the point where it benefits from economies of scale, and can be internationally completive. 4, Unlike quotas, they produce revenue. 5. Unlike tariffs, you know the maximum quantity of goods that will be imported. 14Reading 2: TRADE AND DEVELOPMENT With political independence, the Less Developed Countries (LDCs) inherited a structure of production and international trade that had largely been designed to serve the interests of the metropolitan powers, rather than those of the LDCs themselves. They were heavily dependent on the production and export of a limited range of primary commodities (foodstuffs, fuels and industrial raw materials) going mainly to the developed capitalist economy. In many cases, that dependence has not yet been broken. At the present time, for example, coffee still represents approximately 90 per cent of Burundi’s recorded export and 50 per cent of Columbia’s; copper accounts for more than 70 per cent of Zambia’s export; cocoa represents more than 70 percent of Ghana’s exports. Many other examples could be given. The import structures of the LDCs were dominated by the importation of manufactured goods and intermediate inputs — durable consumer goods, machinery, and transport equipment, chemicals, petroleum and so on. At independence most trade was with the colonial “mother country”. 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. At the center of the relationship between trade and development remains the controversy concerning the long-term behavior of the terms of trade of the LDCs. The commodity, or net barter, terms of trade are the ratio of the unit price of export to the unit price of import and the deterioration in the index implies that a given volume of exports is exchanged for a smaller volume of imports. The secular deterioration hypothesis is associated with the work of Hans Singer and Raul Prebisch. In its original form, it was based on the argument that 15in the developed countries strong trade unions could ensure that workers, rather than consumers, benefited from productive gains, whereas in the LDCs, higher productivity led to lower prices, thus benefiting consumers in the developed economies. Associated with, although formally separated from, such argument was the view that primary commodity export prices were highly unstable and prone violent fluctuations, thus damaging the development of the LDCs. 1, What is a structure of production and trade of LDCs? What about MDCs (More Developed Countries)? 2. Give three examples of the current reliance of LDCs on primary products for export. 3. What are the arguments which suggest that there were no advantages to be gained by LDCs from their structure of production and trade? 4. Give a definition of the net barter terms of trade.Exercise 1: Replace the underlined words and expressions in the text with the words and expressions below A. balance of payments __B. balance of trade C. barter or counter-trade D. climate E. commodities F, division of labour G. economies of scale H. factors of production I. nations K. protectionism L. quotas M. tariffs (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 The General Agreement on Tariffs and Trade (GATT), concluded in 1940, aims to maximize international trade and to minimize (6) the favouring of domestic industries. GATT is based on the comparative cost principle, which is that all nations will raise their income if they specialize in producing the commodities in which they have the highest relative productivity. Countries may have an absolute or a comparative advantage in producing particular goods or services, because of (7) inputs (raw materials, cheap or skilled labour, capital, etc), (8) weather conditions, (9) specialization of work into different jobs, (10) savings in unit costs arising from large-scale production, and so forth. Yet most governments still pursue protectionist policies, establishing trade barriers such as (11) taxes charged on imports, (12) restrictions on the quality of imports, administrative difficulties, and so on. 17Write your answer here: 1. Ts aie je le [sy Ss Exercise 2: There is a logical connection among three of the four words in each of the following groups. Which is the odd one out, circle it and explain why? 1. absolute advantage- barriers- comparative advantage- free trade 2. autarky- counter trade- invisible trade- visible trade 3. balance- deficit- dumping- surplus 4. banking- insurance- merchandise- tourism 5. comparative advantage- protectionism- quotas- tariffs 6. non tariff barriers - norms- quotas- taxes 7. barter- import substitution- infant industries- tariff barriers 8. debt- reschedule- protect- subsidize- substitute 9. liberalize- protect- subsidize- substitute Exercise 3: Complete the summary using the list of words, A-K, below. THE TRANSPORT REVOLUTION Modern cargo-handling methods have had a significant effect on (1) as the business of moving freight around the world becomes increasingly streamlined. Manufacturers of computers, for instance, are able to import (2) ... from overseas, rather than having to rely on a local supplier. The introduction of (3) ... .. has meant that bulk cargo can be safely and efficiently moved over long distances. While international shipping is now efficient, there is still a need for governments to reduce (4)... order to free up the domestic cargo sector in 18A. tariffs B. components _C. container ships D. output E. employees F. insurance costs G. trade H. freight I fares K, software L. international standards Write your answer here: i 2. ay 4, Exercise 4: DELIVERING THE GOODS The vast expansion in international trade owes much to a revolution in the business of moving freight A. International trade is growing at a startling pace. While the global economy has been expanding at a bit over 3% a year, the volume of trade has been rising at a compound annual rate of about twice that. Foreign products, from meat to machinery, play a more important role in almost every economy in the world, and foreign markets now tempt businesses that never much worried about sales beyond their nation's borders. B. What lies behind