Chapter 1 Introduction to International Trade

8/12/2019 Chapter 1 Introduction to International Trade

1/40

Introduction to

International Trade


2/40

What is international trade?

Import and export activities carried out

by any nation with another nation; by

any company in one country with a

company in another country

The exchange of services or goods

between different national sovereigntiesor countries


3/40

Factors that can facilitate trade

between countries:

Government policies that promote

competition and encourage efficiency

Industries that are competitive

Labour force and workers who are able

to enter and leave occupations without

difficulties

An open society and economy.


4/40

Reasons for IT

Comparative advantages The tendency of a country to specialize

in the production and export of things

that it can produce best and relatively

cheaper that other countries of the world

Removing protective framework

Technology

Refers to the method of producing

goods and services that are efficient


5/40

Advantages

Enable country to obtain goods which arenot available locally and to export surplusgoods.

Increase standard of living and the

economics of the country concerned Competition

Increase productivity, efficiency and qualityof goods and services

Economies of scale because of the enlargemarkets

Closer political link between countries


6/40


7/40

Risks in International trade

Credit risk (exporter)

Can the buyer pay for the imported

goods

To reduce the risk the seller should carry

a status enquiry or getting a copy of the

audited account


8/40

Performance risk (importer)

The goods or services that are imported

do not meet the provisions laid down in

the contract Can be reduced making trade enquiry

on the supplier to ascertain whether the

supplier supplies goods of high quality


9/40

Documentary risk

A possibility that documents presented

by an exporter are forged

Bank is paying to the wrong person


10/40

Foreign exchange risk

The fluctuation in exchange rate

Can minimized it by entering into a

forward contract


11/40


12/40

Protections

Tariffs

Taxes and duties on imported goods

It will increase the price of the importedgoods

The demand for imported goods willdecreased and increase the supply of localgoods

Import quotas

Restriction on the quantity to be imported

Will reduce the quantity of imported goodsin the country


13/40

Subsidies

Granting of subsidies and financial

assistance to make the local goods cheaper

Local producers will have a cost advantage

over foreign producers

Currency depreciation

Imports will be more expensive

Will reduced the demand for imported goods


14/40

Non-tariff barrier

Various safety and performance requirement

on imported good

Procedures for importing goods

Exchange control regulation

Health and pollution standards

Labeling and packaging regulations


15/40

Trade Bloc


16/40

Trade bloc

AFTA

NAFTA EAEC


17/40

Trade Bloc

A trade bloc can be defined as a

preferential trade agreement (PTA)

between a subset of countries, designed tosignificantly reduce or remove trade barriers

within member countries.


18/40

When a trade bloc comprises

neighbouring or geographically close

countries, it is referred to as a regionaltrade (or integration) agreement.

It is sometimes also referred to as anatural trade bloc to underline that the

preferential trade is between countries

that have presumably low transport

costs or trade intensively with oneanother.


19/40

The two principal characteristics of a trade

bloc are that:

(1) it implies a reduction or elimination of

barriers to trade, and

(2) it applies only to the member countries of

the trade bloc, outside countries being

discriminated against in their trade relationswith trade bloc members.


20/40

AFTAASEAN FREE TRADE

AREA Trade bloc agreement by the Association of

Southeast Asian Nations that support local

manufacturing in all ASEAN countries.

Signed on 28 January 1992 in Singapore.

Originallywith 6 members

Now10 members

4 latecomersrequired to sign the AFTA

agreement in order to join ASEAN butgiven longer time frames to meet AFTAs

tariff reduction obligation.


21/40

ASEAN member countries

Originally (1992) Latecomers

Brunei Myanmar (1997)

Indonesia Cambodia (1999)

Malaysia Laos (1997)

Philippines Vietnam (1995)

Singapore

Thailand


22/40

AFTAASEAN FREE TRADE

AREA

Primary goals of AFTA:

1. Increase ASEANs competitive edge as

a production base in the world market

through the elimination, within ASEAN

of tariffs and non-tariff barriers

2. Attract more foreign direct investment toASEAN.


23/40

Primary mechanism

Common Effective Preferential Tariffs (CEPT)

AFTA does not apply a common external tariff onimported goods.

Each ASEAN member may impose tariffs on goods

entering from outside ASEAN based on its nationalschedules.

