Theories of International Trade,Tariff and Non-tariff barriers andTrade BlocksInternational Business Management           ...
Agenda Theories of International Trade Tariff & Non-tariff Barriers Trade Blocks                       Mrs. Charu Rasto...
Adam SmithRicardoOhlin & HeckscherTHEORIES OFINTERNATIONAL TRADE                    Mrs. Charu Rastogi Asst. Prof.
Evolution of Trade Theories Mercantilism Absolute advantage (Classical) Comparative advantage Factor Proportions Trade...
Mercantilism: mid-16th century   Theory assumes that a nation‟s wealth    depends on accumulated treasure    ◦ Gold and s...
Assumptions of Absolute Advantageand Comparative AdvantageTheories 2 commodity model 2 countries,   Labor as the only in...
Theory of absolute advantage   Adam Smith: Wealth of Nations (1776) argued:    ◦ A country should produce only goods wher...
Theory of absolute advantage   … destroys the mercantilist idea since there are    gains to be had by both countries part...
Theory of absolute advantage      PPF – Production Possibility      Frontier                 Ghan                 a       ...
Absolute Advantages and Gainsfrom TradeAssume total amount of resources at 200. In the absence of trade resource is used  ...
Mrs. Charu Rastogi Asst. Prof.
Mrs. Charu Rastogi Asst. Prof.
Mrs. Charu Rastogi Asst. Prof.
Criticism of Absolute CostAdvantage Theory Most of the criticisms from absolute  advantage theory would arise because of ...
Theory of comparative               advantage   David Ricardo: Principles of Political Economy    (1817)    ◦ Extends fre...
Theory of comparativeadvantage       PPF – Production Possibility       Frontier                        Ghan              ...
Comparative Advantage and Gains               from Trade100-100for bothproductsSK:100-100Ghana:150 forCocoaand 50 forRice ...
Limitation of ComparativeAdvantage Theory Driven only by maximization of production and  consumption Only 2 countries en...
Mrs. Charu Rastogi Asst. Prof.
Comparative advantage:Bollywood                 Mrs. Charu Rastogi Asst. Prof.
Mrs. Charu Rastogi Asst. Prof.
Mrs. Charu Rastogi Asst. Prof.
Factor proportions theory   Heckscher (1919) - Olin (1933) Theory   Export goods that intensively use factor    endowmen...
Factor proportions theory   … trade theory holding that countries produce and    export those goods that require resource...
Factor Proportions Trade Theory:Considers Two Factors of Production          Labor          Capital                     ...
Factor Proportions Trade Theory    A country that is relatively labor abundant should    specialize in the production and...
Tariff and Non-Tariff Barriers, Trade BlocksTRADE BARRIERS                            Mrs. Charu Rastogi Asst. Prof.
Trade Barriers Countries use protectionist measures to shield a  country‟s markets from intrusion by foreign competition ...
Tariff   Tariff in international trade refers to the duties or    taxes imposed on the import traded goods when    they c...
Non-Tariff BarriersA form of restrictive trade where barriers to trade are set    up and take a form other than a tariff. ...
Non-Tariff Barriers       Customs and Administrative Entry Procedures:    ◦      Valuation systems    ◦      Antidumping ...
Non-Tariff Barriers       Government Participation in Trade:    ◦       Government procurement policies    ◦       Export...
Trade Blocks A trade block is a type of intergovernmental  agreement, often part of a regional  intergovernmental organiz...
Major Trade Blocks   European Union (EU)   North American Free Trade Agreement (NAFTA)   Singapore American Free Trade ...
Levels of integration                    • Special TariffsTrade Concessions   • Relaxation in NTBs                    • On...
Possible Questions   Theories of International Trade   Explain Adam Smith‟s theory of absolute    advantage. How does Ri...
Mrs. Charu Rastogi Asst. Prof.
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2. Theories of International Trade, Tariff and Non-tariff barriers and Trade Blocks

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This presentation starts with an overview of the initial theories of international trade like mercantilism, theory of absolute advantage, theory of comparative advantage and factor proportions theory. It goes on to discuss trade barriers, tariff and non-tariff barriers and trade blocks.

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2. Theories of International Trade, Tariff and Non-tariff barriers and Trade Blocks

  1. 1. Theories of International Trade,Tariff and Non-tariff barriers andTrade BlocksInternational Business Management Mrs. Charu Rastogi Asst. Prof.
  2. 2. Agenda Theories of International Trade Tariff & Non-tariff Barriers Trade Blocks Mrs. Charu Rastogi Asst. Prof.
  3. 3. Adam SmithRicardoOhlin & HeckscherTHEORIES OFINTERNATIONAL TRADE Mrs. Charu Rastogi Asst. Prof.
  4. 4. Evolution of Trade Theories Mercantilism Absolute advantage (Classical) Comparative advantage Factor Proportions Trade International Product Cycle New Trade Theory National competitive advantage Mrs. Charu Rastogi Asst. Prof.
