Trade and domestic policies in an open economic setting Introduction

1. Trade and domestic policies in an open economic settingIntroduction Slides for lessons. Course in Trade and Domestic Policies in an Open Economic SetttingProf. Jose-Maria Garcia-Alvarez-Coque

2. Why this subject may be useful? No country is self-sufficient in everything. All measures have costs and distributive effects. Endless debate between “globaphiles” and “globaphobes”. National policies have international impacts. Is a common regulation needed? Regional or multilateral strategies?

3. How measuring international trade and prices? • What are the main trends in world agricultural trade? • How globalisation of agricultural markets is arranged at international level? Why international rules are need? • What are the main arguments for trade liberalisation? • What are the factors explaining why a country is an exporter or an importer? • What is the impact of trade measures on consumers, producers, State and general efficiency? • What are the political factors explaining why do governments do what they do? • What is the international impact of domestic policies? • How trade distortions can be measured? • Why agricultural trade is from being free in current days? Main questions

4. Trade and market concepts

5. Main questions: The first: How measuring international trade?: Let’s consider the international prices. They represent what the commodity can earn as an export or what it costs to the economy as an import. (If Syria goes to the world market, what price?). Does a world market exists? Commodity prices? Unit values? Seasonality and short-term variations.

6. The second question How using trade data? Two extremes: data are too scarce or too abundant. Please, use your common sense. If you have a theory, use the data needed to test such theory (sounds simple, but it is an “art” and requires some practice, but there are many more difficult things in life).

7. Border price: calculation problems Choosing the appropriate border price: FOB (free on board), CIF (Cost, insurance and freight) Average prices? Choosing the exchange rate. Small country assumption: price taker?

8. Is Syria a small country?

9. A couple of trade concepts:Terms of Trade Average export price / Average import price It is an indicator of relative profitability of exports against imports. So, it might allow to see the relative performance of Syria against other countries. Take care that the average export price depends on diversification of exports and concentration on low value or high value products. Terms of trade can be applied to other types of transaction: eg. inter-sectoral terms of trade.

10. Mediterranean countries. Terms of trade Source: FEMISE (2002)

11. A couple of trade concepts:Parity prices How estimating international prices where transport and handling costs appear? Import parity price = Price of a major exporter + transport and handling costs from that market. Export parity price = Price of a major market - transport and handling costs to that market. Thorugh parity prices you see a “net” international price adjusted by transport and handling costs.

12. Parity prices: Example Assume that international price (estimated at one representative market is about 100 US$/100 Kg). Assume that transport and handling costs are 50 US$/100 Kg. Calculate import and export parity prices. IPP = 150; EPP = 50. Trade can only hapen when domestic prices are outside the interval (50, 150).

13. Trends in world agricultural trade

14. 1. Declining importance of agricultural trade Source: WTO

15. 2. Trade mainly takes place between developed countries World agricultural trade is dominated by intra-zone trade 19 per cent of world agricultural trade is among NAFTA partners. 41 per cent is among EU Member States.

16. Major agricultural exporters Source: WTO

17. 3. Declining trend in real agricultural prices (with sharp variations) Real agricultural price indices (1980 = 100) Source: WTO

18. 4. Trade is increasingly dominated by TNCs Wal-Mart General Motors and Ford have a bigger turnover than Africa’s entire combined GDP. 500 corporations control over 70 percent of world (agricultural + industrial) trade. A large proportion of international exchange by transnational companies takes place inside a given corporation (or between branches of this corporation). TNCs: Increasingly important in agricultural trade. Question: TNCs operating in Syria?

19. 5. Developing countries evolving as food importers.

20. 6. Declining share of developing countries in the export market

21. 7. Growing importance of high-value products Processed and Non traditional exports. Emerging actors: a challenge for the Mediterranean region?

22. 8. Poverty keeps significant People earning less than 1 dollar per day

23. 9. Rural population keeps important

24. International trade and Economic Globalisation (I)

25. About globalisation It is not so new. It has evident advantages and disadvantages: Engine for wealth and prosperity. But, financial volatility and social effects.

26. Some macro developments 1870 - 1914: rapid growth of global economy. After WW1 volatility, inflation and recessions. During the 1940s, the Bretton Woods institutions are created: IMF: financing problems of countries with negative balance of payments. World Bank: financing modernisation, restructuring and development. Between 1940s and 1970s: “a golden age of capitalism”. Oil price shocks in 1970s, debt crisis for developing countries in the 1980s. During 1990s, some economic growth but financial instability.

27. The GATT and the WTO The GATT is signed in 1947. General Agreement on Tariffs and Trade. The GATT was an agreement, not an organisation. The organisation is the WTO, but it was not created until 1995, until a long process of negotiations called Uruguay Round.

