Notas de lectura
International Trade
- Grado
- International Trade
- Institución
- Universidad De Navarra (UNAV)
Lecture notes of 30 pages for the course International Trade at UNAV (Apuntes de clase)
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Marta Mata España5º Derecho y RRII
Chapter 1: Introduction to International Trade
1. Why do countries trade?
They are different:
• In their natural resources and climate
• Tastes for the goods
• Cost of labour and scale of production
• Qualified labour and technology
They can reduce costs of production
• If every country tried to produce the whole range of products it consumes it would do it at a
very high cost. The best option is to…
• Specialise in the production of some goods and import the rest (import those goods for which
they have consumption needs and are poorly endowed of the necessary resources. Also import the
raw materials that you use to manufacture the goods before exporting them).
What influence trade:
• Proximity: The closer the countries, the higher the trade
• Population: The bigger population, the higher the trade
• Integration: The greater integration into an organisation, alliance, EU, NAFTA (-Canada, EU,
Mexico-)…, the higher the trade.
2. Export and Import
Export: Sell a country’s good to another country. Exporter: The seller
Import: Buy the good from another country. Importer: The buyer.
3. Determinants of bilateral trade
Positive relationship; proportional -the greater this factors, the higher trade-:
- Size of each country: Population and GDP
- Proximity
- Trade agreements
- Cultural and political affinity
Negative relationship; inversely proportional -the greater this factors, the lower trade-:
- Artificial barriers: Protectionism
- Natural barriers
4. Gravity model/Theory of international trade
It makes a parallelism between Newton gravity law and the volumen of trade between 2 countries
emphasising GDP + distance.
• Newton’s law of gravity: The gravitational attraction between 2 objects is proportional to the
product of their masses and diminishes with distance.
• International trade: The volume of trade between 2 countries is proportional to the product of their
GDPs and diminishes with distance. Positive relationship with the GDP, and negative with the
distance.
,COMMERCIAL HISTORY
1500-1820: Very little international trade (0.96%). The 2 main factors:
• Worldwide poverty
• Mercantilist thought
- They foster national production, trying to decrease imports
- Concerned with the process of nation building
- They though that only trade trade surplus was beneficial for the country, which is obtain
when exports (incomes of sales) are higher than imports (expenditures of the purchases). So the
government developed a regulation trade trying to reduce imports: tariffs, quota, these
protectionists trade policies implied the reduction of international trade.
- The surplus they gain from the little international trade surplus was used to import/buy
gold and silver -more spending: more domestic output and employment.
1820-1913: Increase in international trade (more than 3% annually).
• Technological advances, especially in communications and transports
• Classical economists: the ones that see the gains from liberalisation (it was better to liberate
trade, eliminating barriers to trade).
- Most relevant: David Ricardo
- Countries are benefited from trade regardless of trade surplus (even when there is trade
deficit) because they can consume more.
- Gains from trade is every country exports the goods in which it has a comparative
advantage (and import the rest of the goods).
1913-1950: Radical decrease in international trade (0.9%).
• Due to the World Wars and Great Depression, which lead to a rise of nationalism leading to
protectionism.
• US: They impose the Smoot-Hawley Tariff Act (1930) which foster domestic production in
order to reduce imports. Tariff of 60% on many categories of imports (60% calculated upon the
price, so that the price + that 60% is the final price paid by the consumer).
• The proliferation of tariffs, worsened the effects of the Great Depression as the countries
behaved with retaliation to the tariffs raised by other countries.
Tariff is a tax, while quota is a restriction on the amount. Tariff is easier to implement, because:
(1) quota requires a perfect account of units that are entering the country, (2) tariffs are social
accepted, as we think that are the foreigners the ones that are paying.
1950-now: Increase in international trade.
• Due to: End WWII + European Coal and Steel Community + GATT (today, WTO)
• Trade liberalisation: Many countries turned away from isolation
• Sustainable growth with oscillations (increases or decreases) due to the economic cycles (ex: oil
crises, crises of 2008…)
• The sum of exports and imports is now higher than 50% of global production
, PROTECTIONIST POLICIES
Tariff: Tax charged by a country’s government to foreign sellers.
Export subsidy: Payment (by the government) to a country’s entity who sells the good abroad, it
is trying to foster exports. A subsidy which is paid to the producers or sellers of a good to help
them export their products to another country
Import quota: Direct restriction on the maximum amount of the good that can be imported
(typically imposed by controlling the units per year).
Voluntary export restraint: A quota which is self-imposed by the exporter. Why? It is usually
imposed by the government of the exporter county to their domestic firms in order to avoid
retaliation by the importer country which could trigger a trade war. Most relevant case: Exports of
Japanese cars to the US during the Reagan administration.
Local content requirement: It is a requirement that a specific share of the final product’s value has
to be produced inside the country in order for the foreign firms to be allowed to sell in the
country. This makes sense when the production has different stages and each stage can be
produced in different countries.
Export credit subsidies: It is like an export subsidy but has the shape of a subsidised loan to the
exporter.
National procurement: Purchases by the public institutions or by regulated firms of national
goods.
Red-tape barriers: Conditions which may not be necessary and are imposed to create substantial
obstacles to trade. Ex: Health or security conditions or cross-borders procedures.
Tariff: Tax paid by foreigners who sell the good in the importer country (compete with national
firms). It is more socially accepted than other protectionists tools as it is directly paid by foreigners.
Effects: The level of imports is reduced and the price in the importer country increases. Benefits
producers and damages consumers. Consumers have little information about the increase in prices.
5. Process of trade liberalisation after WWII
Trade liberalisation
Initially this process took place by bilateral agreements but later on, multilateral trading
agreements took place because they realised that agreements between 2 countries affected others
(clients, providers…) and it was better to have all the countries involved. They do this through:
- Trade rounds (basically meetings between ministers in charge of trade)
- GATT (1948): Provisional agreement that ruled liberalisation process before they create the WTO
- WTO (1995)
Trade Rounds
1º Geneva Trade Round (1947): They signed the GATT agreement, and they agree on tariff
reduction and removals. Signed by 23 countries, entry into force in 1948. In the following rounds,
other countries were joining. At the very beginning they try to create the ITO to be in charge of this
rounds, but its creation was frustrated so the GATT was leaved as the only international instrument
governing the conduct of world trade.
2º Annecy Round (1949) + 3º Torquay Round (1950-51) + 4º Geneva Round II (1956): There
were more tariff removals on other categories of products, and new countries join.
5º Dillon round (1960-62): Common External Tariff for the countries that belong to the European
Economic Community; so that countries couldn’t charge the tariff they want to No Members, all of
them must have the same tariff. They do this in order to reduce/choose the countries with lower
tariffs.
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