Chapter 3 The World of International Trade

1. Chapter 3 The World of International Trade

2. Ancient Silk Road trade routes across Eurasia

3. Outline • International Trade • Environment (Agreements and Organizations) • A Framework for Trade Analysis • The SETP System • Market Identification • Impediments to Trade • Trade Intermediaries • Comparative and Competitive Advantage • New Theories of International Trade • Real Exchange Rates

4. International Trade The impetus for the existence and expansion of international trade is the same as that for any commercial transaction: value creation. International trade creates value for both producers and consumers reducing prices and increasing availability and variety for consumers increases the efficiency of resource allocation worldwide increases the supply for importable products International Trade increases demand for exportable products reduces production costs and lowers input costs raising prices and volumes Economies of Scale

5. International Trade • increase the risks of a firm’s operations • reduce the stability of a country’s economy Less expensive or higher-quality imported products • Changes in prices and demand in export markets • Changes in prices and supply in imported products • Changes in exchange rates Increased competition for domestic firms Increased openness to the international economic environment Disruption and restructing International trade leads to increased exposure for both firms and countries to the forces in the international economy, and disruption and restructing.

6. International Trade FDI: change trade flows and patterns International financial flows: foreign exchange availability and exchange rate movements impact on trade International Trade International technology transfer (capital goods): leads to trade in materials and semi-finished and financial products International trade is inextricably linked with FDI, international technology transfer and international finance.

7. International Trade Environment In the 1970, international trade was one of the major driving forces behind world economic expansion. The expansion in 1970-1980 was fostered by: falling tariff and nontariff barriers to trade in most countries; decreased transportation and communication costs; the export-oriented growth strategies of many countries. During the global recession in the early 1980s, world trade declined in real terms by a greater amount than did world GDP.

8. International Trade Environment Major political leaders may have significant implications for the the world trade environement. The Uruguay round of GATT negotiations resulted in the establishment of the WTO and some of the most basic changes to the GATT since it was implemented in 1947. The gains from the negotiation and implementation of trading agreements such as GATT, NAFTA, and FTAA(Free Trade Area of the Americas)can be great, resulting in some reductions in protection in manufacturing sector.

9. Group 20 (G20) The Group of Twenty (G20) is the premier forum for international cooperation on the most important issues of the global economic and financial agenda. It brings together finance ministers and central bank governors from 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States of America plus the European Union The 2013 G20 Leaders' Summit was held in St. Petersburg on September 5-6, 2013, which was the main G20 event of 2013.

10. Asia-Pacific Economic Cooperation (APEC) The APEC CEO Summit is the premier business event in the Asia-Pacific. In 2013, Indonesia, the Summit’s theme is ‘Towards Resilience and Growth: Reshaping Priorities for Global Economy’ , which will provide enriching discussion by policy makers, business leaders and innovative thinkers on securing inclusive sustainable growth and achieving the aim of shared development and common prosperity for all.

11. Largest countries by total international trade (In 2012)

12. Growth in volume of world merchandise trade and GDP, 2005-13(Annual % change)

13. Volume of world merchandise exports, 1990-2013a Indices, 1990=100

14. Merchandise exports and imports by region, 2011

15. Top traded commodities (exports) in 2012

16. Source: World Economic Outlook (WEO) data, IMF

17. Exports and imports of commercial services by region, 2011

18. A Framework for Trade Analysis 1. The Social, Technological, Economic and Political (STEP) system, and its effects on comparative and competitive advantage 2. Market Identification: Countries abroad as markets for exports and sources of imports 3. Impediments to Trade: Tariff and nontariff barriers to trade and government incentives to promote trade. 4. Trade Intermediaries: Linking producers and buyers through trade intermediaries

19. 1.The STEP system Each firm operates within the social, technological, economic, and political (STEP) environment of the country in which it produces. The STEP environment has a strong influence on the firm: cost, quality, range of products, domestic demand, technology, efficiency, cost and availability of natural resources and factor inputs. comparative advantage of the products STEP environment competitiveadvantageof the firm in the national market and abroad

20. Comparative and Competitive Advantage As with any form of voluntary exchange between independent, value-maximizing agents, international trade takes place when value is created for the participants in the transaction above the value they can receive through alternative uses of their resources. The goal of international trade operations is to increase the value of the firm; exports for exports’ sake (except in the short run to gain market share) are not the goal. How and why is value created when some products are exported and others imported?

21. Absolute Advantage

22. Comparative Advantage

23. 2. Market Identification Market Identification entails analysis of trends in demand arising from changes in population, income levels, and consumer preferences in potential export markets. If there is a demand for the firm's products in a market, the supply capabilities of domestic firms and other exporters worldwide to meet this demand at lower prices or higher quality must be assessed. If a firm has comparative and competitive advantages, the next step is to identify markets aboard:

24. 3. Impediments to Trade The third block of analysis: impediments to trade: • Government policies to restrict and to promote trade can have a decisive influence on: • Trade flows • The competitive position of firms in export markets • The availability and price of imports • The ability of firms to compete with imports • Governments can also facilitate exports directly by: • Concessional export financing • Export subsidies • Differential taxation of export earnings • Financing for export market development

25. 4. Trade Intermediaries Trade Intermediaries analyze the linkages of producers on one country to buyers in the export market. The product must be: Transported from the factory to the point of shipment (port or airport) Transported to export market Be received in the export market Clear customs Move through distribution channels to the point of sale Sold to the customer Be serviced after sale International channels of distribution are often long, multilayered, complex, difficult to analyze and understand, and expensive to access or to develop. Channel costs may represent three times the production cost of a product. If the last three factors are settled:

26. Conclusions of Theories of International Trade Trade enhances the welfare of both countries, but the distribution of these gains among participants within each country and among the countries is not uniform.

