bse-intl eco december 07

8/9/2019 BSE-Intl Eco December 07

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International Economics

Session for CPCM participants

at

BSE Training Institute, Mumbai

December 24, 2007

E-mail: [email protected]


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International EconomicsOverview of Theories of InternationalTrade

Benefits from trade

Pattern of tradeGovernment Policy

Trade Reforms in India

WTO and its impact on Indianeconomy


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Introduction

Relevance and Scope ofInternational Economics

Patterns and Trends inInternational Trade


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Popular Sayings

"When America sneezed, Japan and Europeused to catch a cold

"No nation is immune to economic eventsthat occur in far away places

"Surely there is no closed economy in the

real-world, except the world economy!"


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Examples

"When East and West Germany wereunited, the cost was high for WestGermany. It had to borrow money

extensively from internationalsources, raising interest rates. Thiscaused high interest rates all over theEurope.


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Examples

"As Toyotas flooded the US market, producers inthe US faced a hard choice: to either trim theirbudgets or close their doors. Many workers losttheir jobs, and louder and louder calls for'protection from ruinous foreign competition'

were heard. As a result, the country thatchampioned free trade in the world economyhad second thoughts about the benefits of freetrade.

And how about the impact of China and India inmany industries today!


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The study of international economics hasnever been as important as it is now

At the beginning of the 21st

century,nations are more closely linked throughtrade in goods and services, through flowsof money, and through investment in each

others economies than ever before


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International Economics studies how a numberof distinct economies interact with one anotherin the process of allocating scarce resources to

satisfy human wants

Whereas economic theory deals with theproblems of a single closed economy,

International Economics focuses on theproblems of two or more economies


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Why is the trade between Finland and Japandifferent from the trade between Helsinkiand Oulu districts of Finland?

TWO reasons:

1) Since international trade crosses national borders,governments can monitor this trade

CAN impose taxes or quotas on goods importedfrom Japan

- Have to decide whether to do so or not!

2)International trade involves the use of different

national currencies! Finns will pay in Euros for Japanese cars but

Japanese want to be paid in Yens

- we have created international payments


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Two branches

International Economics can be dividedinto two major branches:

International Trade

International Finance


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Two branches

j International TradeWhy and What is traded?

Trade flows

Trade policy

j International Finance

Exchange ratesBalance of payments problems


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Two branches

International Trade is the exchange of goodsand services among residents/ companies ofdifferent countries

the approach is microeconomic in nature;long run focus

International Finance deals with the foreignexchange market and the balance of payments

the approach is mainly macroeconomic innature; short run focus


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Economic Interdependence

US remained the strongest nation andover time, integrated itself with the rest ofthe world

1950-European Community (now EU) 1960s -Rise in importance of MNCs

1970s- Market power enjoyed by the OPEC

1990s & 21st

Century- Global economicinterdependence became more sophisticated

Advocated free trade to solve economiccrises-LDCs, and DCs


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International Trade-Effects

US importing PC-components

EU/Japanese companies buying USfinancial assets

By consuming more than what itproduces, US remained a net borrower in1980s and 1990s

Global trading day is on for 24-hours Leading nations like US have 250 foreign

banks

India also has about 15 leading foreign

banks


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Trends in Global Trade


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Historical World GDP

Source: Historicaldata fromAngusMaddisonThe WorldEconomy: HistoricalStatisticsOECD(2003): forecastsare illustrative only

Share of world GDP

India becoming a keyglobal player

India to a be key beneficiary as leadership shifts to Asiafrom the developed world


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India: An Economic powerhouse

Already one of the fastest growingeconomies in the world

The total middle class (middleclass + aspirers) has grown to300mn plus- one of the biggest

in the world

India's share in world consumerspending has risen from 1.9% to3.1%

At par with developed

countries like France,Germany and UK

Will become the 3rd largest in PPPterms and 7th largest at marketexchange rates by 2020

Time taken to double per capita GDP:

