International Trade. Cheng Ming 程铭 School of Economics, Shanghai University [email protected] Introduction. Importance of foreign trade -- one of the backbones of the growth of the economy -- ties or linkages with the world -- important political means
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-- one of the backbones of the growth of the economy
-- ties or linkages with the world
-- important political means
-- SITC (Standard International Trade Classification)
-- HS (Harmonized System)
a. Net (commodity) terms of trade
N = Px/Pm χ 100
b. Income terms of trade
I = Px/Pm χ Qx
c. Single factor terms of trade
Ｓ＝Ｐx/Ｐm χ Ｚx
d. Double factor terms of trade
D = Px/Pm χ Zx/Zm χ 100
----The ratio of export price index/import price index
--- Improvement and worsening of the terms of trade
--- do not mix up with the concept of trade terms
---- Classification of terms of trade
An inherent inconsistency in the Mercantilism
Two basic reasons for International Trade
Two Goods – Wine & Cheese
One Factor – Unit labor requirement
aLW – unit labor requirement in wine
aLc – unit labor requirement in cheese
L – total labor supply
Slop: opportunity cost of cheese in terms of wine
Production Possibility Frontier
We assume: Home country is less productive than
Foreign in Wine, but more productive in Cheese
aLC/aLW < a*LC/a*LW
Or, equivalently, that
aLC/a*LC < aLW/ a*LW
Therefore, Home country has comparative advantage
-- to think of trade as an indirect method of production, i.e. Home can produce wine directly and trade with Foreign for cheese (produce indirectly)
-- for an hour of labor, direct production 1/aLW wine, or 1/aLC cheese and be trade with wine
-- if (1/aLC)(PC/PW) > 1/aLW, or PC/PW > aLC/aLW
trade will be beneficial
Trade Expands Consumption Possibilities
of wine, Qw
of wine, Qw
of cheese, Qc
of cheese, Qc
Unit Labor Requirements
Home aLC = 1hr per pound aLW = 2hr per gallon
Foreign a*LC = 6 hr a*LW = 3hr
Myth 1: Free trade is beneficial only if your country is strong enough to stand up to foreign competition.
Myth 2: Foreign competition is unfair and hurts other
countries when it is based on low wages.
Myth 3: Trade exploits a country and makes it worse off if its workers receive much lower wages than workers in othernations.
aL1/a*L1< aL2/a*L2 < aL3/a*L3 < …< aLN/a*LN
waLi < w*a*Li, and it can be rearranged to yield
a*Li/aLi > w/w*
Good Home Unit Labor Foreign Unit Labor Productivity
Requirements(aLi) Requirements(a*Li) Advantage(a*Li/aLi)
Apples 1 10 10
Bananas 5 40 8
Caviar 3 12 4
Dates 6 12 2
Enchiladas 12 9 0.75
There are three reasons why specialization in the real international economy is not the extreme:
Specific Factors and Income Distribution
-- an economy produce two goods: manufactures and
-- three factors: labor(L), capital(K), and land(T)
-- labor is the Mobil factor, while K and T are specificfactors for manufactures and food, respectively
-- so, QM = Q M(K,LM)
QF = QF(T,LF)
LM + LF = L
The Production Function for Manufactures
The more labor input, the larger the output.
Because of the
the successive input will have less output.
Reflected by a flatter
of labor, MPLM
The marginal productof labor equal to theslop of the productionfunction.
Output of food, QF, (increasing )
In food, LF
In manufacturers, LM
= - MPLF/MPLM
must be tangent to a line whose
slop is minus the price of
manufactures divided by
that of food.
PF Increase 10%
Labor used in
Shift in labor
Labor used in
Amount of labor
shifted from food
--- the real wage in terms of food rises, squeezing their income, and
--- the rise in manufactures prices reduces the purchasing power of any given income.
Of manufactures, PM/PF
DM = QM, DF = QF
PM хDM + PF хDF = PM хQM + PF хQF, or
DF – QF = (PM/PF) х(QM – DM)
Consumption of food, DF
Output of food, QF
Point 1 represents the economy’s
Production. The economy’s con-
sumption must lie along a line that
Passes through point 1 and has a
Slope equal to minus the relative
Price of manufacturers.