27. Conclusions of Theories of International Trade 1. Trade improves the relative welfare of the factors of production that are used intensively in the exported product. 2. If labor and capital are immobile among sectors, then the returns to the factors of production (labor and capital) in the exporting industry will improve relative to those in the importing sector. 3. The welfare of consumers of the export products will decline relative to consumers of imported products. 4. Countries will tend to export products that use their relatively inexpensive and abundant factors of production intensively. 5. Trade brings about an equalization of the returns to factors of production; that is, trade tends to equalize capital costs and wage rates among countries over time.

28. Examples to show the change of comparative advantage ◆Singapore's rapid economic development over the past 20 years has led to a substantial rise in real wages relative to those in most other countries. In response to this change in Singapore's comparative advantage in labor-intensive products, firms in the export-oriented, labor-intensive garment industry became less competitive on world markets. So some firms have changed their comparative advantage in the production of low-cost, low-quality, standardized garments to a comparative advantage in high-quality designer garments (based on Singapore's relatively low-wage skilled workers).

29. Outsourcing in China ◆Situation: China is slowly emerging as the world's No 1 outsourcing hub, China's current outsourcing market is growing at an estimated 30% every year, and many countries have relocated their headquarters to China to establish businesses. The market for outsourcing activities in China is expected to reach $44 billion (36 billion euros) by 2014 ◆New challenges:The general economic growth along with the surge in demand for local talent means that Chinese labor costs are also increasing and the comparative cost advantage is threatened by competitors in the Asian region. Another threat for the outsourcing industry stems from the technological development of fully automated production facilities that are prompting companies to move back sourcing activities to Europe and the United States.

30. ◆Solutions: First, Chinese suppliers of outsourcing in manufacturing as well as in services need to move beyond price as the dominant attraction for foreign trade. The Chinese industry is increasingly embracing the open innovation paradigm of the so-called knowledge economy, where R&D is of the essence. Second, suppliers of outsourcing can help their customers in other ways: as identifiers and developers of possibilities in the fast-growing Chinese market. Finally, leading Chinese suppliers of outsourcing services may consider following their customers out to other emerging economies in Vietnam, Malaysia or Thailand in their search for new sourcing opportunities and providing outsourcing services.

31. New Theories of International Trade: ▲Agglomeration of Interconnected Companies Exchange of ideas among personnel Building of support infrastructure ☆Some examples of industry Agglomeration in some countries: Food additives and furniture in Denmark; Cutlery and printing presses in Germany; Ceramic tiles, footwear, and wool fabrics in Italy; Air-conditioning machinery, musical instruments, and forklift trucks in Japan; Pianos, travel goods and wig in Korea; Ship repair in Singapore.

32. Among firms and supporting infrastructure in clusters, there are substantial economies of scale, positive spillover effects(extranalities), and interlinkages that promote both competition and cooperation. Agglomeration affect competition in three broad ways: by increasing the productivity of companies in the area; by driving the direction and pace of innovation; by stimulating the formation of new businesses, which expands and strengthens the cluster itself. "First-mover advantage" and the presence of industry agglomeration can be overcomed by new entrants with sufficient resources to bear the initial losses entry entails.

33. Samsung launches construction of $7b Xi'an high-tech factory ☆Construction of the first phase of Samsung's NAND flash plant in Xi'an, Shaanxi province, involving a total investment of $7 billion, kicked off on Sep 13, 2012. ☆The South Korean company's plant, the biggest ever overseas investment in western China, is located in Xi'an Hi-tech Industrial Development Zone, will produce nanometer chips, mainly used in smartphones and tablet PCs. ☆"The construction of the Samsung plant will greatly enhance the international influence and competitiveness of Shaanxi's information industry and lay a solid foundation to build a world-leading information industry cluster in the province." ☆Xi'an has more than 2,600 enterprises engaged in the IT industry and a number of world-famous IT enterprises, such as Applied Materials, Qualcomm, GE, Erisson, Micon, Walsin, Simmtech Electronics, NEC, ZTE and Huawei, have already entered the city's high-tech zone.

34. The Benefits of Trade ▲The overwhelming conclusion of all the theories of international trade is that trade creates value for all the participants. ▲In theory, governments can increase national walfare by protecting firms from trade competition while they are still struggling to gain sacle efficiency, undertake R&D, differentiate their products, and promote exports. ▲Management and goverments have focused their attentin on the "hot" industries on the cutting edge of technology when they have tried to identify the "winners of tomorrow" in export markets.

35. Real Exchange Rate ▲Trade flows are also influenced by: Real Exchange Rates Demand conditions over the business cycle An increase in a country's real exchange rate has many of the same effects as a reduction in its tariff rate. reduces export increases import Real exchanges rates may change due to: A gap between investment demand and domestic savings. Short-term government macroeconomic policy. Change in a country's terms of trade. Discovery of valuable natural resources.

36. Asian Real Exchange Rate against the US

39. Demand Demand conditions over the business cycles in the domestic market and in export markets, and source countries for imports influence international trade. If the domestic economy is expanding relative to the economies of other countries, exporters will tend to divert production to the domestic market. If the domestic demand is slack, producers will tend to try to push excess production onto export markets.