CHAPTER 7: INTERNATIONAL TRADE
7.0. INTRODUCTION
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Trade relations between countries have grown in recent decades both in importance and
complexity.
◦ An important part of a country's consumption originates in foreign countries: part of the
national production is oriented beyond the borders.
◦ Currently, international commercial exchanges affect not only raw materials and
finished products but also all kinds of components and tasks of the production chain,
making the network of international trade more dense and interdependent.
7.1. THEORIES OF INTERNATIONAL TRADE. COMMERCIAL POLICY
INSTRUMENTS
7.1.1. Conceptual framework
International trade (or foreign trade): exchange of goods, products or services between
two or more countries (or different economic regions). Reasons that justify it:
1. Irregular distribution of resources among countries
2. Price differences between countries
3. Need to take advantage of the benefits derived from international trade:
• Productive specialization
• Increase in competition
• Economies of scale
• Access to more innovative technologies
7.1.2. Theories of international trade
a. Traditional theories of international trade
- Commercial advantages are based on the existence of differences between countries
- International trade allows a more efficient use of productive resources:
1. A. Smith (the absolute advantage theory)1.
2. D. Ricardo (the comparative advantage theory)2.
1
According to Adam Smith, who is regarded as the father of modern economics, countries should only
produce goods in which they have an absolute advantage. An individual, business, or country is said to
have an absolute advantage if it can produce a good at a lower cost than another individual, business, or
country.
2
Comparative advantage, economic theory, first developed by 19th-century British economist David
Ricardo, that attributed the cause and benefits of international trade to the differences in the relative
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3. Heckscher and Ohlin model: The explanation of trade is based on the different
relative combinations of factors (L and K) of the economies and the intensity with
which these factors are combined in the production of each of the goods.
- These theories explain INTERINDUSTRIAL trade: Inter-industrial trade is the
exchange between countries of goods and / or services that belong to different sectors. In
other words, this type of trade consists of buying and selling products corresponding to
different industries. This would mean that partner countries are complementing each other
according to their comparative advantages. In other words, each one exports to the other
the products made most efficiently. For example, Spain exports olive oil to Germany and
Germany exports cars to Spain. It is important to note that interindustrial trade involves
finished products and intermediate products necessary to finish a product.
b. New theories of international trade
The explanation of trade is based on the use of economies of scale.
- This encourages companies to concentrate their production geographically.
- At the same time, they try to differentiate their products from those of their competitors
to maintain a certain market power: consumers perceive products as different.
- This allows the existence of INTRAINDUSTRIAL trade:
• Trade in horizontally differentiated goods, products of similar quality that differ
in some other characteristic such as the brand.
• Trade in vertically differentiated goods, depending on the quality of the varieties.
c. Latest theories of international trade
It is the company, and not the country, the carrier of the commercial advantages. The
starting point remarks in the idea that there are many companies in all the countries and
not all of them export. Accessing another market (through X or direct investment)
involves costs that the company must be willing to assume. Consequently, only the most
productive companies in each market are in a position to access international markets.
There are global value chains (international fragmentation of value chains):
- The different stages of the production process are located in different countries.
- It gives rise to international exchange not only of finished goods but of tasks or
phases of production of a good.
- The consequences for developing countries are not always positive.
opportunity costs (costs in terms of other goods given up) of producing the same commodities among
countries.
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7.1.3. Commercial policy instruments
a. Tariff
Tax on the importation of g&s in a country, collected by customs agents at the place of
entry. Main objective: to protect the general industry as well as the jobs generated by it.
Types:
- Specific: set for each unit of good.
- Ad valorem: as a% of the import value.
- Mixed: combination of both
Tariff effects:
- Increase in national production and decrease in imports.
- Increase in state tax revenues.
- Asymmetry between the concentration of benefits obtained by the favored (companies
and workers protected) by the protectionist policy and the dispersion of the costs suffered
by the injured parties (consumers having to pay higher prices).
b. Other commercial policy instruments
• Import Quotas: limitation of the total amount of imports that are allowed to enter each
year in a country.
• Production or export subsidies and compensatory taxes.
• Barriers to export: export quotas, export taxes, agreements freely concluded between
governments or producer associations (international cartels).
• Voluntary export restrictions: normally due to requirements of the importing country.
• Dumping: international price discrimination in which an exporting company sells in a
market abroad at a lower price than in the own country or in third countries.
• Anti-dumping duty: when there has been evidence that the foreign seller was practicing
dumping.