(slope = - PM/PF)
Consumption of food, DF
Output of food, QF
Before trade, economy’s pro-
duction and consumption were at Point 2 on its production possibilities frontier (PP). After trade, The economy can consume at any point on its budet constraint in the colored region consists of feasible posttrade consumption choices with consumption of both goods higher than at the pretrade point 2.
(slope = - PM/PF)
In spite of the real importance of income distribution, most economists remain strongly in favor of more or less free trade, reasons are:
a. Income distribution effects are not specific to international trade.
b. It is always better to allow free trade and compensate those who are hurted by trade than to prohibit it.
1. A model of Two-factor Economy
Unit land input aTF,
that produce oneunit
A farmer can
Produce a unit of
Food with less land
If he or she uses more
Labor,and vice versa.
Unit land input aLF,in hours
-- factor prices: w/r (wage rate per hour of labor/ cost of one unit of land)
在每个部门，生产中所使用的土地与劳动的比例取决于劳动与土地的相对价格，即w/r。图中的FF曲线表示在粮食生产中的土地-劳动比的选择，CC曲线则表示在棉布生产中的土地-劳动比率。对于任何一个给定的工资-租金比，粮食生产会使用较高的土地-劳动比率。在这种情况下，我们称粮食生产为土地密集型(land intensive)，棉布生产为劳动密集型(labor intensive).
Relative price of Cloth, PC/PF
给定棉布的相对价格,工资与地租的比例一定等于(w/r)1. 对应于这一工资—地租比例,棉布和粮食生产中的土地与劳动比例分(TC/LC)1和(TF/LF)1. 如果棉布的相对价格上升(PC/PF)2, 工资—地租比就一定会上升到(w/r)2,从而造成两个部门生产中使用的土地– 劳动比例提高.
Price of cloth
Labor used in food production
Land used in food
Land used in clothproduction
Labor used in cloth production
Output of food,QF
Output of cloth, QC
-- known as the “Rybcznski effect” (罗布津斯基效应)
-- since Home is the labor-intensive economy, Home tends to produce a higher ratio of cloth to food.
-- When Home and Foreign trade, their relative prices converge.
-- Since Home is abundant in labor, cloth production uses a higher ratio of labor to land in its production than food, since cloth is labor-intensive product, Home will export cloth and import food.
of cloth, PC/PF
of cloth, QC+QC*
-- we assume countries produce both goods;
-- countries have the same technologies;
-- factor price equalization depends on the complete convergence of the prices of the goods which is not the fact.
-- the effects of shifts in world supply resulting from economic growth;
-- shifts in world demand resulting from foreign aid;
-- simultaneous shifts in supply and demand resulting from tariffs and export subsidies.
QF = V/PF – (PC/PF)QC
An economy whose
frontier is TT will
produce at Q, which
is on the highest
The isovalue lines become steeper when the relative price of cloth rises from VV1(PC/PF)1 to VV2(PC/PF)2. As a result , the economy produces more cloth and less food and the equilibrium output shifts form Q1 to Q2
The economy produces at point Q, where the production possibility frontier is tangent to the highest possible isovalue line. It consumes at point D, where that isovalue line is tangent to the highest possible indifference curve. The economy produces more cloth than it consumes and therefore export cloth; correspondingly, it consumes more food than it produces and therefore imports food.
The slop of the isovalue lines is equal to minus the relative price of cloth PC/PF, so when that relative pricerises all isovalue lines become steeper. In particular, the maximum-value line rotates from VV1 to VV2. Production shifts from Q1 to Q2, consumption shifts from D1 to D2.
effects of growth
results from the
fact that such growth
has a bias.
Growth biased toward cloth
Suppose Home has a growth strongly biased toward cloth, so the World as a whole the relative output of cloth to food will rise, resulting a decrease in the relative price of cloth. Export-biased growth tends to worsen a growing country’s terms of trade, to the benefit of the rest of the World.
