International Economics Lecture_4

PAOLO V. VALLADAREZ, LL.B.Instructor

1500-1750Collection of similar attitudes

toward :- domestic economic activity

and - the role of international trade

“POLITICAL ECONOMY OF NATION-BUILDING”

OR

“AKO, AKO, AKO, PALAGI NA LANG AKO …. Dapat lang!”

* NATIONAL WEALTH WAS REFLECTED IN A COUNTRY’S

HOLDINGS OF PRECIOUS METALS.

NATIONAL WEALTH = PRECIOUS METALS “SPECIE”

(THEY HAVE A STATIC VIEW OF WORLD RESOURCES)

Acquisition of precious metals thus became the means for increasing wealth and well-being and the focus of the emerging European Nation-states.

Believed that in a hostile world, the enhancement of state power was essential to the growth process

Strong army, strong navy and

Merchant marine and productive economy

ACCUMULATION OF PRECIOUS METALS

SYSTEM WHERE GOVERNMENTS CONTROL

THE USE AND EXCHANGE OF PRECIOUS METALS

* Economic activity can be viewed as a ZERO-SUM

GAME in which one country’s economic gain was at the

expense of another.

* Employed the LABOR THEORY OF VALUE

Commodities were valued relatively in terms of their relative labor content

●ECONOMIC ACTIVITY SHOULD BE REGULATED AND NOT LEFT TO INDIVIDUAL

PREROGATIVE.

* POLICIES ON POPULATION AND LABOR WERE INFLUENCED BY

TRADE POLICIES

1. FORMATION OF CRAFT GUILDS

2. POLICIES THAT KEPT WAGES LOW

1. GROWING POPULATION WAS CRUCIAL TO GROWTH IN PRODUCTION:

a. Encouraging large families

b. Giving subsidies for children

c. Giving financial incentives for marriage

* MERCANTILISTS STRESSED THE IMPORTANCE OF A

FAVORABLE TRADE BALANCE

=

* MERCANTILISM and DOMESTIC ECONOMIC POLICYRegulation of economic activity through control of industry and labor – formation of craft guilds

Pursued policies that kept wages low

Population control is out of the question

● CRITICIZED MERCANTILISM

● THE WEALTH OF THE NATION IS NOT MEASURED BY GOLD AND SILVER, INSTEAD THE WEALTH OF THE NATION IS BEING MEASURED ON THE GOODS AND SERVICES AVAILABLE FOR THE CONSTITUENTS OF THE SOCIETY

THEORY OF ABSOLUTE ADVANTAGE

-Each country should export those commodities it produced more efficiently because the absolute labor required per unit was less than that of the prospective trading partner.

- The ability of country A to produce a commodity more efficiently than country B

-The assumption is that nations trade if they can mutually benefit from

THEORY OF COMPARATIVE ADVANTAGE

-“A nation, like a person, gains from trade by exporting the goods or services in which it has its greatest comparative advantage in productivity and importing those in which it has the least comparative advantage.” – DAVID RICARDO (19TH CENTURY)

- even if a nation had an absolute DISadvantage in production of both commodities with respect to other nation, mutual advantageous trade could still take place

- less efficient nation should specialize in production and export of commodity which its absolute disadvantage is less.

-This is the commodity in which the nations has comparative advantage

United StatesUnited States United KingdomUnited Kingdom

SHOESSHOES 66/ labor-hr/ labor-hr 11

CORNCORN 33 22

ANALYSIS:

1. UK has absolute disadvantage with respect to U.S. in production of both corn and shoes.

2. However, disadvantage is less in corn than in shoes.

3. Hence, U.K. has a comparative advantage with respect to the U.S. in corn and comparative disadvantage in shoes.

4. U.S. has greater absolute advantage over U.K. in shoes than in corn – U.S. has a comparative disadvantage in corn and a comparative advantage in shoes.

SEATWORKSEATWORK

United StatesUnited States U.KingdomU.KingdomWheat Wheat (bushels/labor-hr)(bushels/labor-hr)

66 11

Cloth (yards/Labor-Cloth (yards/Labor-hr)hr)

44 33

Indicate:

1. Whether the U.S. has an absolute advantage or a disadvantage in wheat and/or cloth?

2. The commodity in which the U.S. and U.K. have a comparative advantage.

3. The gains to the US and the UK if they exchange 6w for 6c.

INSTRUMENTS OF INSTRUMENTS OF TRADE POLICYTRADE POLICY

Why are tariffs / quotas imposed?Why are tariffs / quotas imposed?

1. It may move the terms of 1. It may move the terms of trade to the benefit of the trade to the benefit of the countrycountry

2. Protect “Infant Industries”2. Protect “Infant Industries”

3. Reduce Unemployment3. Reduce Unemployment

INSTRUMENTS OF TRADE POLICYINSTRUMENTS OF TRADE POLICY

In April 2001, Japan restricted In April 2001, Japan restricted imports of agricultural goods from imports of agricultural goods from China, two months later, China China, two months later, China returned the “favor” by putting 100% returned the “favor” by putting 100% tariffs on Japanese autos, cellphones tariffs on Japanese autos, cellphones and air conditioners. Japan then and air conditioners. Japan then considered limiting imports of considered limiting imports of Chinese towels.Chinese towels.