However, goods originating within ASEAN membersare to apply tariff rate of 0 -5%. (known as CEPT

scheme). Besides that, it also eliminate the quantitative

restrictions (import permit, quota) and other non-tariff barriers among ASEAN member countries.


24/40

Products under CEPT Scheme

ASEAN members have option of

excluding products from the CEPT in 3

cases:

1. Temporary exclusions;

2. Sensitive agricultural products;

3. General exceptions.


25/40

Products under CEPT Scheme

Temporary exclusions

Refer to products for which tariffs will

ultimately be lowered to 0-5% BUT which are

being protected temporarily by a delay intariff reductions.

Sensitive agricultural products Include commodities such as rice


26/40

General exceptions

Refer to products which an ASEAN memberdeems necessary for the protection ofnational security, public morals, theprotection of human, animal or plant life andhealth and protection of articles of artistic,historic or archaeological value.

Year 2010all member have agreed enact 0

tariff rate on all imports (for original 6members) and 2015 (for the 4 Latecomerscountries).


27/40


28/40

NAFTANORTH AMERICAN

FREE TRADE AGREEMENT

Implemented on 1stJanuary 1994.

Signed by the government of Canada,Mexico and United States

Creating a trilateral trade bloc in NorthAmerica.

The worlds largest free trade area interms of GDP.

As of January 2008all tariffs betweenthe 3 countries were eliminated.


29/40

Purposes of NAFTA

1. Eliminate barriers to trade and facilitate thecross- border movement of goods and services.

2. Promote conditions of fair competition

3. Increase investment opportunities

4. Provide protection and enforcement ofintellectual property rights.

5. Create procedures for the resolution of tradedisputes

6. Establish a framework for further trilateral,regional and multilateral cooperation to expandNAFTAs benefits.


30/40

Advantages of NAFTA

Benefit to Mexicopoverty rates and real

income rise (in the form of lower prices)

Benefit to Canadaimproves Canada

access for their goods & services to Mexicoand US.

Benefit to the exports activities of the 3

countriesUS agriculture exports to

Mexico and Canada increase and US farm

& food exports to Mexico also increase


31/40

Advantages of NAFTA

Positive impacts on imports activitiesForexample US import products from NAFTAcountries like fresh fruit, red meats, freshvegetables, wine and beer.

Eliminate trade barriersimmediate tariffeliminations applied to a broad range of

agriculture products. More than one half of USimports from Mexico and more than one third ofUS exports to Mexico.


32/40

Disadvantages

Rising level of inequalityUS and Mexico

Canada too dependent on US as Canadassource if economy

Canadian industries and companies arebecoming less competitiveincrease

employment in those profit companies butreduce those little small companies becauseUS overpower them.


33/40

Disadvantages

US jobs were lostLabor in Mexico is

cheaper so many manufacturing industries

moved part of their production there.

Unemployment rate is increasing in US.

Effect to Mexicos environmentbecause of

competition, Mexico agriculture businessused more fertilizers and other chemicals

that lead to pollution.


34/40

Disadvantages

Mexicos farmers were put out of

businessMexico lost 1.3 million farm

jobs.

NAFTA removed tariffscorn and othergrains were exported to Mexico below

cost.

Rural Mexican farmers could notcompeteMexicos reduce its subsidies

to farmers.


35/40


36/40

EAECEAST ASIA

ECONOMIC CAUCUS

Also known as East Asia EconomicsGroup (EAEG).

Regional free trade zone proposed in

1990 by ex-Prime Minister Tun Dr.Mahathir bin Mohamad.

EAEC was a reaction to ASEANsintegration into the Asia-Pacific

Economic Cooperation (APEC) EAEC was never put into action

officially.


37/40

EAECEAST ASIA

ECONOMIC CAUCUS

Recently, the ASEAN + 3 rounds might be

called the successor of EAEC.

In 2005, due to Japans support of the

agreement, ASEAN + 3 or APT agreed to

include Australia, New Zealand and India.

The countries that were


38/40

The countries that weresupposed to compose the

EAECThe 6 members of ASEAN Indonesia

Malaysia China

Philippines plus Japan

Singapore South Korea

Thailand

Brunei


39/40

Objectives of EAEC

To establish a regional trade

arrangement for the group

To establish a political balance against

the US and Japan in APEC

To establish an economic balance

against China and Japan in Asia

A counter to emerging economic blocs inthe west.


40/40

Documents

Chapter 1 Introduction to International Trade