Cloth –biased growth
If Home has a higher propensity to spend on cloth than Foreign, a transfer of income by Home to Foreign shifts the RD curve left from RD1 to RD2, reducing the equilibrium relative price of cloth.
An import tariff imposed by Home will both reduces the relative supply of cloth and increase the relative demand of cloth. As result, the relative price of cloth must rise. Home’s terms of trade will improve.
Of cloth, QC+QC*
1. Economies of scale and international trade:-- an overview
-- External/internal economies of scale,
-- Static /dynamic economies of scale
-- perfect competition: there are many buyers and sellers, none of whom represents a large of part of the market, so firms are price takers.
-- imperfect competition: only a few major producers in an industry, firms will view themselves as price setters.
-- in an industry, there are only a few major producers, and
-- each producer’s product is seen by consumers as strongly differentiated from those of rival firms.
Cost, C and
-- assumption of the model
Q = S× [1/n– b× (p –p)]
Where, Q is the sales volumes of the firm, S is the overall sales volumes of the industry, n is the number of firms, p and p stand for the price of the firm and the average price of the industry.
Cost C, and
Cost, C and
Trade in a World
exports – imports
I = 1 -
exports + imports
-- Specialized Suppliers
-- Labor Market Pooling
-- Knowledge Spillovers
As this model shows, external economies potentially give a strong role to historical accident in determine who produce what, and may allow established patterns of specialization to persist even they run counter to comparative advantage.
Price, Cost (per watch)
Quantity of Watches
Produced and demand
Price,Cost (per watch)
Clearly in this
worse off than
it would be in
the absence of
Quantity of watches
Produced and demanded
Of labor, MPL
Migration of labor
From Home to Foreign
Total world labor force
A country can trade current consumption for future consumption in the same way that it can produce more of one good by producing less of another.
-- differences of resources / transportation costs / government restrictions
-- it turns out to be more effective and profitable to carry out transactions within a firm rather than between firms, because:
a) technology transfer – difficult to determine the price
b) vertical integration – upstream and downstream often get into conflicts, these problems can be reduced or avoided through a single vertically integrated firm.
1. Purposes of Tariffs
(1) specific duty
(2) compound duty or mixed duty
(3) alternative duty: natural rubber
(4) sliding duty: cotton
(5) tariff quote rate: wheat, cotton, sugar, wool, fertilizer ,etc
(1) ad valorem duty
(1) import duty
since 2002, China has four different rates: Common rate, MFN rate, Agreement rate and Special rate
(2) export duty
Purposes: revenue, maintaining domestic production, ect.
Actual rate of protection – weighted average
-- without tariffs, the world
price is determined by
Home import demand
(MD) and Foreign export
A tariff raises the price in Home while reduces the price in Foreign. The volume traded declines.
When a country is small, a tariff it imposes cannot lower the foreign price of the good it imports. As a result, the price of the import rises and the quantity of imports demanded falls
S1 S2 D1 D2
Imports after tariff
Imports before tariff
The costs and
different groups can be represented as sums of the five areas a, b, c, d and e
S1 S2 D1 D2
= (a + b + c + d) – a – (c + e)
= b + d – e
Production distortion loss
Consumption and pro-
duction loss:b and d
Additional terms of
Consumer loss: a+b+c+d
Producer gain: a
Quota rents: c
5.14 6.32 8.45 9.26
2.13 million tons
-- no strict limit on imports, it allows firms to import as long as it buy more domestically, so the effective price of inputs of the firms is an average of the price of imported and domestically produced inputs. This differences of prices pass on to consumers.
A quota leads
to lower domestic output and a higher price than a tariff that yields the same level of imports.
-- a free trade would remove both production and consumption distortions and increases national welfare
-- economies of scale
-- providing entrepreneurs with an incentive to seek new ways to export or compete with imports, since free trade offers more opportunities for learning and innovation than are provided by a system of “managed” trade.
-- it reflects the fact that a political commitment to free trade may be a good idea in practice even though there may be better policies in principle.
1) The conventionally measured costs of deviating from free trade are large.
2) There are other benefits from free trade that add to the costs of protectionist policies.
3) Any attempt to pursue sophisticated deviations from free trade will be subverted by the political process.