  5. 5. Mercantilism: mid-16th century Theory assumes that a nation‟s wealth depends on accumulated treasure ◦ Gold and silver are the currency of trade Therefore, this theory holds that nations should accumulate financial wealth, in the form of gold or silver by encouraging exports and discouraging imports Theory says you should have a trade surplus. ◦ Maximize export through subsidies. ◦ Minimize imports through tariffs and quotas Flaw: restrictions, impaired growth Mrs. Charu Rastogi Asst. Prof.
  6. 6. Assumptions of Absolute Advantageand Comparative AdvantageTheories 2 commodity model 2 countries, Labor as the only input Single currency assumed thereby eliminating effects of exchange rate changes Homogeneous factors of production – All labor units are of same type. They can be freely moved from production of cloth to production of bread and vice versa. i.e. No specialized labor. Units of production are divisible in compact units. All factors of production are fully employed. No government restrictions on freeAsst. Prof. Mrs. Charu Rastogi trade
  7. 7. Theory of absolute advantage Adam Smith: Wealth of Nations (1776) argued: ◦ A country should produce only goods where it is most efficient, and trade for those goods where it is not efficient ◦ Export those goods and services for which a country is more productive than other countries ◦ Import those goods and services for which other countries are more productive than it is Trade between countries is, therefore, beneficial Assumes there is an absolute balance among nations Mrs. Charu Rastogi Asst. Prof.
  8. 8. Theory of absolute advantage … destroys the mercantilist idea since there are gains to be had by both countries party to an exchange … questions the objective of national governments to acquire wealth through restrictive trade policies … measures a nation‟s wealth by the living standards of its people Mrs. Charu Rastogi Asst. Prof.
  9. 9. Theory of absolute advantage PPF – Production Possibility Frontier Ghan a South Korea Mrs. Charu Rastogi Asst. Prof.
  10. 10. Absolute Advantages and Gainsfrom TradeAssume total amount of resources at 200. In the absence of trade resource is used Mrs. Charu Rastogi Asst. Prof.equally for both products; 100 for cocoa and 100 for Ghana
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  14. 14. Criticism of Absolute CostAdvantage Theory Most of the criticisms from absolute advantage theory would arise because of the unrealistic nature of its assumptions. However, an important incompleteness in the theory was the fact that it addressed only a situation wherein one country enjoyed an absolute advantage in production of a commodity over another country. It was pointed out that such situations are rare. Quite often the advantage is not an absolute advantage but a comparative one as would be clear from the Ricardian Theory of Comparative Cost Advantage. Mrs. Charu Rastogi Asst. Prof.
  15. 15. Theory of comparative advantage David Ricardo: Principles of Political Economy (1817) ◦ Extends free trade argument ◦ Efficiency of resource utilization leads to more productivity ◦ Should import even if country is more efficient in the product‟s production than country from which it is buying. Produce and export those goods and services for which it is relatively more productive than other countries Import those goods and services for which other countries are relatively more productive than it is Makes better use of resourcesrs. Charu Rastogi Asst. Prof. M
  16. 16. Theory of comparativeadvantage PPF – Production Possibility Frontier Ghan a South Korea Mrs. Charu Rastogi Asst. Prof.
  17. 17. Comparative Advantage and Gains from Trade100-100for bothproductsSK:100-100Ghana:150 forCocoaand 50 forRice Assume total amount of resources at 200. In the absenceMrs. Charu Rastogi Asst. Prof.equally for of trade resource is used both products; 100 for cocoa and 100 for Ghana
  18. 18. Limitation of ComparativeAdvantage Theory Driven only by maximization of production and consumption Only 2 countries engaged in production and consumption of just 2 goods? What about the transportation costs? Only resource – labour (that too, non-transferable) No consideration for „learning theory‟ Mrs. Charu Rastogi Asst. Prof.
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  20. 20. Comparative advantage:Bollywood Mrs. Charu Rastogi Asst. Prof.
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  23. 23. Factor proportions theory Heckscher (1919) - Olin (1933) Theory Export goods that intensively use factor endowments which are locally abundant ◦ Corollary: import goods made from locally scarce factors  Note: Factor endowments can be impacted by government policy - minimum wage Patterns of trade are determined by differences in factor endowments - not productivity Remember, focus on relative advantage, not absolute advantage Mrs. Charu Rastogi Asst. Prof.
  24. 24. Factor proportions theory … trade theory holding that countries produce and export those goods that require resources (factors) that are abundant (and thus cheapest) and import those goods that require resources that are in short supply Example: ◦ Australia – lot of land and a small population (relative to its size) ◦ So what should it export and import? Mrs. Charu Rastogi Asst. Prof.
  25. 25. Factor Proportions Trade Theory:Considers Two Factors of Production  Labor  Capital Mrs. Charu Rastogi Asst. Prof.
  26. 26. Factor Proportions Trade Theory A country that is relatively labor abundant should specialize in the production and export of that product which is relatively labor intensive A country that is relatively capital abundant should specialize in the production and export of that product which is relatively capital intensive A country will have a comparative advantage in producing products that intensively use resources (factors of production) it has in abundance ◦ China: labor ◦ Saudi Arabia: oil ◦ Argentina: wheat Mrs. Charu Rastogi Asst. Prof.