In November 2003, the In November 2003, the European Union threatened to European Union threatened to slap retaliatory tariffs on over slap retaliatory tariffs on over $ 2 billion of U.S. exports $ 2 billion of U.S. exports because of tariffs that the because of tariffs that the United States had placed on United States had placed on steel imports in 2002.steel imports in 2002.

In March 2002, President George W. In March 2002, President George W. Bush, following a recommendation by Bush, following a recommendation by the U.S. International Trade the U.S. International Trade Commission. Ad valorem tariffs were Commission. Ad valorem tariffs were imposed for three years.imposed for three years.

““breathing room” for the steel breathing room” for the steel industry – so that it can upgrade its industry – so that it can upgrade its equipment and reduce labor costequipment and reduce labor cost

U.S. steel consumers faced sharply U.S. steel consumers faced sharply rising prices..One firm in illinois saw rising prices..One firm in illinois saw its steel import cost rise by more its steel import cost rise by more than 50%than 50%

In what ways can a country interfere In what ways can a country interfere with trade?with trade?

IMPORT TARIFFSIMPORT TARIFFS1.1. Specific TariffSpecific Tariff- Is an import duty that assigns a fixed Is an import duty that assigns a fixed

monetary tax per physical unit of the monetary tax per physical unit of the good importedgood imported

- The total import tax bill is levied in The total import tax bill is levied in accordance with the number of units accordance with the number of units coming into the importing country and coming into the importing country and not according to the price or value of the not according to the price or value of the importsimports

2. Ad valorem tariffs2. Ad valorem tariffs- Is levied as a constant percentage of Is levied as a constant percentage of

the monetary value is levied as a the monetary value is levied as a constant percentage of the monetary constant percentage of the monetary value of 1 unit of the imported goodvalue of 1 unit of the imported good

- Makes it possible for domestic Makes it possible for domestic producers to overcome the loss of producers to overcome the loss of protective value that the specific protective value that the specific tariff was subject to during infaltiontariff was subject to during infaltion

OTHER FEATURES OF TARIFF OTHER FEATURES OF TARIFF LEGISLATIONLEGISLATION

Preferential dutiesPreferential duties- Tariff rates applied to an import Tariff rates applied to an import

according to its geographical sourceaccording to its geographical source

Most favored nation treatment (MFN) Most favored nation treatment (MFN) or Normal Trade Relations (NTR)or Normal Trade Relations (NTR)

- - Suppose the U.S. and India conclude Suppose the U.S. and India conclude a bilateral tariff negotiation whereby a bilateral tariff negotiation whereby India reduces its tariffs on U.S. India reduces its tariffs on U.S. computers and the U.S. reduces its computers and the U.S. reduces its tariffs on Indian clothing. tariffs on Indian clothing. MFN or NTR MFN or NTR states that any 3states that any 3rdrd country with which country with which the U.S. has an MFN or NTR the U.S. has an MFN or NTR agreement will get the same tariff on agreement will get the same tariff on clothing from the U.S.clothing from the U.S.

EXPORT TAXES and SUBSIDIESEXPORT TAXES and SUBSIDIES1.1. Export taxExport tax – is levied only on home – is levied only on home

produced goods that are destined produced goods that are destined for export and not for home for export and not for home consumptionconsumption

2.2. Export SubsidyExport Subsidy – a negative export – a negative export tax or a payment to a firm by the tax or a payment to a firm by the government when a unit of a good government when a unit of a good is exportedis exported

- Attempts to increase the flow of trade - Attempts to increase the flow of trade of a countryof a country

NONTARIFF BARRIERSNONTARIFF BARRIERS

IMPORT QUOTASIMPORT QUOTAS

- Operates directly on the quantity of Operates directly on the quantity of the import instead of on the pricethe import instead of on the price

- Specifies that only a certain physical Specifies that only a certain physical amount of the good will be allowed amount of the good will be allowed into the country usually the time into the country usually the time periodperiod

““VOLUNTARY” EXPORT RESTRAINTSVOLUNTARY” EXPORT RESTRAINTS

- An importing country that has been An importing country that has been preaching the virtues of free trade may preaching the virtues of free trade may not want to impose an outright import not want to impose an outright import quotaquota

- Instead, a country may choose to Instead, a country may choose to negotiate an administrative agreement negotiate an administrative agreement with a foreign supplier whereby that with a foreign supplier whereby that supplier “voluntarily” agrees to refrain supplier “voluntarily” agrees to refrain from sending some exports to the from sending some exports to the importing countryimporting country

GOVERNMENT PROCUREMENT GOVERNMENT PROCUREMENT PROVISIONSPROVISIONS

-these provisions restrict the -these provisions restrict the purchasing of foreign products by purchasing of foreign products by home government agencieshome government agencies

DOMESTIC CONTENT PROVISIONSDOMESTIC CONTENT PROVISIONS

- Attempt to reserve some of the value - Attempt to reserve some of the value added and some of the sales of added and some of the sales of product components for domestic product components for domestic supplierssuppliers