-- a sufficiently small
Tariff the terms of trade
outweight the cost.
Optimal Prohibitive Tariff Rate
tariff,t0 Tariff, tp
-- the basic theoretical case for free trade rested on cost-benefit analysis using the concepts of consumer and producer surplus.
-- some economists argue that these concepts do not properly measure the benefits of producing a good.
-- since labor in a sector may be unemployed or underemployed, the existence of defects in the capital and labor market may prevent the transfer, the possibility of technological spillovers from industries – domestic market failure
Distortion from tariff a and b, however, the calculation overlooks an additional benefit that may make the tariff preferable to free trade. Since the increase in production yields a social benefit
S1 S2 D2 D1
-- the discussion so far is confined to the national warfare, when we look at the reality, there is always individual’s desire reflected in the objectives of the government.
-- in the following model we will assume the governments are trying to maximize political success rather than the abstract measurement of national welfare.
-- the so-called median voter.(中点选民)
选民被依照其偏好的关税税率的高低而排成一条直线。如果一个党派提出高关税A, 那么另一个党派就可能提出通过一个较低的关税税率B而赢得大部分选票。政治竞争迫使两个党派对提出接近于M的关税率， 其中M是中点选民所偏好的关税税率。
Preferred tariff rate
- there is a problem of collective action: while it is in the interests of the group as a whole to press for favorable policies, it is not in any individual’s interests to do so.
- politicians may win the elections partly because they advocate popular policies – need money. So the relevant policies favoring the group that offering sufficient financial contribution will be put forward. Some people therefore envision the trade policy as a sort of auction – in which interest groups “buy” policies.
The Advantages of Negotiation
Intentional Trade Agreements: A Brief History
1. Trade Policy in Developing Countries
-- The Infant Industry Argument
Pitfalls of the Infant Industry Arguments
Justifications for Infant Industry Protection: -- two reasons why infant industry should be protected:
a. Imperfect capital market（市场失灵）: infant industry in developing countries does not have a set of financial institutions, through protection, it allows more rapid growth – as a second best policy
b. The problem of appropriability（无偿占用问题） – the idea is that firms in new industry generate social benefits for which they are not compensated.
As a strategy of promoting manufactures, the import-substituting industrialization has worked. The problem is :has the strategy promoted the growth of economic development?
Preferential Trade Arrangement
Free Trade Area
-- signed on the 23 Oct. 2008, and came into effect on the 1 Jan. 2009.
-- was singed on 8 Apr. 2010, and came into effect on the 1 Aug. 2011.
-- was signed on the 28 Apr. 2009, and came into effect on the 1 Mar. 2010.
Gulf Cooperation Council (GCC), Australia, Norway, Iceland, and Southern African Customs Union (SACU).
-- China India Regional Trade Arrangement Joint Feasibility Study
-- China Korea FTA Joint Feasibility Study
-- China Japan Korea Joint Feasibility Study
-- China Switzerland FTA Joint Study
-- Asian Pacific Trade Arrangement
Trade Creation > Trade Diversion ?
WTO rules ensure that free trade agreement does not result in trade diversion.’
How about Non-tariff barriers?
-- Market access
-- lower costs of doing business
-- firms within the blocs facing more competition
-- firms outside the blocs facing long-term improvements of the firms within the blocs
-- difficult to enter into the trading blocs
-- influence the corporate strategies, such as mergers/acquisitions
Asian Pacific Economic Cooperation （APEC）
13.2001 Shanghai, ChinaNineth “New Century New challenge” – Cooperation, participation, promotion and common prosperity
14.2002 Los Cabos, Mexico Tenth
15.2003 Bangkok, Thailand Eleventh
16.2004 Santiago, Chile Twelfth
17.2005 Busan, Korea Thirteen
18.2006 Hanoi, Vietnam Fourteenth “Hanoi Plan of Action” – Supporting Doha Round, achieving the target of Bogor meeting, FTA, economic and technological cooperation, anti-terrorism, energy, anti corruption, etc.
19.2007 Melbourne, Australia Fifteenth -- Climate change, regional economic cooperation, supporting Doha Round, liberalization of investment, APEC reform and new members.
