SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK INTRODUCTION TO TRADE POLICY AND THE WTO MODULE World Trade Setting the Context or Why Trade? SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Mercantilists’ View of Trade According to the logic of Mercantilism (the accepted viewpoint in the 17th-18th centuries), the way for a nation to become rich was to export more than it imported The policy implication was that the government had to all in its power to stimulate the nation’s exports and to discourage and restrict imports Do you agree?? SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Value of World Trade • 2004- $ US 11 trillion – Merchandise exports- $US 8.9 trillion – Services exports- $US 2.1 trillion • 2006— – Merchandise exports $US 11.98 trillion – Services exports $US 2.7 trillion That is a very large amount of trade and a very large number of jobs SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Growth of World Trade • 2004 merchandise exports up 9% • 2004 services exports up 18% • 2006 merchandise exports up 14.75% • 2006 services exports up 9.6% SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Asian Trade Growth • Merchandise exports up: – – – – – 2002- 9% 2003- 18.7% 2004- 29.3% 2005- 21% 2006- 17.7% (Value in 2006 –US$ 3.39 trillion) Statistics are for Asia excluding Japan, Australia and New Zealand SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Asian Trade Growth • Services exports up: – – – – – 2002- 10% 2003- 12.6% 2004- 23.6% 2005- 12.4% 2006- 12.2% (Value in 2006: US$ 0.527 trillion) SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Overall Growth • In comparison, Asian region’s GDP grew only: – – – – – – – 2001- 3.5% 2002- 5.9% 2003- 6.5% 2004- 7.8% 2005- 7.4% 2006- 7.6% (Preliminary estimated) 2007- 7.2% (Preliminary estimated) SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Why Trade? • 1950 to 1988- countries that liberalized trade regimes: – Enjoyed annual growth rates ½ percent higher than those who did not liberalize SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Why Trade? Cont • Trade barriers removal during 1990’s increased growth by 2.5% year • In 1950 merchandize exports were 8% of world GDP • In 2002 they were 19% of world GDP SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK • Trade represents: – A lot of goods and services – A lot of money – And a lot of jobs 10 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK The Hecksher-Ohlin Theory The Neoclassical theory of international trade was developed independently by two economists in the 1930s It is also known as the “Hecksher-Ohlin Theory” or sometimes the “Factor Proportions Theory.” The H-O theory is the basic x model of international trade Two factors of production  Capital and Labor Two goods  Capital-intensive good and Labor-intensive good It explains why each country has a comparative advantage in producing a different good 20 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK The Hecksher-Ohlin Theory Cont A country will export the good whose production requires the intensive use of the country’s relatively abundant and cheap factor and import the good whose production requires the intensive use of the country’s relatively scare and expensive factor 21 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Prediction The H-O theory implies that the country’s comparative advantage and its trade pattern are determined by its relatively abundant factor Thus the country that is relatively well-endowed with capital will export the good that uses capital intensively in its production, while the labor abundant country will export the labor-intensive good 22 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Factor Endowments • Endowments are factors of production, which a country has naturally—factors are predetermined, not created • Factors of production are typically hard to move from one country to another • Countries tend to produce goods for which they have the natural endowments 23 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Inputs • Inputs are necessary to the creation of all goods and services • The three most important inputs are land, capital, and labour 24 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK The Hecksher-Ohlin-Samuelson Theorem The Hecksher-Ohlin-Samuelson Theorem (also called the Factor-Price Equalization Theorem ) suggests that international trade will eventually lead to equalization in the relative and absolute returns to homogenous factors across nations In other words, international trade will cause the wages of workers with the same level of skill and productivity to equalize across trading countries A similar logic is applied to the return of capital 25 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK The Stolper-Samuelson Theorem The Stolper-Samuelson Theorem suggests that an increase in the relative price of a commodity raises the return ( i.e earnings) of the factor used intensively in the production of such commodity 26 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Rybczynski Theorem The Rybczynski Theorem suggests that at constant commodity prices, an increase in the endowment of one factor will increase the output of the commodity intensive in that factor by a greater proportion, and will reduce the output of the other commodity 27 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK The 20th Century Models —Summary • Theory draws conclusions not only about gains from trade across countries, but also winners and losers within countries • Predicts large income distribution consequences from trade—the owners of the abundant factor of production gain • These insights why stakeholders behave as they do, e.g why unskilled labor in the US fears opening up of trade with Asia • But the empirical evidence is mixed—the simpler Ricardian model does as good or better a job explaining actual trade patterns 28 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Modern developments • Economies of scale give rise to gains from trade through specializing, even if countries have similar factor endowments • Imperfectly competitive markets give rise to gains from trade through product differentiation • Together, these newer theories explain why similar countries trade with each other, and why countries export and import similar products They also help explain the links between trade and foreign investment 29 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Economies of Scale A small countries can achieve economies of scale and gain comparative advantage by producing large quantity of output, that conform to international standards, at the minimal production cost for domestic consumption and export to other countries 30 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Income Similarity This theory explain the intensity of trade of similar products between advanced countries with similar factor endowments At the beginning, firms concentrate in supplying domestic markets But once the market has become saturated, the firms seek to supply in other countries which have the same incomes and tastes as the home country 31 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Trade and Developing Countries • Cheap labor can offset automated production based on advanced technology • Capital can purchase technology from abroad • Productions systems can cross international boundaries through global supply chains • Comparative Advantage is not static 32 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK • • • • Policies to change comparative advantage Invest in education and training Invest in infrastructure Increase research and development Use fiscal and monetary policies to reduce inflation, increase economic and political stability, etc 33 SOUTH EAST ASIA TRADE POLICY TRAINING NETWORK Implications • The logic of economic theory tends to favor freer trade, but the theory itself recognizes that there will be winners and losers from liberalization • If everyone embraced free markets, there would not be need for trade policy or the World Trade Organization • But stakeholders look out for their own interests, not for the system as whole • Thus there is a need for a set of rules to govern the world trading system 34 ... TRAINING NETWORK Overall Growth • In comparison, Asian region’s GDP grew only: – – – – – – – 2 001- 3.5% 2002- 5.9% 2003- 6.5% 2004- 7.8% 2005- 7.4% 2006- 7.6% (Preliminary estimated) 2007- 7.2%