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international trade

Page history last edited by Brian D Butler 1 year, 5 months ago

 

 

 

Table of Contents:


 

 

see also: 

 

 

 

 

Trends in Trade:

 

2009 - with the credit crisis of 2007 now effecting the real economy, we are seeing global slowdown, or a weakness in global trade

 

 

example:  South Korea and Taiwan exports dropping fast

 

 

 

 

 

International Trade Theory

 

Surprisingly, economic zones are more important than geography for determining who trades with whom.

 

International trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is the usually primary meaning of "globalization".

 

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics

 

International trade theory

 

Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs.

 

Ricardian model

 

The Ricardian model focuses on Comparative Advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

 

The Ricardo One-Factor model was originally presented with England and Portugal producing cheese and wine, utilizing only one factor of production (labor).  Imagine if England were absolutely more efficient in producing both products.  England could produce cheese in 1 hour compared to Portugals 6 hours, and England could produce wine in 2 hours compared to Portugals 3 hours.  England would have an "absolute advantage" in producing both products.  But, if you follow David Ricardo's reasoning, he would say that England has a comparative advantage in just the cheese, and that Portugal had a comparative advantage in producing wine.  The concept of comparative advantage is only applicable when comparing production between countries. 

 

                 England         Portugal            England's relative advantage

wine               1 hr               6 hrs                     6 x

cheese            2 hrs            3 hrs                     1.5 x

 

So, because England has more of an advantage in producing wine, they should specialize in just producing wine, and Portugal should specialize in producing just cheese, and the two countries should trade.  If they allow free trade, and if both countries specialize where they have a comparative advantage, then all consumers in both countries will be better off.  For more information, visit the page about Comparative Advantage

 

 

 

International Product Cycle Theory

 

 

If you look at the state of trade in the world economy today, you will see that most trade is actually between the developed nations (between the US and EU, for example).  So, comparative advantage does not really explain this trade between very similar countries.  Almost all of this trade of manufactured goods is not based on cost, but is rather based on desires to find new markets for products.    In this model of the international product cycle, we see that trade is more determined by factors such as technology, wealth of consumers, and size of markets.  

 

 

 

 

 

 

Heckscher-Ohlin model

 

The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.

 

The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance.

 

Specific Factors

 

In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. The specific factors name refers to the given that in the short-run specific factors of production, such as physical capital, are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms. Additionally, owners of opposing specific factors of production (i.e. labour and capital) are likely to have opposing agendas when lobbying for controls over immigration of labour. Conversely, both owners of capital and labour profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

 

Gravity model

 

Who ever is the heaviest, attracts the most trade with eachother (mass aspect).  Then add this to the distance aspect.  USA and Japan have less trade than USA and Canada due to distance. 

 

The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model.

 

The problem with this model is that it doesnt tell you anything about the type of trade. What types of goods or services will be traded?  Hightech / low tech?  This model offers very little details.

 

 

 

 

 

Tips for Investors

should watch carefully for changes in regulations.  If local content rules change, then products athat are currently exporting might stop, and others might pick up.  Anytime that governemtn interference is eliminated (or added) to the market, there will be changes in supply chains.  Watch for opportunities.

 

 

Regulation of international trade

 

Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount and this view has dominated thinking among western nations for most of the time since then. In the years since the Second World War multilateral treaties like the GATT and WTO have attempted to create a globally regulated trade structure.

 

Free trade is usually most strongly supported by the most economically powerful nations in the world, though they often engage in selective protectionism for those industries which are politically important domestically, such as the protective tariffs applied to agriculture and textiles by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.

 

Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.

 

During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression leading to a collapse in world trade that many believe seriously deepened the depression.

 

The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, NAFTA between the United States, Canada and Mexico, and the European Union between 25 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely due to opposition from the populations of Latin American nations. Similar agreements such as the MAI (Multilateral Agreement on Investment) have also failed in recent years.

 

Risks in international trade

 

The risks that exist in international trade can be divided into two major groups:

 

Economic risks

 

 

* Risk of insolvency of the buyer,

* Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date

* Risk of non-acceptance

* Surrendering economic sovereignty

 

Political risks

 

 

* Risk of cancellation or non-renewal of export or import licences

* War risks

* Risk of expropriation or confiscation of the importer's company

* Risk of the imposition of an import ban after the shipment of the goods

* Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages

* Surrendering political sovereignty

 

 

Learn more: 

 

Here is a series of videos from the Annenberg foundation discussing international trade & currency issues.  Each video is about 1 hour long, and gives an excellent background...

 

 

VOD1. Trade—An Introduction

Why nations trade and what determines trade’s basis and direction. Case studies: IBM’s computer production in Japan; Australia’s mineral export boom and domestic car production.

 

VOD2. Protectionism vs. Free Trade

Tariff and nontariff trade barriers and the beneficiaries of protectionism. Case studies: French agricultural subsidies and conflict in the Uruguay Round; voluntary export restraints on Japanese cars into the U.S.

 

VOD3. Trade Policy

Subsidies, regulatory policies, import-competing, and export-promotion. Case studies: Airbus; the Chilean wine industry.

 

VOD4. Trade Liberalization and Regional Trade Blocs

Multilateral trade liberalization and preferential trading arrangements. Case studies: the Canadian-U.S. Free Trade Agreement; the U.K.’s entry into the EC. Updated 2003.

 

VOD5. Labor and Capital Mobility

The mobility of capital, labor, and technology, including what drives and inhibits labor migration. Case studies: guest workers in the Netherlands; Mexican immigration to the U.S. and maquiladoras.

 

VOD6. Multinational Corporations

How capital moves, transfer technology, and the surrounding controversies. Case studies: investment by Ericsson in Hungary; a comparison of Smith-Corona and Brother.

 

VOD7. Fixed vs. Floating Exchange Rates

The strengths and weaknesses of each type of rate, along with their role as shock absorbers. Case studies: Komatsu vs. Caterpillar; petrodollar recycling in the 1970s.

 

VOD8. Managing Currencies and Policy Coordination

What motivates governments to manage currencies and coordinate policies. Case studies: the Plaza and Louvre Accords; the cost to the U.K. of joining the European Monetary System.

 

VOD9. Exchange Rates, Capital Flight, and Hyperinflation

How international capital flows, inflation, and trade flows affect exchange rates. Case studies: Mexico and the money center banks; hyperinflation in Argentina. Updated 2003.

 

VOD10. Developing Countries

How these nations have been helped or hurt by the rapid growth since WWII. Case studies: comparing South Korea and Sri Lanka; aid vs. trade in Tanzania.

 

VOD11. Economies in Transition

Transforming former Communist countries into market economies. Case studies: state industries vs. private entrepreneurs in Russia; the success of Poland’s “shock therapy.”

 

VOD12. Environment

Transnational pollution and international property rights. Case studies: the U.S.-Mexico agreement on dolphin-safe tuna fishing; trans-national pollution along the Rhine River.

 

VOD13. The Evolving World Economy

The importance of human capital and the shift away from manufacturing to services and knowledge-intensive industries. Case studies: the rise of East Asia, especially China; Microsoft and U.S. dominance of the software market. Updated 2003.

 

 

 

 

 

 

 

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A

B

C

D

D cont.

E

F

G

H

I

I cont.

J

K

L

M

N

O

 

 

 

P

Q

R

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S cont.

T

T cont.

U

V

W

 

 

 

See also

 

 

 

 

 

This is a list of international trade topics.

 

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