20.2008 Lima de Chile : World economic and financial situation, food safety, energy safety, corporate social responsibility, climate change, disaster prevention and reduction. (16th)
21.2009 Singapore: regional food safety challenge, health system cooperation, prevention and controlling of worldwide new infectious diseases. (17th)
22.2010 Yokohama, Japan “Yokohama Vision”: promoting Free Trade Area of Asia Pacific (FTAAP), break down barriers of trade ,investment and logistics, food safety, disaster prevention, countering terrorist forces. (18th)
23.2011 Hawaii, USA : level of tariffs of all green products below 5% by 2015, avoiding any preventing measures of the transferring of IPs, and reduction of energy consumption by 45% by 2035, reduction of non tariff barriers of green products.(19th)
24. 2012 Vladivostok (符拉迪沃斯托克), Russia :Theme: integration and development, innovation and promote prosperity. (20th)
25. 2013 Bali, Indonisia: The APEC informal leadership meeting theme is “Resilient Asia-Pacific, Engine of Global Growth.”, focuses on achieving the Bogor goals, sustainable and equitable growth, Asia Pacific interoperability issues. (21st)
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From 1947 to 1994, eight rounds：
(1) from Apr. to Oct. 1947, Geneva, 23 members.
(2) from Apr. to Oct. 1949, Anthy (昂西), France,33 members.
(3) Sep.1950 to Apr. 1951, Torquay (托基), UK, 39 members.
(4) Jan. to May 1956, Geneva, 28 members.
(5) Sep. 1960 to July 1961, Geneva （Dillion Round），45members.
(6) May 1964 to June 1967, Geneva （Kennedy Round) , 54members,covering antidumping issues.
(7) Sep.1973 to Apr. 1979, Tokyo ,（ TokyoRound）, 99 members, covering NTBS.
Under the initiative of the USA and EU, the Uruguay
Round was finally wrapped up on the 15,Nov. 1993.
Representatives from 125 members signed the final act in Marrakech, Morocco.
(1) Facilitating the implementation, administration and operation; furthering the objectives
(2) Providing a forum for negotiations among members and a framework for the implementation of the results of such negotiation.
(3) Administering the DSU (Disputes Settlement Understanding).
(4) Administering the TPRM (Trade Policy Review Mechanism).
(5) Cooperating with the IMF and IBRD and its affiliated agencies, to achieve greater coherence in global economic policy-making.
(1) Wider range of administration.
(2) a legal personality, the so-called “UN of economics；
(3) the improvement of the mechanism of dispute settlement.
(4) establishment of the trade policy review mechanism.
(5) furthering the cooperation with IMF and IBRD.
(1) Non-discrimination – MFN and National Treatment
(2) Elimination of quantitative Restrictions (Trade liberalization )
(4) Market accession
(5) Justice, fairness in dealing with trade disputes
(6) Preferential treatment towards developing and Least Developing Countries.
Marrakesh Agreement Establishing WTO
Annex 1 A. Multilateral Agreements on Trade in Goods
B. General Agreement on Trade in Services (GATS)
C. Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs)
Annex 2 Understanding on Rules and Procedures Governing the Settlement of Disputes
Annex 3. Trade Policy Review Mechanism
Annex 4. Plurilateral Trade Agreements
-- Agreement on Trade in Civil Aircraft
-- Agreement on Government Procurement
-- International Dairy Agreement *
-- International Bovine Meat Agreement *
-- China is the initial contracting party and participated in the first round of negotiation.
-- On the 10thJuly,1986 , China applied for the resume of the status in GATT.
-- Basic principles：(1) resume of the status；(2) the status of developing country. (3) reduction of the tariffs as a basis to undertake the obligations of GATT.(4) acquiring unconditional MFN treatment. (5) eliminating discriminative quantitative restrictions.
-- The establishment of WTO on Jan.1,1995
-- On Nov. 15, 1999, bilateral agreement on the accession of China to WTO was signed between China and The States in Beijing.
-- On Nov.11,2001, China was accepted by WTO on The Doha Meeting, as the 143 member of WTO.