Introduction to International Trade and Economy

INTERNATIONAL TRADE
GT30103
Semester 1, Session 2018/2019
Lecture TWO: Chapter ONE
Introduction to International Trade and Economy
5 February 2019
Introduction to International Trade and Economy by Iftekhar Amin Chowdhury is licensed under a Creative Commons
Attribution-NonCommercial 4.0 International License.

©Iftekhar A. Chowdhury
1. Video (Trade Matters)
2. International Economics – Trend toward Globalization
3. Understanding Tariffs
4. Trade Controversies
5. The Great Depression
6. The General Agreement on Tariffs and Trade (GATT)
7. The Uruguay Round
8. The World Trade Organization
9. Bound Vs Applied Average Tariff Rates
10. Question and Answer session regarding the class
11. Video Case on “International Trade Centre”
DISCUSSION CONTENTS

“CAN WE SURVIVE WITHOUT TRADE?”
HTTPS://WWW.YOUTUBE.COM/WATCH?V=PGASN8-QL90

INTERNATIONAL ECONOMICS – TREND
TOWARD GLOBALIZATION (1)
International economics
Assesses the implications of international trade, international investment, and
international borrowing and lending.
International trade
Applies microeconomic models to help understand the international economy.
International finance
Applies macroeconomic models to help understand the international
economy.

Importance of foreign trade and influence around the world is
indicated by:
1. Exponential growth in overall annual exports
2. Steady increase in world exports as a percentage of the world GDP
3. Growth in the share of FDI around the world taken as a percentage of world
GDP

Exponential
growth in overall
annual exports
Figure 1.1 Global
Export Volume, 1950–
2016 (in Billions of U.S.
Dollars)

Steady increase in
world exports as a
percentage of the
world GDP
Figure 1.2 World
Exports, 1960–2016
(Percentage of World
GDP)

Growth in the share
of FDI around the
world taken as a
percentage of
world GDP
Figure 1.3 World Inward
FDI Stocks, 2005–2017
(Percentage of World
GDP)
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

TOWARD GLOBALIZATION (6*)
Regional free trade agreements:
- promote interdependence
- connectedness with strategic trade partners
Globalization
Economic, social, cultural, or environmental changes that interconnect people
around the world

UNDERSTANDING TARIFFS (1)
Tariff
- A tax or fee collected by a government on imported goods
- Represents the primary way in which countries either liberalize
trade or protect their economies
- Levied in two ways:
# Specific tariffs (levied as a fixed charge per unit
of imports)
# Ad valorem tariffs (levied as a fixed percentage
of the value of the commodity imported)
- On average, less-developed countries maintain higher tariff rates

Average Tariff
Table 1.1 Average Tariffs in
Selected Countries (2017)
Country Applied Rate (%)
United States 3.5
Canada 4.1
EU 5.2
Japan 4.0
South Korea 13.9
Mexico 7.0
Chile 6.0 (uniform)
Argentina 13.7
Brazil 13.5
Thailand 11.0
China 9.9
Egypt 17.9
Malaysia 5.8
Philippines 6.3
India 13.4
Kenya 12.8
Ghana 12.2
UNDERSTANDING TARIFFS (2)

UNDERSTANDING TARIFFS (3*)
Problems using average tariffs as a measure of protection
# Different methods of average tariff rate calculations give different
impressions about the level of protection
- Simple average method adds up all the tariff rates and divides by
the number of import categories
- Trade-weighted average tariff measure weighs each tariff by
the share of total imports in that import category
- The average tariff rate on dutiable imports overstates the
degree of protection
# Tariffs are not the only trade policy used by countries

TRADE CONTROVERSIES (1)
 Bursting of the real estate bubble led to the economic downturn of 2009
 The economic downturn fueled anti-globalization sentiments
 There is ambivalence among countries and policymakers between trade
liberalization and trade restriction
 Doha Round — Participating countries should aim to:
- Reduce trade barriers from their present levels
- Promote international investment
- Protect intellectual property rights

TRADE CONTROVERSIES (2*)
Doha Round
- Sometimes called the Doha Development Agenda, or DDA
- Began at the WTO ministerial meeting held in Doha, Qatar, in
November 2001
- First round of trade liberalization talks under the auspices of the
WTO
- Highly complex because:
#153 countries must reach a consensus
#Many trade-related issues are under discussion
#Insufficient commitments on agricultural liberalization by
the developed countries

THE GREAT DEPRESSION (1)
 Began with the crash of the U.S. stock market in late 1929
 Resulted in a massive reduction in GDP across countries
 Lowered international trade flows
 Aggravated the problem of unemployment
 Led the U.S. to set higher tariffs for increasing protection to the domestic
import competing industries

