International trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. Increasing international trade is the primary meaning of "globalization".
International trade is also a branch of macro economics, which, together with international finance, forms the larger branch of international economics.
International trade theory
Several different models have been proposed to predict patterns of trade and to analyze the effects of trade policies such as tariffs.
Ricardian model
The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.
Heckscher-Ohlin model
The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.
The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce.
Specific Factors
In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. The specific factors name refers to the given that in the short-run specific factors of production, such as physical capital, are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms. Additionally, owners of opposing specific factors of production (i.e. labour and capital) are likely to have opposing agendas when lobbying for controls over immigration of labour. Conversely, both owners of capital and labour profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.
Gravity model
The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model.
Law of comparative advantage
Countries have different endowments of factors of production. They differ in raw materials, labor, economics, capital and priority, which are mostly or relatively immobile between countries. The ability to supply goods differs between countries. We will distinguish between absolute advantage and comparative advantage.
Absolute advantage
When one country produce a good which less resources than another country, it is said to have an absolute advantage on that good. Production can be maximized by the specializing county and then trading with the other country will gain maximum for both of them
Comparative advantage
Provided opportunity costs of various costs of various goods different in two countries, both of then can gain from mutual trade if they specialize in producing and exporting those goods that have relatively low opportunity costs compared with the other country.
The basic argument for free trade is based on the economic theory of comparative advantage: each region should concentrate on what it can produce most cheaply and efficiently and should exchange its products for those it is less able to produce.
Companies have a comparative advantage in those goods that can be produced at a lower opportunity cost than in other countries. If companies are to gain from trade, they should export those goods in which they have a comparative advantage and import those goods in which they have a comparative disadvantage.
Gains of trade
- Decreasing costs
- Difference in demand
- Increased competition
- Non-economic advantages
Restricting trade
Arguments on restricting trade
- The infant industry argument
- Reduced reliance on goods, which have little dynamic potential
- To prevent dumping and unfair trade practice
- To prevent the establishment of a foreign based monopoly
- To spread the risk of fluctuating market
- To reduce the influence of trade on consumer tastes
- To import the trade of harmful goods
Methods of restricting trade
- Tariffs and customs duties
- Quotas
- Exchange controls
- Import licensing
- Embargoes
- Export taxes
- Subsidies
- Admistrative barriers
- Procurement policies
Regulation of international trade
Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade.
Mercantilism is an economic theory that holds that the prosperity of a nation depends upon its supply of capital, and that the global volume of trade is "unchangeable." Capital, represented by bullion (gold or silver) held by the state, is best increased through a positive balance of trade with other nations (exports over imports). Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy, by encouraging exports and discouraging imports, especially through the use of tariffs.
Free trade
After World War II, strong sentiment developed throughout the world against protection and high tariffs and in favor of freer trade. The results were new organizations and agreements on international trade such as the General Agreement on Tariffs and Trade (1948), the Benelux Economic Union (1948), the European Economic Community (Common Market, 1957), the European Free Trade Association (1959), Mercosur (the Southern Cone Common Market, 1991), and the World Trade Organization (1995).
In the 19th century, especially in Britain, a belief in free trade became paramount and this view has dominated thinking among western nations for most of the time since then. free trade is an idealized market model, often stated as a political objective, in which trade of goods and services between countries flows unhindered by government-imposed tariff and non-tariff barriers. Intellectually, this arrangement is supported by microeconomic analysis and nearly all economists, who argue that the benefit of trade is a net gain to both trading partners. It is opposed by anti-globalization and some labour campaigners due to what they see are many tendencies for abuse by wealthier states.
The term is given to economic policies, as well as political parties that support increases in such trade.
Free trade is usually most strongly supported by the most economically powerful nations in the world, though they often engage in selective protectionism for those industries which are politically important domestically, such as the protective tariffs applied to agriculture and textiles by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.
Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.
In the years since the Second World War multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure.
GATT
The General Agreement on Tariffs and Trade (typically abbreviated GATT) was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. The GATT's main purpose was to reduce barriers to international trade. This was achieved through the reduction of tariff barriers, quantitative restrictions and subsidies on trade through a series of different agreements. The GATT was an agreement, not an organization. Originally, the GATT was supposed to become a full international organization like the World Bank or IMF called the International Trade Organization. However, the agreement was not ratified, so the GATT remained simply an agreement. The functions of the GATT have been replaced by the World Trade Organization which was established through the final round of negotiations in the early 1990s.
The history of the GATT can be divided into three phases: the first, from 1947 until the Torquay round, largely concerned which commodities would be covered by the agreement and freezing existing tariff levels. A second phase, encompassing three rounds, from 1959 to 1979, focused on reducing tariffs. The third phase, consisting only of the Uruguay Round from 1986 to 1994, extended the agreement fully to new areas such as intellectual property, services, capital, and agriculture. Out of this round the WTO was born.
WTO
In the early 1990s the nations of the European Union (the successor organization to the Common Market) undertook to remove all barriers to the free movement of trade and employment across their mutual borders
The WTO discussions should follow these fundamental principles of trading.
