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Chapter 1: Introduction to ITTL1. Trade fundamentals
International: the scope is our globe, which has continents (Africa, Latin America, Asia, North
America, Europe…), geopolitical situations, regions, unions (the European Union) and countries
Trade: you have and I have something which we don’t have in common, how can we trade with each
other? Like trading goods (before money was introduced), or buying products (with money), or
trading data, knowledge…
Logistics and the 7 R’s
Logistics
Logistics is the process of planning, implementing and controlling procedures for the efficient
and effective transportation and storage of goods including services and related information
from the point of origin to the point of consumption for the purpose of conforming to
customer requirement
It consists of flow of goods, money, information and reverse flow
Part of the larger supply chain management
Supply chain management
SCM is the management of a network of relationships within a firm and between
interdependent organisations and business units consisting of material suppliers, purchasing,
production facilities, logistics, finances, etc. and information from the original producer to
final consumer with the benefits of adding value, maximizing profitability through efficiencies
and achieving customer satisfaction.
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,Transport: has a role within trade & logistics:
How can I move something from A to B? what are the different possibilities, advantages and
disadvantages?
What is import & Export?
Domestic companies are companies within a region
Foreign companies are companies outside that region.
Export is shipping goods from domestic companies out of their region. Import is when
foreign companies ship something into another region.
Buying or selling can thus be importing or exporting.
Transport does not directly adds value to the raw material, assembly part or finished product, but it
makes it available where the customer wants to have it.
Transport is a derived demand: Demand for transport is dependent upon other needs (consumption
or production needs); dependent upon someone wishing to move freight from one point to another
Some organisations will support the growth of trade ( like the WTO), but trading means collaborating
or working together between countries and some issues might occur like:
- Duties or tariffs: taxes collected on goods that are imported and exported
- Protectionist tariffs: extra taxes to discourage import by making them more expensive
- Import & export controls: restrictions on certain products or products from certain countries
(live animals, quota, IP (Intellectual Property), politics)
- Embargo: prohibit trade to a country (Cuba, Iran, Iraq, Russia)
To ease the trading between countries we can work with Free Trade Zones: no duties are charged in
that particular zone e.g. a port or harbour. Some governments will organize a duty drawback: your
duties as a company will be refunded. On a higher level, free trade agreements can be signed
between countries or regions. You can work with a Custom broker to manage alI these complicated
rules and tariffs,: they are licensed to manage your imports and exports. These brokers figure out
how much you should pay while applying tariff classification with tariff schedules.
Why do countries trade?
There are two basic types of trade between countries:
The first in which the receiving country itself cannot produce the goods or provide the
services in question, or where they do not have enough.
The rational is quite logical. As long as the importing country can afford to buy products or services
they are able to acquire things which, otherwise they would have to do without.
The second, in which they have the capability of producing the goods or supplying the
services, but still import them.
The EU imports cars, coal, oil, clothing and many more products which it was well able to produce
domestically until it either transferred production abroad or ceased the production as local industries
became uncompetitive.
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,However, the reasons for importing products generally fall into three classifications:
- The imported goods may be cheaper than those produced domestically;
- A greater variety of goods is made available through imports;
- The imported goods may offer advantages like better quality or design, higher status (e.g.
Prestige labelling), technical features, etc.
The comparative advantage – David Ricardo
There is an economic benefit for the global economy for a nation, to specialize in producing those
goods for which it had relative advantage and exchanging them for other kind of products from
nations.
Example:
In Puerto Rico, one hour of labor can produce either ten bottles of wine or five pieces of cloth. In
France, one hour of labor can produce either 20 bottles of wine or 20 pieces of cloth. While France
has an absolute advantage in both the production of wine and cloth, Puerto Rico has the comparative
advantage in producing wine. This is because if Puerto Rico allocates more of its resources toward
wine production and less of its resources toward cloth product, it has a lower opportunity cost than
France. So it would have an advantage
The evolution of world trade
Merchandise trade grew by an average of 3.4% per annum from 1870 until the period of WW1.
Two WW alternated by the Depression and a world slump reduced the annual growth rate of
in International trade to less than 1%.
Then, the international institutions which were established in the post-1945 period began to
introduce some financial stability and impact which made it possible to have a 23 year period
of more growth averaging 7.9%.
Mid-seventies the first oil crisis occurred with a further steep increase till 2007, but the,
international banking crisis from 2008 has decreased trade globally.
After 10 years of growth the covid pandemic has decreased trade in 2020 and we are still
recovering.
Protectionism
The reaction of many governments to economic slump was to protect jobs at home by raising the
protection against imports (and in particular during periods of crisis)
The methods of protection:
1. Tariffs (like a tax/import dutie)
It is a tax or import duty levied on goods and services entering a country.
Tariffs can be fixed or % levies
They serve the twin purposes of generating revenue for governments and making it more
difficult for companies from other countries to do business in the protected market.
2. Non-tariff barriers
- Import Quotas
They provide restrictions to the total number or value of goods which may be imported into
the country during a specified period. Example: during the 1980S
o Chinese quotas on imported automobiles
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, - Voluntary export restraints
Agreed arrangements whereby an exporter agrees not to export more than a specific
amount of a good to the importing country.
o Such agreements are common for automobiles, electronics, steel and chemicals.
- Domestic subsidies
The government provides financial aid to domestic manufacturers which gives them an
advantage over external suppliers.
- Import deposits
It requires the importer to make a deposit with the Government for a fixed period. The effect
on cash flow is intended to discourage imports.
- Health & safety standards or technical specifications
This requires importers to meet stringent standards or to complete complicated and lengthy
formalities.
Example: The French ban on lamb imported from the UK during the 1990s
Regions in World Trade
4 basic models of trading block:
Free trade area: Members agree to reduce or abolish trade barriers (tariffs and quotas) between
themselves but keep those barriers against non-members. (ASEAN, NAFTA)
Customs union: agree to reduce or abolish trade barriers between themselves + agree to establish
mutual tariffs and quotas against outsiders.
Common Market: + reduce restrictions on the movement of people and finance + reducing barriers
on the sale of goods.
Economic Union (Eu): A common market which is taken further by agreeing to establish common
economic policies in areas such as taxation and interest rates. Even a common currency is described
as an economic union.
The 10 major regional trading blocs in the world economy
Trading blocs: A trade bloc is a type of intergovernmental agreement, where barriers to trade are
reduced or eliminated among the participating states. Trade blocs can be stand-alone agreements
between several states or part of a regional organization
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