Global Economics - Trade

Trade

Trade

Overview

• What is global trade

• Why do we trade

• Comparative vs Absolute Advantage

• How does it work

• Who are the actors

• Barriers to trade

• Trade Agreements

• Globalization

• US Outlook

• Global trade in the news

What is global trade

• International trade is the exchange of capital, goods, and services across international borders or territories.

• Each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations.

• Benefits of trade include lower prices and better products for consumers, improved political ties among nations, and efficiency gains for domestic producers.

Why Trade - Comparative Advantage

Source: “International Trade” lumen.org

Impacts of comparative advantage

• More total output and freedom of choice in consumption

• More specialization, and less freedom of choice in production

• Some sectors/regions within a country will lose out (but winners can compensate losers)

Why Trade – Absolute Advantage

6 rupiah3 pesosTotal resources

2 C4 rupiah1 pesoclothes

2 F2 rupiah2 pesosfish

Total outputIndonesiaPhilNO TRADE

6 rupiah3 pesosTotal resources

3 C3 pesosclothes

3 F6 rupiahfish

Total outputIndonesiaPhilTRADE

1 rupiah = 5 pesos

Why Trade – Absolute Advantage

1 rupiah = 5 pesos

33 pesosTotal resources

11 C11 pesoclothes

11 F22 pesosfish

Total outputIndonesiaPhilCapital Flow Scenario

6 rupiah3 pesosTotal resources

2 C4 rupiah1 pesoclothes

2 F2 rupiah2 pesosfish

Total outputIndonesiaPhilNO TRADE

Why Trade - Absolute Advantage

• There will be more fish and clothes

• What about employment in Indonesia?

• Can people flow across borders?

• Is efficient economic production all that matters?

• Can winners compensate losers?

• If trade is voluntary, how could this happen?

So how is trade managed then?

• Who are the actors?

• Nation states

• Individual companies?

• Non-Governmental Organizations?• World Trade Organization

• International Monetary Fund

• World Bank

How is it managed: Barriers to Trade• Policy trade barriers are barriers to trade

intentionally imposed by national governments.

• Tariffs: taxes imposed on imported goods that make them more expensive. The purpose of a tariff is to make domestic goods that compete against imported goods more competitive.

• Quotas: limit the amount of imported goods that can enter a country within a certain period of time. Again, the intent is to make it easier for domestic companies to compete.

• Product standards limit trade based on whether products or how they are made match certain qualifications.

• Ex. Labor standards

Trade Agreements

• Bilateral, Multilateral, Unilateral

• Bilateral and Multilateral involve 2 (bilateral) or more (multilateral) parties sharing common rules & regs

• Unilateral is more of a trade decision, where one country takes action against another/others without their consent

• Bilateral Ex: US-Australia FTA

• Multilateral Ex: U.S.-Mexico-Canada Agreement (Formerly NAFTA)

How is Trade Managed: Intergovernmental Agencies• World Trade Organization

• “The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments”

Wave of Globalization Post WWII

What is Globalization?• The integration of all national economies into

one global market, with one set of rules & a focus on reduced trade barriers

• Global market takes precedence over national autonomy

• Supporting institutions are IMF, World Bank, World Trade Organization (WTO), etc.

• Does this best describe the system we have now?

• Is it new?

Instances of past “Globalization”

• Roman conquest

• Voyages of “discovery”

• End of Napoleonic Wars

• Silk Road Creation

Click to edit Master title style

Exports

GDP

Growth 1950-2007

• World Trade 25X

• World Output 8X

• Primary Driver?

• Reduction of Trade Barriers

• What effects here at home?

Manufacturing’s Share of the Economy Has Shrunk Dramatically

Manufacturing as Percent of Gross Domestic Product,

For Michigan and for the United States, 1963-2007

0

10

20

30

40

50

60

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

Year

Pe

rce

nt

Michigan

United States

Other potential pitfalls?

• Incentives to “Race to the Bottom”?

• Environmental Standards

• Human rights

• Currency devaluation?

What does the U.S. interaction with world markets look like?