28. Is the GATT looking for trade liberalisation? Some GATT aspects: The Most Favoured Nation (MFN). National Treatment. Tariffication. Prohibition of quantitative restrictions. Antidumping and safeguards.

29. Agriculture and the GATT The Agricultural “Waiver” in the 1950s. The Uruguay Round starts: 15 negotiating chapters, including agriculture. After Uruguay Round there are imperfect rules for agriculture, but at least there are rules Is the bottle half full or half empty? Agreement of Agriculture, Article 20: continuation of the reform process. Current issues: Non-trade concerns. WTO scope The “double standards” issue for developing countries

30. International trade and Economic Globalisation (II)Regional vs multilateral choices

31. Regional integration and Art. XXIV Regional agreements: contradicting MFN? GATT Article XXIV allows for an exception. Tariffs to be abolished in “substantially” all sectors in countries involved. This has open the door to “free interpretation”.

32. Two types of agreements Customs Unions. Members set up common external tariffs. Free Trade Areas. Members do not charge tariffs on each others’ products but they set their own tariffs against outside world. It needs Rules of Origin. Examples: AFTA, NAFTA, Mercosur, EU, Association Agreements…………….. There are deeper steps of integration, like the European Monetary Union……...

34. Which stategy? There are still some reasons to join a regional agreement: Lowering transaction costs of negotiations. Harmonisation of standards. Global public goods: environment, human rights, poverty alleviation, peace……. Anchoring reforms. But, who takes the leadership?

35. North-South integration It is now recommended as a boost for economic modernisation. But, there is the risk of a vertical relation between the “hub” and the “spokes”. South-South integration helps to break the radial “hub and spoke” system.

36. Status of agreements with the EU

37. Spain 558558 Portugal 105054 Total GDP (2000)million US $ Luxemburg 18892 Egypt 98725 Algeria 53306 Morocco 33345 Tunisia 19462 Syria 16984 Lebanon 16488 Cyprus 8698 Jordan 8281 Malta 3565 0 100000 200000 300000 400000 500000 600000

38. International trade theory (I)

39. Name one proposition in Economics which is both true and non-trivial. Samuelson’s answer: “the comparative advantage”. “That is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them”.

40. Comparative advantages Ricardo’s theory. An intuitive explanation. Absolute advantage. Countries A and B. What if country A has absolute advantage in everything? Comparative advantage must not be confused with absolute advantage.

41. A numerical example • A is better in everything but it is relatively more productive at making cloth. • Opportunity costs of cloth in country A (1/2) are lower than in country B (6/3). Country A has comparative advantage in producing cloth.

42. Is it right that both countries specialise and trade? Assume that at the international market: (price of cloth/price of food) = 1. Country A: With 1 hour work gets 1/2 units of home food, but with 1 hour work in cloth Country A gets 1 unit of foreign food. Country B: With 1 hour work gets 1/6 units of home cloth, but with 1 hour work in food Country B gets 1/3 units of foreign cloth.

43. Foreign trade expands consumption possibilities • Production possibilities • L = 1 Qc + 2 Qf • (line PF) • Without trade consumption possibilities are constrained by PF. • With trade, consumption possibilities expand to TF

44. Right statements? “Free trade is only beneficial if your country has a higher productivity”. “What can we do if cannot be more efficient than anyone else?” “Trade exploits a country where workers receive lower wages”.

45. The Hecksher-Ohlin model(factor-proportions theory) Ricardo model only looks at differences in labour productivity. Two basic concepts: Factor intensities. Abundant resources. H-O result: Countries tend to export goods that are intensive in the factors that are abundantly supplied in those countries.

46. Implications of the H-O model Factor price equalisation. With trade international prices converge. If country A exports cloth because it is labour-intensive and labour is abundant (cheap), trade will increase relative price of labour in coutry A. If country B exports food because it is land-intensive and land is abundant (cheap), trade will increase relative price of land in country B.

47. And... Biased specialisation. An increase in the supply of one factor expands production possibilities but in favour of the output of the good intensive in that factor. What about Syria. Which factor has increased its supply? What would happen if this supply suddenly goes down?

48. International trade theory (II)

49. Economies of scale Many industries are characterised by increasing returns or economies of scale. Economies of scale may be: Internal to the firm. External to the firm but internal to the industry. Economies of scale can be given by history or accident.

50. Imperfect competition Economies of scale usually lead to imperfect competition. A case of imperfect competition is dumping. A case of dumping is reciprocal dumping: two monopolistic firms dump into each other’s home market.