  27. 27. Tariff and Non-Tariff Barriers, Trade BlocksTRADE BARRIERS Mrs. Charu Rastogi Asst. Prof.
  28. 28. Trade Barriers Countries use protectionist measures to shield a country‟s markets from intrusion by foreign competition and imports Protectionism is implemented through the imposition of trade barriers, which include tariff barriers and non-tariff barriers Reasons for protectionism: ◦ Maintain employment and reduce unemployment ◦ Increase of business size ◦ Retaliation and bargaining ◦ Protection of the home market ◦ Need to keep money at home ◦ Encouragement of capital accumulation ◦ Maintenance of the standard of living and real wages ◦ Conservation of natural resources ◦ Protection of an infant industry ◦ Industrialization of a low-wage nation ◦ National defense Mrs. Charu Rastogi Asst. Prof.
  29. 29. Tariff Tariff in international trade refers to the duties or taxes imposed on the import traded goods when they cross the national borders. Different rate of duty for different goods Customs Tariff Structure for 2012-13: http://www.cbec.gov.in/customs/cst2012- 13/cst1213-idx.htm Example: There is a 100% duty on importing private cars/vehicles Mrs. Charu Rastogi Asst. Prof.
  30. 30. Non-Tariff BarriersA form of restrictive trade where barriers to trade are set up and take a form other than a tariff. Forms of NTBs Specific Limitations on Trade: ◦ Quotas  sets a physical limit on the quantity of a good that can be imported into a country in a given period of time  Example: Russia has quotas on the number of tons of beef (315,000) and chicken (1.05 million) that can be imported each year. If the quotas are reached, the state then charges an additional 60-80% tax. ◦ Import Licensing requirements  Each license specifies the volume of imports allowed, and the total volume allowed should not exceed the quota. Licenses can be sold to importing companies at a competitive price, or simply a fee. ◦ Proportion restrictions of foreign to domestic goods (local content requirements) ◦ Minimum import price limits ◦ Embargoes  An embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Mrs. Charu Rastogi Asst. Prof.
  31. 31. Non-Tariff Barriers Customs and Administrative Entry Procedures: ◦ Valuation systems ◦ Antidumping practices ◦ Tariff classifications ◦ a classification assigned by government officials that affects the size of a tariff and the imposition of import quotas. ◦ Example: The U.S. Customs Service only charges an 8.5% tariff on imported leather or “non rubber” shoes, while it charges anywhere from 20-67% for imported rubber shoes like athletic footwear or waterproof shoes ◦ Documentation requirements ◦ Fees Standards: ◦ Standard disparities ◦ Intergovernmental acceptances of testing methods and standards ◦ Packaging, labeling, and marking Mrs. Charu Rastogi Asst. Prof.
  32. 32. Non-Tariff Barriers Government Participation in Trade: ◦ Government procurement policies ◦ Export subsidies ◦ Countervailing duties  A duty placed on imported goods that are being subsidized by the importing government ◦ Domestic assistance programs Charges on imports: ◦ Prior import deposit subsidies ◦ Administrative fees ◦ Special supplementary duties ◦ Import credit discriminations ◦ Variable levies ◦ Border taxes Others: ◦ Voluntary export restraints ◦ Orderly marketing agreements Mrs. Charu Rastogi Asst. Prof.
  33. 33. Trade Blocks A trade block is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states Criteria for formation of Regional Trade Blocks – ◦ Neighboring countries ◦ Similar resource endowments and production structures – and hence possibility of cartelization in International market for buying / selling OR ◦ High degree of mutual dependence – hence large gains through mutual free trade ◦ Political will Mrs. Charu Rastogi Asst. Prof.
  34. 34. Major Trade Blocks European Union (EU) North American Free Trade Agreement (NAFTA) Singapore American Free Trade Agreement (SAFTA) Organization of Petroleum Exporting Countries (OPEC) Association of South East Asian Nations (ASEAN) South Asian Association of Regional Co-operation (SAARC) Mrs. Charu Rastogi Asst. Prof.
  35. 35. Levels of integration • Special TariffsTrade Concessions • Relaxation in NTBs • Only for select commodities and services • Complete removal of restrictions on movement of Free Trade Area goods • Quite often leading to Customs Union • Adoption of common standards – environment, Common Market labor, etc. • Common external trade policy • Common Economic Policy Economic Union • Common Currency and Monetary Policy • Free movement of factors • Common Governing Body Political Union • Common Laws Mrs. Charu Rastogi Asst. Prof.
  36. 36. Possible Questions Theories of International Trade Explain Adam Smith‟s theory of absolute advantage. How does Ricardo‟s theory of comparative advantage differ from theory of absolute advantage ? Explain the concept of trade barriers. What are different types of tariff and nontariff barriers? Explain the term Globalisation. Discuss various stages in Globalisation. What are the barriers to international trade ? List and explain all the types of barriers to international trade. Mrs. Charu Rastogi Asst. Prof.
  37. 37. Mrs. Charu Rastogi Asst. Prof.

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