LECTURE 1

International Trade: An Avenue

of Interactions
Gains from international trade
 The theories of trade from David Ricardo’s Principles of Political Economy and Taxation of 1817
until the present time explain the benefits from trade (Ricardo, 1971).At the risk of doing injustice
to the theories of international trade, the gains can be summarized in three areas. First, the
expanded market and subsequent growth of production reduces cost per unit, and elevates and
spreads efficiency. Second, international competition reduces monopoly power by domestic
producers and compels them to design and achieve higher production efficiencies. Third,
consumers gain wide variety of products at lower prices and enjoy increased purchasing power for
their limited incomes. Instead of importing goods from abroad, if the same are produces and
consumed within the country, then the relative loss suffered by the country will constitute the basis
for measuring gains from trade. This would be maximum gains. On the other hand, if the goods
received from international trade are consumed in same ratio as when the same are produced with
in the country, then the resulting increase in income will be the minimum gains from trade. real
gains from trade is always between these maximum and minimum gains.
 Increase product variety
 Vent for surplus STUDY
 Increase in welfare DIFFERENT
INTERNATION
 Efficient utilization of recourses AL TRADE
THEORIES
Widening of the market
Increase in saving and investment
Gains from specialization
Countries may also gain by trading current resources for future resources (lending and
borrowing)
While trade is generally beneficial, the benefits rise with more freedom. Countries with freer
trade reap more benefits than countries with restricted trade. A study done by the World Bank
examined trade policy and economic performance for 41 developing countries between the
early 1960s and late 1980s ((The) World Bank, 1987), and compared economic performance of
countries with free trade and countries with restricted trade. The study found the countries with
free trade enjoyed higher economic performance than countries with restricted trade policy.
The data show that countries with strong free trade policy outperformed those with moderate
free policy, and both outperformed the countries with either moderate or strong restricted
policy. The finding was equally true for the two study periods of 1963-1973 and 1973-1985.
The study found that the average annual growth in real per capita income for 1963-1973 was
6.9 percent in the countries with strong free trade policy and 1.6 percent in the countries with
strong restricted trade policy. The study suggests that investment capital tends to be more
productive in a free trade environment, producing higher economic output and efficiency.
Trade Protectionism

Protectionism is the sum of government trade policies intended to assist domestic producers against
foreign producers in a particular industry, by means of raising the price of foreign products, lowering
cost for domestic producers, and limiting foreign producers’ access to domestic market. The methods
to achieve such protection are all too familiar and include:
 tariff taxes on imports which continue to be used in spite of great progress under GATT;
 quota ceilings on quantity of foreign products sold in domestic market, which limit the supply and
raise the price of imported products;
 regulatory obstacles that place hurdles in the way of imported products such as product
classifications and seemingly endless lists of standards and specifications;
 subsidies to domestic producers that range from tax breaks to direct cash payments;
 And currency controls to limit access to foreign currencies or manipulate exchange rates to inflate
the price of foreign products and lower the price of domestic products.

The arguments for protectionism include national defense, trade deficit, employment, infant
industries, and fair trade.
Ꚛ Protecting jobs and industries is a political argument for trade protectionism ,the premise is that
without trade protectionism a nation could lose long-established industries and companies that first
made a product in a particular nation. This will eventually result in the loss of jobs, rising
unemployment, and eventual decrease of a nation’s gross domestic product (GDP).
Ꚛ National security is used for trade protectionist policies since the industries involved include
defense-related companies, high-tech firms, and food producers. The argument here is that
industries such as aerospace, advanced electronics, and semi-conductors are vital components of
national defense policy and that relying on foreign manufacturers would seriously affect a nation’s
defense in time of war. By having manufacturing for defense items protected from foreign
competition, trade protectionism is necessary for a nation’s existence. In the defense industry,
Boeing, Raytheon and DRS Technologies all have dozens of strategic relationships with
international suppliers, partners, clients, and foreign governments as well. Furthermore, these
companies do compete internationally.
Ꚛ Protecting consumers is an argument used by policymakers to protect consumers from unsafe
imported products. Consumer advocates, domestic manufacturers, and certain policymakers claim
that foreign-made goods may fail to follow requirements for product safety in the manufacturing
and distribution process. This could result in serious illness, unsafe products, and even possibly
death of the consumer. Domestic manufacturers argue that if they must follow government-
imposed safety and production requirements then foreign producers must also do so.
Ꚛ The infant industry argument was first put forth by Alexander Hamilton in 1792. This idea states
that new manufacturers have an extremely difficult time competing against well-established, well-
funded, extremely profitable companies in developed countries. New manufacturers in developing
nations may not have the economic and financial resources, as well as the technology, physical
equipment, and research and development expertise to compete against older, established firms. In
order that infant industries and new companies gain market-share and a competitive edge against
well-established firms, governments must put into place short-term support mechanisms for these
infant industries until they have reached a level so they can compete with foreign companies. It
can also be argued that a developing nation in attempting to diversify its economy, must protect its
infant industries. Government intervention of an infant industry may come in the form of tariffs,
subsidies, administrative trade policies, or quotas.
Ꚛ Balance of payments Advocates of protectionism are alarmed at the deficit in the balance of
payments 'current account. When trade deficit persists and grows, politicians begin to wield Trade
protectionism. protectionism to battle the perceived injustice in the country’s trade relations. This
argument, while popular, disregards key issues.
There are various methods of trade protectionism whose goal is to protect a nation’s economic well-being. These include:
 Tariffs which are a tax on imports from other countries and foreign markets. Here, the government imposing the tariff is looking to restrict
imports of foreign goods and services, protect its own industries and companies manufacturing such items and raise tax revenues. Tariffs
could be specific in which there is a fixed tax rate or fee for each unit of a product or commodity brought into a nation. There are also ad
valorem tariffs which are set as a proportion of the value of the imported product.
 Quotas are a direct restriction on the number of certain goods, products, and commodities that may be permitted to be imported into a
nation. This import quota is generally enforced by the issuance of import licenses to a certain group of persons or companies. There is also
voluntary export restraint (VER) that acts as a trade quota imposed by an exporting nation. VERs can also come in the form of political
pressure on a nation by another country in order to stop the export of goods or commodities.
 Subsidies are government payments to domestic producers. This can come in the form of cash payments, low-to-no interest loans, tax
breaks, and government ownership of common stock in domestic companies. Subsidies help domestic producers by having extra cash
available for production of goods thereby lowering manufacturing costs and allowing these same companies to gain foreign markets.
 Local content requirements may be imposed by a nation seeking to decrease imports by setting a manufacturing requirement in which a
stated part or parts of a product must be made domestically. This occurs by having a percent of a product manufactured domestically or that
in value terms, such as 85 percent of its value, must be made locally.
 Administrative trade policies consist of bureaucratic rules, laws, and regulations designed to create serious difficulties for an importer of
goods or commodities into a particular nation. Formal trade barriers can come in the form of onerous rules, regulations, administrative
requirements, and paperwork to be completed. Informal trade barriers include the inspection of every product, good, and commodity
entering a nation in order to check for disease or suspicious content. This can take time, effort, and may often severely damage the item
being inspected. Administrative policies can also involve setting high-level health and safety standards and difficult-to-obtain import
licenses for foreign producers.
 Antidumping policies are enacted by a nation in order to prevent the selling of goods in a foreign market at a price far below their
production costs in order to gain a substantial share of that nation’s market. Anti-dumping rules can also include regulations prohibiting the
sale of goods, products, or commodities below its fair market value.
 Exchange rate controls can be used to make a nation’s product cheaper abroad by lowering the value of its currency in the foreign
exchange markets. The premise is that a nation can sell its currency in foreign exchange markets to the point where its loses value against
other currencies. This will cause the price of imports to rise while lowering the cost of its exports. This will help a nation, whether
developed or developing, increase the opportunity to sell its products and goods in foreign markets.
Anti-Protectionism