1. A trading system should be free of discrimination in the sense that one country cannot privilege a particular trading partner above others within the system, nor can it discriminate against foreign products and services.
2. A trading system should tend toward more freedom, that is, toward fewer trade barriers (tariffs and non-tariff barriers).
3. A trading system should be predictable, with foreign companies and governments reassured that trade barriers will not be raised arbitrarily and that markets will remain open.
4. A trading system should tend toward greater competition.
5. A trading system should be more accommodating for less developed countries, giving them more time to adjust, greater flexibility, and more privileges.
WTO governing rules
· Non-discrimination
· Reciprocity
· Prohibitions of quotas
· Fair competition
· Binding tariffs
Unlike the GATT ,the WTO has the power to impose santionson countries breaking trade agreements. Provision for appeals is there, if the disputes between member countries cannot be taken care by WTO in an amikable way
The Uruguay Round.
Trade talks started in September 1986, in Punta del Este, Uruguay. They eventually accepted a negotiating agenda that covered virtually every outstanding trade policy issue. The talks were going to extend the trading system into several new areas, notably trade in services and intellectual property, and to reform trade in the sensitive sectors of agriculture and textiles. All the original GATT articles were up for review. It was the biggest negotiating mandate on trade ever agreed, and the ministers gave themselves four years to complete it.
Two years later, in December 1988, ministers met again in Montreal, Canada, for what was supposed to be an assessment of progress at the round’s half-way point. The purpose was to clarify the agenda for the remaining two years, but the talks ended in a deadlock that was not resolved until officials met more quietly in Geneva the following April.
Despite the difficulty, during the Montreal meeting, ministers did agree a package of early results. These included some concessions on market access for tropical products — aimed at assisting developing countries — as well as a streamlined dispute settlement system, and the Trade Policy Review Mechanism which provided for the first comprehensive, systematic and regular reviews of national trade policies and practices of GATT members. The round was supposed to end when ministers met once more in Brussels, in December 1990. But they disagreed on how to reform agricultural trade and decided to extend the talks. The Uruguay Round entered its bleakest period.
On 15 April 1994, the deal was signed by ministers from most of the 123 participating governments at a meeting in Marrakesh, Morocco. Pitfalls were talked about and were incorporated into the Doha Development Agenda in late 2001.
DOHA Development agenda
The rebuilding process of trhe WTO began in Doha ,Quatar in November 2001. The meeting between the 142 members of WTO continues with the decision to launch a new round of WTO trade talks ,to be called the ‘Doha Development agenda’
The Doha negotiations are designed to increase the liberalisation of trade. However incorporated negotiations already underway on agriculture and services. Agriculture and services were the only areas where negotiations on further trade liberalization had been mandated in the Uruguay Round WTO Agreements (see Agreement on Agriculture: General Issues).
The Doha Ministerial Declaration sets out the basic mandate for the negotiations. With over three quarters of WTO members identifying themselves as developing countries, the Doha Declaration gives developing country issues a high priority in the negotiations.
The main objectives for agriculture found in the Doha Declaration are for "substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade distorting domestic support." Members also agreed to "take note of the non-trade concerns reflected in the negotiating proposals submitted by members and confirm that non-trade concerns will be taken into account in the negotiations as provided for in the Agreement on Agriculture." Most countries accept that agriculture has functions other than producing food and fiber-non-trade concerns-such as food security, environmental protection, structural adjustment, rural development, poverty alleviation, and animal welfare. Non-trade concerns have not received much attention in the Doha negotiations, as countries have concentrated on negotiating cuts in tariffs, domestic support, and export subsidies, while providing for the special and differential needs of developing countries.
In addition to the Doha Ministerial Declaration, two other key Doha documents track progress in agricultural negotiations:
- The General Council Decision of August 1, 2004—also called the "July Package"—provides a framework for "modalities," broad outlines or formulas for reducing import barriers, export subsidies, and domestic support in the final agreement in agriculture.
- The Hong Kong Ministerial Declaration of December 2005 includes preliminary agreements on several issues in the agricultural negotiations. In the area of market access, this includes progress on establishing ad valorem tariff equivalents on which cuts will be based; adopting four tariff bands that would subject higher tariffs to larger cuts; accepting the criteria to select certain products ("Special Products") for reduced tariff cuts by developing countries; and agreement by developed countries to extend duty- and quota-free market access for most products originating from LDCs. The Declaration also documents the agreement to end export subsidies in agriculture by 2013.
For information on the status of the negotiations and other details, see WTO's Doha Development Agenda: Negotiations, Implementation and Development.
WTO Doha Round: The Agricultural standoff
On July 24, 2006, the WTO's Director General announced the indefinite suspension of further negotiations in the Doha Development Agenda or Doha Round of multilateral trade negotiations. The principal cause of the suspension was that a
core group of WTO member countries -- the United States, the European Union (EU), Brazil, India, Australia, and Japan -- known as the G-6 had reached an impasse over specific methods to achieve the broad aims of the round for agricultural trade:
substantial reductions in trade-distorting domestic subsidies, elimination of export subsidies, and substantially increased market access for agricultural products.
No comments:
Post a Comment