THE GREAT DEPRESSION (2*)
The Smoot-Hawley Tariff Act:
 Resulted primarily from the Great Depression which called for
protection of the domestic industries
 Raised average tariffs to as much as 60 percent
 Led to retaliation (higher tariffs) from foreign economies
 Led to a dramatic drop in international trade flows across the
world

 The International Trade Organization (ITO)
- Intended to promote trade liberalization by establishing guidelines
or rules that member countries would agree to adopt
- Conceived during the Bretton Woods conference in 1944, along
with the International Monetary Fund and the World Bank
- Later ITO changed the name to International Trade Centre (ITC)
THE GENERAL AGREEMENT ON
TARIFFS AND TRADE(1)

 The GATT
- Designed to be a part of an agreement to establish an ITO
- Consists of a set of promises, or commitments, that countries
make regarding their own trade policies to achieve trade
liberalization

 Eight rounds of negotiation under the GATT:
- The Geneva Round (1948)
- The Annecy Round (1950)
- The Torquay Round (1951)
- The Geneva II Round (1956)
- The Dillon Round (1962)
- The Kennedy Round (1967)
- The Tokyo Round (1979)
- The Uruguay Round (1994)

 Promises and Commitments:
- Nondiscrimination
- Application of Nondiscrimination:
# Most-favored nation
# National treatment

GATT Exceptions
 Trade remedies
- Antidumping laws
- Antisubsidy laws
- Safeguard laws
 Free Trade Areas (FTAs)
- North American Free Trade Agreement (NAFTA)
- European Economic Community
TARIFFS AND TRADE(5*)

 Last of eight completed rounds of the GATT
 Dealt with issues related to:
- Agriculture
- Textiles and apparel
- Services
- Intellectual property
THE URUGUAY ROUND(1)

 Agreement on Agriculture (AoA)
 The General Agreement on Trade in Services (GATS)
 Agreement on Textiles and Clothing (ATC)
 Trade-Related Aspects of Intellectual Property Rights (TRIPS)
 Agreement on Sanitary and Phytosanitary Measures
 Agreement on antidumping
 Agreement on Subsidies and Countervailing Measures
 Agreement on Trade-Related Investment Measures (TRIMS)
 Agreement on Import-Licensing Procedures
 Agreement on Customs Valuation
 Pre-shipment Inspection Agreement
 Rules of Origin Agreement
THE URUGUAY ROUND(2*)

 Established to monitor and sustain the complete set of Uruguay Round
agreements
 Promotes trade liberalization and fosters growth & economic development
 Monitors each member country’s trade policies with respect to the trade
agreements that were made in the Uruguay Round
THE WORLD TRADE ORGANIZATION (1)

 The Dispute Settlement Body (DSB)
- Comprises of one representative from each member country
- Resolution of a dispute follows these steps:
#Consultations
#Panel formation
#Appeals
#Resolution
THE WORLD TRADE ORGANIZATION (2*)

“FROM GATT TO WTO”
HTTPS://WWW.YOUTUBE.COM/WATCH?V=FWMHHFIMLVW

 Bound tariffs are not necessarily the rate that a WTO member applies in
practice to other WTO members' products.
 Applied tariff is less than or equal to the bound tariff in practice for any
particular product.
 The gap between the bound and applied MFN rates is called the binding
overhang.
BOUND VS APPLIED TARIFF RATES (1)

BOUND VS APPLIED TARIFF RATES (2*)
Country
Applied Rate
(%)
Bound Rate
(%)
% Bound
United States 3.5 3.6 99.9
Canada 4.1 6.5 99.7
EU 5.2 5.0 100.0
Japan 4.0 4.5 99.7
South Korea 13.9 16.5 94.9
Mexico 7.0 36.2 100.0
Chile 6.0 (uniform) 25.1 100.0
Argentina 13.7 31.8 100.0
Brazil 13.5 31.4 100.0
Thailand 11.0 28.0 75.2
China 9.9 10.0 100.0
Egypt 17.9 36.8 99.3
Malaysia 5.8 21.3 84.3
Philippines 6.3 25.7 67.0
India 13.4 48.5 74.4
Kenya 12.8 95.1 14.8
Ghana 12.2 92.5 15.4

QUESTION & ANSWER

VIDEO CASE
• International Trade Centre (ITC)
(https://www.youtube.com/watch?v=HLWy2ZdMAR8)
• Discussion on ITC

INTERNATIONAL TRADE
GT30103
Semester 1, Session 2018/2019
Lecture TWO: Chapter ONE
Introduction to International Trade and Economy
19 September 2018

Introduction to International Trade and Economy

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