Globalisation and Free Trade (ch 17) MBA Session 5 Professor Dermot McAleese Trinity College Dublin.
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Transcript of Globalisation and Free Trade (ch 17) MBA Session 5 Professor Dermot McAleese Trinity College Dublin.
Globalisation and Free Trade (ch 17)
MBA Session 5
Professor Dermot McAleese
Trinity College Dublin
OUTLINE
Trends in global trade
Gains from foreign trade
Quantifying the gains from trade
Why protection failed
Competitiveness and Globalisation
WHERE ECONOMICS BEGAN Adam Smith, Wealth of Nations, 1776
Productivity the key to wealth of nations (not gold, not balance of trade surplus)
Productivity enhanced by specialisation
Dexterity
Saving of time
Machinery invented by workmen
Specialisation increased by enlarging the extent of the market
Extent of market limited by
Trade barriers
Monopoly ‘Invisible hand’ will even look after the poor!
‘in a well-governed society, opulence extends itself to the lowest ranks of the people’
TRENDS IN GLOBAL TRADE
Growth in trade
Composition of trade
Trade regimes (GATT, Uruguay Round, WTO)
Two Core Principles of WTO
• Non-discrimination
• National Treatment (banks, insurance, gasoline stations etc)
Administration and implementation of the 29 multilateral agreements which make up the WTO ( incl agriculture, textiles, GATS, government procurement)
A forum for multilateral trade negotiations
Resolving trade disputes (200 cases outstanding)
Reviewing national trade policies (142 members to date)
Co-operating with other global economic policy institutions
THE FUNCTIONS OF THE WTO
Table 1. Trade and GDP, 1900-2000
(average annual percentage change in volume)
Source: WTO, Regionalism and the World Trading System (Geneva, April 1995); International Trade Statistics (1995); own estimates
1900-13 1913-50 1950-73 1973-00
Merchandise trade 4.3 0.6 8.2 4.7 Gross domestic product 2.5 2.0 5.1 2.8
Table 1a. Value of world exports, 2000 (US$ billion)
Source: WTO and own estimates
World merchandise exports 6180Commercial services 1415Total 7595
Table 2. Leading exporters and importers in merchandise trade in 2000
Source: WTO, press release, 6 April 2000.
Rank Country $US bn % share Rank Country $US bn % share
1 US 782.4 12.3 1 US 1,258.0 18.9 2 Germany 552.0 8.7 2 Germany 500.1 7.5 3 Japan 479.0 7.5 3 Japan 379.5 5.7 4 France 298.1 4.7 4 UK 331.7 5.0 5 UK 280.1 4.8 5 France 305.4 4.6 6 Canada 277.2 4.2 6 Canada 249.1 3.7 7 CHINA 249.2 3.9 7 Italy 233.3 3.5 8 Italy 234.6 3.7 8 CHINA 225.1 3.4 9 Netherlands 211.7 3.3 9 Hong Kong 214.0 3.1
10 Hong Kong 202.4 3.2 10 Netherlands 197.0 3.0
1 EU 15 855.4 17.2 2 EU15 959.2 18.2
Exporters Importers
Table 3. How important is trade?
Source: World Development Indicators, The World bank (2000).
CountryExports as a % of GDP
(1998)
The least trade-dependent nationsRwanda 5Brazil 7Albania 9Uganda 10Argentina 10India 11Peru 12Iran 13Bangladesh 14
Major industrial economies (G7 nations)US 12Japan 11China 22Germany 27France 27UK 29Italy 27Canada 41
The world's most trade-dependent nationsSingapore 153Hong Kong 125Malaysia 114Ireland 80Estonia 80Belgium 73
GAINS FROM TRADE
Traditional gains
comparative advantage
variety of products
Modern extensions
competition and contestability
economies of scale and scope
innovation and R&D (imports)
product and quality improvement
ON FOREIGN TRADE
‘No extension of foreign trade will immediately increase the amount of value in a country, although it will very powerfully contribute to increase the mass of commodities, and therefore the sum of enjoyments.’
David Ricardo, Principles of Political Economy and Taxation 1821, Chapter VII
The gains from trade liberalization should not only be seen through a narrow economic lens. Trade has also been a vehicle for promoting broader political objectives, especially peace and stability. Trade establishes mutually beneficial links among nations, creating interest in cooperation. It cements relationships among disparate peoples and societies, lessening the risk of conflict, and it strengthens the commitment of governments to rules in the place of realpolitik.
World Trade Organization, Annual Report, 1998
Table 4. Developing countries: trade orientation and economic performance
Source: IMF, World Economic Outlook (May 1993), p. 76.