this explosion in international commerce? The general worldwide decline in trade barriers, such as customs duties and import quotas, is surely one explanation. The economic opening of countries that have traditionally been minor players is another. But one force behind the import- export boom has passed all but unnoticed: the rapidly falling cost of getting goods to market. Theoretically, in the world of trade, shipping costs do not matter. Goods, once they have been made, are assumed to move instantly and at no cost from place to place. The real world, however, is full of frictions. Cheap labour may make Chinese clothing competitive in America, but if delays in shipment tic up working capital and cause winter coats to arrive in spring, trade may lose its advantages.20 At the turn of the 20th century, agriculture and manufacturing were the two most important sectors almost everywhere, accounting for about 70% of total output in Germany, Italy and France, and 40-50% in America, Britain and Japan. International commerce was therefore dominated by raw materials, such as wheat, wood and iron ore, or processed commodities, such as meat and steel. But these sorts of products are heavy and bulky and the cost of transporting them relatively high. Countries still trade disproportionately with their geographic neighbours. Over time, however, world output has shifted into goods whose worth is unrelated to their size and weight. Today, it is finished manufactured products that dominate the flow of trade, and, thanks to technological advances such as lightweight components, manufactured goods themselves have tended to become lighter and less bulky. As a result, less transportation is required for every dollar's worth of imports or exports. . To see how this influences trade, consider the business of making disk drives for computers. Most of the world's disk-drive manufacturing is concentrated in South-east Asia. This is possible only because disk drives, while valuable, are small and light and so cost little to ship. Computer manufacturers in Japan or Texas will not face hugely bigger freight bills if they import drives from Singapore rather than purchasing them on the domestic market. Distance therefore poses no obstacle to the globalisation of the disk-drive industry. '. This is even more true of the fast-growing information industries. Films and compact discs cost little to transport, even by aeroplane. Computer software can be ‘exported’ without ever loading it onto a ship, simply by transmitting it over telephone lines-from one country to another, so freight rates and cargo- handling schedules become insignificant factors in deciding where to make the product. Businesses: can locate based on other considerations, such as the availability of labour, while worrying less about the cost of delivering their output. In many countries deregulation has helped to drive the process along. But, behind the scenes, a series of technological innovations known broadly as containerisation and inter-modal transportation has led to swift productivity improvements in cargo-handling. Forty years ago, the process of exporting or importing involved a great many stages of handling, which risked portions ofthe shipment being damaged or stolen along the way. The invention of the container crane made it possible to load and unload containers without capsizing the ship and the adoption of standard container sizes allowed almost any box to be transported on any ship. By 1967, dual-purpose ships, carrying loose cargo in the hold* and containers onthe deck, were giving way to all- container vessels that moved thousands of boxes at a time. . The shipping container transformed ocean shipping into a highly efficient, intensely competitive business. But getting the cargo to and from the dock was a different story. National governments, by and large, kept a much firmer hand on truck and railroad tariffs than on charges for ocean freight. This started changing, however, in the mid-1970s, when America began to deregulate its transportation industry. First airlines, then road haulers and railways, were freed from restrictions on what they could carry, where they could haul it and se what price they could charge. Big productivity gains resulted. Between 1985 and 1996, for example, America's freight railways dramatically reduced their employment, trackage, and their fleets of locomotives - while increasing the amount of cargo they hauled. Europe's railways have also shown marked, albeit smaller, productivity improvements. . In America the period of huge productivity gains in transportation may be almost over, but in most countries the process still has far to go. State ownership of railways and airlines, regulation of freight rates and toleration of anti-competitive practices, such as cargo-handling monopolies, all keep the cost of shipping unnecessarily high and deter international trade. Bringing these barriers down would help the world's economies grow even closer. Which paragraph contains the following information? 1. asuggestion for improving trade in the future 2. the effects of the introduction of electronic delivery 3. the similar cost involved in transporting a product from abroad or from a local supplier 4. the weakening relationship between the value of goods and the cost of their delivery 21Write your answer here: 1. 2. 3. 4. Decide if these statements are true (T) or false (F) or not given (NG) 1. International trade is increasing at a greater rate than the world economy. 2. Cheap labor guarantees effective trade conditions. 3. Japan imports more meat and steel than France. 4. Most countries continue to prefer to trade with nearby nations. 5. Small computer components are manufactured in Germany Write your answer here: As 2. 3. 4. 5. Wee thy lets Students discuss in groups the following questions. 1. Does your country have a trade surplus?. What are its chief exports? . Which industries or sectors are protected? . Which do you think should be protected? . Give example of Vietnam, which can apply the theory of comparative advantage in importing and exporting? 23