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International trade

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Introduction to international trade, undergraduate class given at American Business School-Paris, December 2012.

Introduction to international trade, undergraduate class given at American Business School-Paris, December 2012.

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  • 1. International TradeInternational Relations POL 210Sandrine TesnerDecember 7, 2012
  • 2. Some numbers Trade grew 5.5% in 2011 and was expected to decelerate in 2012. The US remains the world’s leading trader, with $3.75 trillion worth of exports and imports in 2011. China ranks 2nd and Germany 3rd. The US imported $2.26 trillion in 2011 and exported $1.48 trillion. The US exports 48% within NAFTA whereas 71% of European trade is intra-regional. The US’s second largest partner is Asia, followed by Europe. 53% of Asian trade is intra-regional. 50% of world exports come from North America and Europe. The EU is Africa’s main trading partner while Asia is the Middle East’s main trading partner. Europe trades about as much with the Middle East as it does with Africa—namely, very little. The US is the world’s largest services trader ($976 bil.) by a margin of almost 2 to 1 vs. Germany, which ranks 2nd. The UK ranks 3rd.
  • 3. Importers vs. ExportersLeading importers Leading Exporters1. US 1. China2. China 2. US3. Germany 3. Germany4. Japan 4. Japan5. France 5. Netherlands6. UK 6. France7. Netherlands 7. Korea
  • 4. The WTO Geneva-based, operational since 1995 but the successor of GATT, which had negotiated the reduction of trade barriers since 1948. 157 members to date. Russia became a member in 2012. Dedicated to the negotiation of trade rules and issues, the handling of trade disputes, technical assistance on trade policies for developing nations, and maintaining trade statistics. Agreements cover the trading of goods, services, and intellectual property (TRIPS). Not a UN specialized agency. Pascal Lamy is Director-General, fulfilling a 2nd five-year term (2009-14).
  • 5. Short history A world trade organization was supposed to be created in 1945 as part of the economic agencies of the post-WWII order. Negotiations began and produced an agreement to lower trade barriers on 1/5th of global trade. In March 1948 these tariff concessions were codified into a Protocol that took effect under the name of GATT (General Agreement on Tariffs and Trade). At the same time, negotiations continued on the creation of the ITO. A conference opened in Havana, Cuba, in late 1947 with the aim of creating this global trade body. The ITO’s Charter was agreed to in March 1948. Ratification proved impossible in several countries, however, and the US Congress, in particular, blocked it. That was the end of the ITO. GATT was never an organization but a standing negotiation process which continued to search for a reduction in trade barriers through so- called “rounds”. The Uruguay Round, lasting from 1986-94, was the longest and WTO emerged from it. Doha Round ended in 2011 but failed to achieve its agenda.
  • 6. The basis of free trade Until the late 18th century, the prevailing theory of exchange was called mercantilism. It held that a country had an interest in exporting as much as possible and importing as little as possible. The ‘prize’ and aim of this policy was to accumulate gold. In the early 19th century, a British economist named David Ricardo (1772-1823) demonstrated that countries would benefit from trading goods on the basis of their comparative advantage in producing these goods. Comparative advantage: nations have various advantages in technology, natural resources, human talent, know-how, etc. It is profitable for them to specialize in those goods and services in which they have the highest advantages. Specializing in other goods will produce inefficiencies and waste money and other resources. Even if country A produces everything more cheaply than country B, it should still specialize in the good that it produces the most cheaply and trade the other good.
  • 7. Why trade? Keep in mind that comparative advantage is not static. A country has to adjust constantly to shifting conditions in the international environment. Historical economic data show a correlation between trade and economic growth, as well as a correlation between decreasing exchanges and recessions (Depression). Countries have an economic advantage to specialize in the goods and services the produce the most efficiently. (Of course, exchange rates complicate the picture.) Cultural-political value of exchange. Protectionism correlates with international political tensions (1930s). It also results in producers’ forcing on domestic markets poorly made, outdated products because they are shielded from competition.
  • 8. Trade terminology Most-favored-nation status: advantages offered to nation A must be extended to nation B and to all nations a country trades with. Multilateralism. Tariff: a custom duty imposed on an imported good, which may make the imported good more expensive than the domestic one. Tariffs raise revenue for governments. Non-tariff barriers: these are non-financial ways of imposing limits on imported goods, including through technical requirements, product standards, testing, certification procedures, red tape, etc.. Dumping: when a company sells a product on a foreign market at a price lower than it charges domestically. Countervailing duties: duties imposed by an importing country on goods whose production is subsidized in the exporting country. This aims to level the playing field by removing the advantage of subsidies given to producers (which make the goods cheaper on international markets).
  • 9. Preferential trade agreements (PTAs) The European Union, NAFTA, MERCOSUR, ASEAN—regional trade agreements have proliferated in recent decades. Do they violate most-favored-nation status? In principle, yes. Article 24 of GATT, however, permits the creation of regional trade agreements if they do not hurt international trade. In particular, the regional blocks should help trade flow more freely among the countries in the group without barriers’ being raised on trade with the outside world. Non-members should not find trade with the group any more restrictive than before the group was set up. But some trade economists believe that the proliferation of PTAs will undermine the rules-based mechanisms of the WTO, especially the dispute settlement mechanism, and hurt ‘third’ countries (not represented in the PTA).
  • 10. Links www.wto.org Trade statistics: http://www.wto.org/english/res_e/statis_e/statis_e.htm#stats Country trade profiles: http://www.wto.org/english/res_e/publications_e/trade_profiles12_e.htm “The Broken Legs of Global Trade” by trade economist Jagdish Bhagwati: http://www.project-syndicate.org/commentary/the- broken-legs-of-global-trade “Termites in the Trading System: How Preferential Agreements Undermine Free Trade.” Jagdish Bhagwati, Oxford University Press, 2008. UNCTAD, 2012 Trade and Development Report. 34-page overview below: http://unctad.org/en/PublicationsLibrary/tdr2012overview_en.pdf

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