Which of the following is true about the US and its international trade role?

a. The world’s largest exporter in absolute terms

b. A relatively “closed” economy (X/GDP low)

c. Its largest trading partner is China

d. Imports more gasoline than it exports

e. None of the above

U.S. Trade Magnitude

Merchandise Trade $15.9 Trillion

Services $ 4.8 Trillion

WORLD EXPORTS – 2016 MERCHANDISE

1) CHINA $ 2.10 Trillion

2) U.S. $ 1.46 Trillion

3) GERMANY $ 1.34 Trillion

4) JAPAN $ 0.65 Trillion

5) NETHERLANDS $ 0.57 Trillion

Openness

• Exports/GDP

THAILAND 69%

GERMANY 46%

KOREA 42%

WORLD AVERAGE 29%

CHINA 28%

JAPAN 16%

UNITED STATES 12%

AFGHANISTAN 7%

Participation in free trade?

• The U.S. has free trade agreements in place with 20 countries.

•Australia

•Bahrain

•Canada

•Chile

•Colombia

•Costa Rica

•Dominican Republic

•El Salvador

•Guatemala

•Honduras

•Israel

•Jordan

•Korea

•Mexico

•Morocco

•Nicaragua

•Oman

•Panama

•Peru

•Singapore

US Trading PartnersRank Country Exports Imports Total Trade

Percent of Total

Trade

1 China 111.2 493.5 604.6 15.6%

2 Canada 276.4 294.7 571.2 14.8%

3 Mexico 245.6 319.4 565.0 14.6%

4 Japan 68.2 130.2 198.5 5.1%

5 Germany 53.3 115.6 168.9 4.4%

6 Korea, South 50.7 67.8 118.6 3.1%

7 United Kingdom 60.7 55.5 116.2 3.0%

8 France 33.4 48.1 81.5 2.1%

9 India 29.8 50.5 80.2 2.1%

10 Italy 21.3 49.8 71.1 1.8%

11 Taiwan 27.2 41.6 68.8 1.8%

12 Netherlands 45.2 22.1 67.3 1.7%

13 Brazil 36.3 28.7 65.0 1.7%

14 Ireland 10.0 52.9 62.9 1.6%

15 Switzerland 21.0 37.7 58.7 1.5%

What Goods Are Traded?

GROSS EXPORTS ($ Millions)

• Passenger Cars $ 54,000

• Gasoline $ 45,000

• Fuel Oil $ 36,000

Gross Exports and Net Exports

• GROSS EXPORTS OF GASOLINE $45 Bill.

• e.g. to Latin America

• - GROSS IMPORTS OF GASOLINE - $31 Bill.

• e.g from Europe/Middle East

• NET EXPORTS + $ 14

United States Net Exports

NET EXPORTS (X-M) ($ Millions)

• AIRCRAFT $ 45,000

• SOYBEANS $ 20,000

• CHEMICALS $ 18,000

• FUEL OIL $ 14,000

• GASOLINE $ 14,000

United States Net Imports

NET Imports (X-M) ($ Millions)

• CRUDE OIL - $ 126,000

• PASSENGER CARS - $ 112,000

• CELL PHONES - $ 71,000

What Goods?

• UNITED STATES

• EXPORTS – BOTH MANUFACTURED AND PRIMARY

• IMPORTS – BOTH MANUFACTURED AND PRIMARY

• JAPAN

• EXPORTS – MANUFACTURED

• IMPORTS - PRIMARY PRODUCTS

• CANADA

• EXPORTS – PRIMARY PRODUCTS

• IMPORTS – MANUFACTURED PRODUCTS

Which of the following is true about the US and its international trade role?

a. The world’s largest exporter in absolute terms

b. A relatively “closed” economy (X/GDP low)

c. Its largest trading partner is China

d. Imports more gasoline than it exports

e. None of the above

Trade in the news…

• US-China trade war: UN warns of 'massive' impact of tariff hike

• https://www.bbc.com/news/business-47126114

• Trump’s ‘Historic’ Trade Deal: How Different Is It From NAFTA?

• https://www.bloomberg.com/graphics/2018-nafta-vs-usmca/?srnd=politics-vp

Summary

• Background to trade

• Globalization

• Comparative/absolute advantage

• Trade barriers

• Intergovernmental groups

• U.S. status quo

• Framework for discussing trade

• Who are the actors/stakeholders?

• Is there comparative/absolute advantage involved?

• What barriers to trade are involved?• Are they justified?

Questions?