The main theories of international trade in goods and services, and of international movements of capital and labor. Partial equilibrium and general equilibrium analysis of the major instruments of trade policy, their economic effects, and the issues created by their use in practice. The economics ...
International Trade Notes
Topic 1 – Trade in the Global Economy
Ø Information globalization – information would have taken months to reach other
countries – while nowadays you can get information immediately
Ø Labour mobility – takes about 24 hours to travel anywhere nowadays – while before
it would take 6-months by ship to come from Britain to NZ
Ø Trading goods and services – goods and services are produced and exchanged all
over the world
Ø Political globalization – EU have joined together to have agreements for overall
economic growth
Ø Culture and language globalization – mixing between different cultures through
media and transportation
Ø Capital mobility – everything is driven by money – globalization is driven by money –
so that you can make more profit – negotiate business deals with other countries in
order to expand your business
Ø We rely greatly on trade to help support ourselves – one German supermarket
removed all foreign products in order to show how much we depend on other
countries – and the only thing left on the shelf were a few beers
Ø NZ’s exports dairy, tourism, education services (foreign students study here and
generate a lot of value for NZ), WETA Digital (helped made Lord of the Rings and The
Hobbit)
Ø 1850’s is the first trade globalization – and trade crash in the early 1900’s due to the
World Wars – after the war’s things start to recover – and now 50-60% of total world
GDP is from trade
Ø GFC caused a huge collapse in world trade
Ø Technological progress has directly caused the trade globalization – the cost as
compared to 1930 of sea freight is 21%, air transport is 15% and calling costs have
become nearly 0%
Ø Second cause of globalization is trade liberalization – tariffs have dropped from 25%
in 1930s to under 5% now
Ø WTO has helped to reduce tariffs has countries have entered into multilateral trade
agreements – it has survived from more than 50 years
Ø There are also many regional trade agreements such as the EU, ASEAN, NAFTA
(USMCA new name)
Ø There are almost 300 preferential trade agreements in force – in 1950’s it was
almost 0 – most of these agreements have come from developing countries
Ø Global supply chain – many parts of the Boeing 787 come from all over the world
– wings come from Japan, many parts from Australia, Europe – it is finally
assembled in the headquarter of Boeing Company in the USA
Ø Final assembly only takes 3-days now and there is reduction in assembly costs
Ø Trade between LEDC’s before 1940’s was stable and very low – but now it accounts
for 30% of all trade share
Ø Cross-border claims is bank lending and exchanging securities
Ø FDI has increased by 470% since 1980 while imports and exports have increased by
55%
, Ø Capital goods move closely with FDI – 33% of USA exports was from capital goods to
arm’s length parties and 30% to related parties (subsidiaries)
Ø Many of the trades are occurring between the same company over all the world
Ø Globalization has gone digital – Global Internet Protocol – 1992 it was 100GB per day
– in 2022 it will be 150,000GB per second
Ø In 2005 16.8% of the world was using internet – now it is more than 50% of the
world watching internet
Ø This gives many opportunities for business – before you needed a big deal – you can
open your own online store by yourself – you can design apps and generate ad
revenue
Ø US advertising has largely changed in 2019 $123.1 billion was spent on internet
advertising
Ø Retail sales on e-commerce has increased from $1.336 billion to $4.135 billion
Ø E-commerce retail sales account for 15.5% of total global retail sales as compared to
2015 which was 7.4%
Ø Emerging economies are integrated more extensively into the world trading system,
due to the surge of global production network and supply-chain trade
Ø Trade protectionism is rising in many advanced economies such as Brexit and US-
Chine trade war
US-China Trade War
Ø NZ is a very open economy – if the biggest two partners fight it will have
consequences on us – we rely very heavily on trade
Ø Recently, the international trade has seen fast expansion – and there is a lot of
interdependence between many countries
Ø Peak Pegasus – cargo went from US with 70,000 tons of soy sauce worth 23 million
USD – it was meant to arrive on July 6 – the cargo sped up to 25km/h
Ø US imposed 25% import tariffs – effective midnight EDT which is July 6th – this would
mean that extra 6 million would need to be paid in tariffs – and the ship was late by
5 hours
Ø And they drifted around for 1-month in an attempt to avoid the tariff – but they
went back and paid their 6 million
Ø Tariff between US and China was 3.1% and 8.0% respectively – and by the end of
2019 it had become 21% for both countries