• Non-tariff barriers: government purchases, technical and administrative barriers.
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7.2. THEORIES OF ECONOMIC INTEGRATION
7.2.1. Modalities of economic integration
Total Economic Union: single economic policy
Monetary Union: Economic Union + Single Currency and Single Monetary Policy
Economic Union: Common Market + economic policy coordination
Common Market: Free movement of goods, services and productive factors
Custom Union: Elimination of tariffs between members and common external protection
(common tariff against third parties)
Free trade Area: Elimination of tariffs between members, each maintaining its own
commercial policy with third countries
Preferential agreement: Tariff reduction between members to boost trade
7.2.2. Effects of economic integration
a. Statics: changes in trade flows, production and consumption derived from variations
in relative prices caused by changes in external protection:
• Trade creation: substitution of more expensive domestic products for cheaper imported
products (increase of aggregate efficiency of the economy).
• Trade diversion: imports from non-member third countries are replaced by imports from
partner countries, although they may be more expensive (decrease of aggregate efficiency
of the economy).
b. Dynamics: mechanisms that affect the potential growth of output through the increase
of factor endowment or the increase of productivity. They are those that permanently alter
growth potential. In general, they tend to be positive and even more far-reaching than the
static ones:
- Economies of scale.
- Intensification of competition.
- Incentives for innovation and technological change.
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- Greater availability and mobility of productive factors.
- Increase in variety of goods available.
- Possibility of developing activities that are difficult to undertake in isolation.
7.3. CHARACTERISTICS OF INTERNATIONAL TRADE
1. Gradual opening process of the economy worldwide: trade growth at higher rates than
those of production growth.
2. Greater dynamism in trade in manufactures compared to trade in raw materials.
3. Increasing importance of the exchange of services.
7.4. REGULATION OF INTERNATIONAL TRADE: FROM GATT TO WTO
The countries of the world have tried to define adequate institutional frameworks to
encourage trade liberalization both in the field multilateral as well as regional (especially
since 1950).
Multilateral scope: WTO (World Trade Organization)
- In mid-2016, 164 countries were members of the WTO (95% of the world
population) committed to liberalization of trade.
- The WTO has its roots in the General Agreement on Tariffs and Trade (GATT).
GATT (General Agreement on Tariffs and Trade)
- Created in 1948 to promote trade liberalization in a multilateral framework.
- It started with 23 countries
- Objective: to achieve freer commercial relations, with lower levels of protection, based
on several principles:
a. Reciprocity principle: mutual tariff reductions.
b. Principle of non-discrimination: standards and common treatment for all
signatories (clause of most favored nation).
c. Principle of transparency, stability and predictability.
- Most favored nation clause: any concession granted by one of the signatories to another
of the partners should be automatically extended to the rest of the signers. Exceptions:
a. Promotion of regional integration processes.
b. Generalized Systems of Preferences (GSP): treatment of products from
developing countries that may be subject to non-reciprocal tariff reductions in
order to favor their export capacities (these are advantages with a generalized
character with respect to all developing countries benefited).
- Negotiating Rounds: GATT mechanism to advance the liberalization process:
• Meetings where all the GATT signatory countries participate to specify the
mandatory tariff reductions for all signers.
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• 8 Negotiating Rounds (between 1974 and 1994): progress is made in the reduction
of tariffs. There was an increase in the range of products considered, and also an
increase in the number of signatory countries (23 → 123).
• Uruguay Round (1986-1994): the last and most ambitious: it proposes the creation
of the WTO as a permanent organization.
WTO (World Trade Organization)
- Multilateral institution where the rules governing international trade are established,
trying to contribute to the creation of a freer commercial environment and with equal
opportunities for all its members.
- Main functions:
a. Manage and apply the multilateral and plurilateral trade agreements that make
up the WTO.
b. Serve as a forum for multilateral trade negotiations.
c. Try to settle trade differences.
- It is governed by the procedures, decisions and practices that defined GATT's actions,
although it broadens its scope of action to other fields: it introduces sustainable
development as an objective from a perspective of optimal use of natural resources within
a framework of respect and protection of the environment.
Ministerial conference
- It is composed of representatives of all member countries, being the highest authority in
the WTO.
- Since its creation there have been several Ministerial Conferences: more information on
the website of the WTO.
- Doha Conference (2001): It was agreed to launch a new Round of Negotiations (the 1st
of the WTO) to promote changes in trade regulation more sensitive to the needs of
developing countries. Doha Development Agenda was created (very little progress has
been made).
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