1974-85 1986-92
Strongly outward-orientedReal GDP growth 8 7.5Real per capita GDP growth 6.1 5.9Total factor productivity 2.6 3.8
Moderately outward-orientedReal GDP growth 4.3 4.8Real per capita GDP growth 2.2 2.5Total factor productivity 0.9 2.4
Moderately inward-orientedReal GDP growth 4.4 2.4Real per capita GDP growth 1.8 -0.1Total factor productivity 1.3 0.3
Strongly inward-orientedReal GDP growth 2.3 2.5Real per capita GDP growth -0.3 -0.1Total factor productivity -0.4 0.3
All developing countriesReal GDP growth 4.1 3.8Real per capita GDP growth 1.7 1.5Total factor productivity 0.8 1.4
Estimated Annual Income Gains form the Uruguay Round ($bn)
US 122
EU 164
Japan 27
Developing economies 116
China 19
Chinese Taipei 10
Other 52
Total 510
COMPARATIVE ADVANTAGE
‘nations should concentrate on what they are best at producing’
International Trade Theory
A country can have an absolute disadvantage in all goods and yet gain from trade with the more efficient partner
The gain is realised through imports
Trade involves mutual gains (trade is a positive sum game)
The total gain from trade may be unevenly shared
X-EFFICIENCY AND FREE TRADE
Wine
Clothing
T
T T’
T’
0
QUANTIFYING THE GAINS FROM TRADE
gains from free trade vs. autarky
gains of incremental movement towards freer trade
comparative analysis
TRADE POLICY AND PROTECTION
Sources of possible distortion:
Unemployment and the capacity to adjust
Foreign monopoly power
Failure of prices to signal future changes in comparative advantage
Neglect of environmental effects
WHY FREE TRADE MIGHT NOT ALWAYS BE BEST POLICY
(Adam Smith, Box 17.4)
Defence of the country
Level playing field
Retaliation
Transitional protection
optimum tariff
infant industry
income distribution
strategic trade theory
MODERN ARGUMENTS FOR PROTECTION
WHY PROTECTION FAILED
• Protected industries started well but became inefficient
• Downward pressure on prices for food products (bad for farmers, good for the consumer)
• Protection discouraged exports, thus missing out on economies of scale
• Protected industries were poor innovators
• Protection gave incentive to corruption
What determines comparative advantage? What can we export?
‘Comparative advantage is no longer seen as divine inheritance…
…nor are market structures and rivals’ behaviour set in tablets of stone’
Cecchini, P., The European Challenge 1992, (Aldershot: Wildwood House, 1988), p. 85
PORTER’S DIAMOND
Source: Michael Porter, The Competitive Advantage of Nations (London: Macmillan, 1990)
Firm StrategyStructure and Rivalry
Factor Conditions
Related and Supporting Industries
Demand Conditions
Chance
Government
TRADE POLICIES AND NEW TRADE ISSUES
how to cope with the losers (Box 17.5)
how to maximise the gains
trade agreements and the WTO
new forms of protection
Case Study: Effects of China’s entry into WTO (Dec 2001)
• Some concessions on agriculture
• Improved access to global market
• Textiles and clothing agreement
• Strong foreign investment effect
• Spur to efficiency in import-competing firms
• Underpins market reform process
Effects of China’s entry into WTO – Short run costs
• Job losses in state operated enterprises
• Pressure on agriculture
• Cost of intellectual property agreement
• Exposure to any downturns in the world economy
China’s trade by area 2000
• Exports $bn %
US 52 21
Hong Kong 45 18
Japan 42 17
Korea 11 5
EU 18
• Imports $bn %• Japan 42 18• Taiwan 26 11• S Korea 23 10• US 22 10• EU 15
High tech Exports (% of total exports to OECD)
• China 20 Thailand 34
• Hong Kong 30 Taiwan 50
• Indonesia 9
• Korea 41
• Malaysia 58
• Philippines 60
• Singapore 77
Higt tech= computers, telecom,electronics Sitc 77
BIS annual report 2001 p.43
Higt tech= computers, telecom,electronics Sitc 77
BIS annual report 2001 p.43
China and WTO – the view from Geneva
There is no doubt that China’s decision to join the WTO is particularly momentous. Opening its markets to foreign trade and investment will make China more prosperous, and commtting China to world trade rules will foster and consolidate market-based reforms. WTO Members stand to gain by better access to an economy of 1.3 billion consumers, which was growing at 8% in 2000. WTO Annual Report 2001
Class Exercise
What has the WTO done for the developing countries?
NEW TRADE ISSUES
Services (GATS) Intellectual property (TRIPS) Environment Direct foreign investment Fair trade and competition Labour standards Bribery and corruption Trade and development in the least developed
countries
FREE TRADE AND UNEMPLOYMENT
Note: If free trade brings the economy from A to P* instead of to P, there will be unemployment. P* is certainly a worse point than P: it could also be wore than A
Wine
Clothing
P
A
T
P*
‘In the past comparative advantage was function of natural-resources endowments and factor proportions (capital-labour ratios). Cotton was grown in the American south because the climate and soil were right. Slavery provided abundant labour. Cotton was spun in New England because it had the capital to harness available waterpower. Each industry has its natural location.Consider what are commonly believed to be the seven key industries of the next few decades – microelectronics, biotechnology, the new materials industries, civilian aviation, telecommunications, robot plus machine tools, and computers plus software. All are brainpower industries. Each could be located anywhere on the face of the globe. Where they will be located depends upon who can organise the brainpower to capture them. In the century ahead comparative advantage will be man-made.’
Lester Thurow, Head to Head: The Coming Economic Battle Among Japan, Europe and America (1992).