Ø In 2001 after WTO accession – both countries cut their tariffs – 20% of imports of
USA imports came from China – USA imports were 500-600 billion
Ø USA exports also raised exponentially – but exports were 180 billion – this put USA in
a deficit
Ø USA runs huge trade deficits with its top 5 trading partners – 50% of the trade deficit
is from China
Ø This war between China
and US is expected to last
a decade as seen by the
US-Japan trade war in
1980s
,Ø Trump’s posts on twitter say – that they have a 500 billion trade deficit and 300
billion loss on intellectual property
Ø There are too many restrictions in EU for USA products making it hard to export
Ø Trump is trying to come up with a new trade agreement with NAFTA
Ø To Trump having a deficit means that you are not engaging in fair trade – so he is
trying to renegotiate
Ø However, the numbers may be hard to comprehend – as when iPhone are imported
China may only get 2% but the full value of the iPhone is added to the imports to US
Ø If USA always has a trade deficit how are they able to finance
the bill
Ø USA mainly only runs a deficit in goods while they have
positive FDI and services trade – but this is not as advertised
by the media
Ø The current account deficit is much smaller than the trade
deficit
Ø US trade deficit overall is only 2.3% of overall GDP – USA has becoming trade
openness – and run deficits in current account since 1982
Ø When you export more than you import – you gain foreign currency – surplus means
you make money
Ø Your welfare depends on how much money you can spend – your lifetime welfare is
calculated by how much you spend not how much you have saved
Ø When you have a deficit – you can borrow, you can use your
accumulated wealth or run down their foreign assets
Ø When you invest by things such as building a factory overseas it
is a form of direct investment
Ø If you buy foreign stocks below 10% it is known as portfolio
investment
Ø If you lend money overseas it is other investment
Ø Central bank also invests overseas – they need to hold foreign reserves
Ø When foreigners purchase US resources it goes under credit and is considered an
export for the US
Ø When US purchases foreign resources, it is a debit as they are importing foreign
assets
Ø US invest way more than overseas than what foreigners invest in US – this positive
balance means that US foreign reserves increase
Ø CA records the int’l transactions of goods and services which are used for current
consumption & investment;
Ø FA records the int’l transactions of asset ownerships which generate income in the
future (interest, dividend, capital gains, etc.)
Ø Due the deficits it reduces the foreign reserves that the US has in order to fund the
deficit
Ø US companies invest more overseas than foreign companies do
into the US – so the companies have to take money out of the
US to invest therefore foreign reserves fall
Ø Overall the US has a FA surplus so the FR will increase
Ø So, the CA deficit is financed by the FA surplus – by definition
these two accounts must be equal
, Ø Capital account may refer to debt forgiveness to foreign country
Ø Sometimes you can’t have full information of what is being imported and exported –
so you put them under net errors and omissions
Ø Flow variable – is the amount of income flowing into your account – such as income
over of week
Ø Stock variable refers to how much income you have at a particular time
Ø US is a net debtor to the rest of the world
Ø Foreigners are investing in US so that raises your liabilities
Ø Eventhough US is a net debtor the services on the CA is positive so
foreigners are still paying US for its services
Ø This is because US does not solely borrow – they also own foreign assets
Ø US has been a net debtor since 1989 but its net income is always positive
Ø US borrows heavily from foreign countries but they also invest heavily
Ø US earns a huge amount from the direct investment they make overseas than they
have to pay to the foreigners who invest in US – which helps to fund the deficit
Ø US has a very high portfolio deficit because foreigners invest a lot in US companies to
gain dividends – however, this income is used for direct investment overseas – they
are working as a venture capitalist – invest in risky schemes to gain high return
Example: Suppose that the U.S. owes USD 100 billion to the rest of the world and pays the annual interest rate
of 1%, while the U.S. owns USD 80 billion foreign assets at an average annual return of 5%.
• 80 − 100 = −20: the U.S. is a net debtor to the rest of the world
• 80 × 5% − 100 × 1% = 4 − 1 = 3: the U.S. has a positive net int’l investment income
Ø You need to look at the gross numbers – not only the net numbers – US runs trade
deficit in goods by makes surplus in services
Ø Most cars are made in joint ventures with China (50-50) – and US exported 4 times
more cars to China than they imported
Ø US makes huge returns from its investments in other countries
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