• Since the Smoot-Hawley Act, most countries have been anti-protectionist. They realize protectionism lowers international
trade for everyone. One of the strongest tools in anti-protectionism is the free trade agreement (FTA). It reduces or
eliminates tariffs and quotas between trading partners. The largest agreement is the North American Free Trade Agreement.
It is between the United States, Canada, and Mexico. The Trans-Pacific Partnership would have been larger. But President
Trump withdrew the United States from that agreement. As a result, the other involved countries have formed their own
accord. If China decides to join them, it will replace NAFTA as the world's largest trade pact. Also, in the running for the
world's largest trade agreement would have been the Transatlantic Trade and Investment Partnership. It was between the
European Union and the United States. But the Trump administration has not pursued it. Another large multilateral trade
pact is the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), between the United States and
Central America.
• There are also bilateral agreements with Chile, Colombia, Panama, Peru, and Uruguay. The United States also has
agreements with the Middle Eastern countries of Israel, Jordan, Morocco, Bahrain, and Oman.
• But FTAs don't eliminate protectionist measures like subsidies or currency wars. One of the disadvantages of NAFTA was
that subsidized U.S. farm products put Mexican farmers out of business. However, despite their disadvantages, for some
countries and industries, free trade agreements have more pros than cons.
• In a global economy, protectionism is damaging to everyone. Trump’s “America First” economic policy could hurt the U.S.
economy in the long run. Tariff imposition on imports from China, Canada, EU, Mexico, and India have triggered
retaliatory tariffs. A trade war with these large economies leads to serious consequences for U.S. exporters and the labor
force. But the immediate losers will be the global consumers. They will be forced to pay inflated prices. High costs could
create inflation around the world.
• Free trade agreements could advance the world economy. Although unfavorable to uncompetitive domestic industries, these
boost local industries that can produce at better economies of scale than those of other nations.
Non-tariff Measures

• Non-tariff measures (NTMs) are policy measures, other than ordinary customs tariffs, that
can potentially have an economic effect on international trade in goods, changing quantities
traded, or prices or both.
Source: UNCTAD / GNTB-MAST
• Countries are allowed by the WTO to regulate their imports and exports in order to
achieve legitimate non-trade objectives.

NTM can be used for:

• Correcting various market failures such as informational asymmetries, externalities and
monopoly power (price ceiling)
• Protect consumer health (standards, certification, labelling)
• Safeguard the environment (import ban)
• Protection of national industries or infant industries (bailouts, subsidy)
Non-tariff Measures: Certain stylized facts on NTMs

• NTMs can actually be trade and/or welfare enhancing

• They can affect prices and quantities or both
• Even though applied indiscriminately, they can be discriminatory
• Among the different types of NTMs, sanitary and phytosanitary (SPS) and Technical
Barriers to Trade (TBTs) are most predominant
• On the whole, TBTs are more prevalent than SPS measures, but SPS more prevalent
on agri-food products than TBTs
• The exact extent of burden imposed by NTMs differ among export markets
• Mixed results on whether NTMs are complements on substitutes to tariffs (differs by
country and product groups)

Genetically modified product=GMP

Non-tariff Measures as Non-tariff Barriers

Brazil-Retreaded
tyres Case (DS332)

EC-Asbestos Case
(DS135)

US-Gasoline Case
(DS2)

US-Shrimp Case
(DS335)
Trade Liberalization
https://en.irefeurope.org/Publications/Online-
Articles/article/Trade-Liberalisation-The-Challenge-of-Non-
Tariff-Barriers