England: 58 years from 1780-1838

US: 47 years from 1839-1886

Japan : 24 years from 1885-1919

South Korea: 11 years from 1966-1977

China: 9 years from 1978-1987 and again from1987-1996

Time taken to double per capita GDP,

India

Period Aggregate GDP Per cap GDP Years todouble

1974-84 4.2 1.8 40

1984-94 5.1 2.8 26

1994-04 6.3 4.3 17

2004-2014 8 6 12


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Indian Economy: A snapshot

Source: RBI, ODCI,CMIE,The WorldFactBook

GDP crosses $1trillion

GDP is set to double

by 2012 Indias share in World

GDP to rise from

6.7% in 2005

7.2% in 2010 8.8% in 2020

India has joined the elite band of USD1trillion economies

Satisfactory

CurrentPerformance

Satisfactory

Social Development

Income disparity

Reforms

Inflation FDI Inflow

Industrial growth

GDP growth

Fx Reserves

Services

Economic scorecard


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New growth trajectory

Since 60s Indiareal growth onrise; momentum

pick up in late

2000


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Reaching high slow & steady

India overtakesJapan to becomethe third largest

country in PPP

terms


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Opening up slowly

Indias share inglobal trade is ~1%


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Foreign trade growth

Both exports andimports have

witnessed momentum

since 2000. However,

higher import growth

than export growth is a

cause of concern


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Trade Theories

Absolute Advantage

Comparative Advantage

Factor price equalization

Life cycle Theory

New Trade Theory

National Competitive Advantage theory No nation was ever ruined by trade.

Benjamin Franklin


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Country Focus

1. Ghana and South Korea

2. Crawfish Wars

3. Free trade and RE Inc

4. Nokia


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1. Ghana Vs. South Korea

1970 Ghana ($250) and South Korea($260) PCY

1998, Ghana ($360) South Korea($8630)

Korea followed open trade policies;Ghana adopted restricted trade policies


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2. Craw fish Wars

Consumers in Louisiana (US) use crawfish intheir diet

Local US producers prices $5-8 per pound

Chinese imports posed a threat to domesticproducers (by pricing it at $2-3 per pound) andbenefited by cost reduction to US consumers

International Trade Commission in 1997 levied110-123% duty on Chinese fish imports;nullifying cost difference.


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3. Free Trade and REInc

Free trade benefited Recreational Equipment Inc

US Cooperative worked well for 33 years

1993 NAFTA between US and Mexico tariffsremoved

Shifted production to Mexico for cost saving

US operations shut down, job losses in REI

Consumers benefited from NAFTA


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4. Nokia Mobile

Finland Nokia Mobile phones

(Motorola, Nokia and Erickson)

Initially Finland was a country

manufacturing tires, paper, consumerelectronics, and telecommunications

By the year 2000 focused on telecom

equipment increased its sales to $24bln and earnings $4.5bln

(contd)


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Nokia Mobile

History, geography and political economy

Nordic nations, sparsely populated in colsareas

Laying a land line costly

Sweden, Norway and Finland first takewireless telecom

It costed $ 800 per subscriber to put wirelines $500 per person for wireless (contd)


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Nokia concld.

By 1994 12% of Scandinavians ownedwireless phones compared to 6% in US

By mid 2000, 70% are connected whileit was 30% in US

Competitive edge, pragmatism, no

national monopoly made it succeed andhave operating margins of Nokia 20% in2000, compared to 6.4% for Motorola


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Absolute Advantage

One country is said to have an absoluteadvantage over another country in theproduction of a particular good if it canproduce that good using smallerquantities of resources.

Eg: England produces Textiles; France

Wine


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Limitation of the AbsoluteAdvantage Theory

What if one trading nation has absoluteadvantage in both & the other has inneither

Still, trade is possible according to theComparative Cost theory by Ricardo

The weaker nation would specializeproduction of that good where thedisadvantage is lower

Post-trade, the weaker nation wouldimprove efficiency due to economies of

scale


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One country is said to have acomparative advantage over anothercountry in the production of a particular

good if it produces that good with loweropportunity costs.

Two countries can mutually benefit fromtrade even if one country is at anabsolute advantage relative to anothercountry in the production of every good.

Comparative Advantage


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Ricardian Law of ComparativeAdvantage

When countries differ in relative laborproductivity (comparative advantage):

Each country can increase its welfareby:

Specializing in production of thosegoods for which it has a comparative

advantage


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Heckscher-Ohlin Theory

Comparative advantage arises from thedifferences in Factor endowments

The abundance of factor makes its cost low

Hence a country exports those goods thatmake intensive use of factor that isabundantly present

It imports goods that require intensive use of

factors that are locally scarce. US exports capital-intensive goods

China exports labor-intensive


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The Product Life-Cycle Theory

US dominance (1945-75) in newproduct innovations

New Product developed and sold inlocal market and also exported

demand for export increases andproduction facilities shift to othercountries

(Raymond Vernon)


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The New Trade Theory

Based on economies of scale that helps inunit cost reduction

World market may be able to support onlylimited number of firms that enter first gainadvantage

Aerospace example Boeing and Airbus

Dominance of US and Europe


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The New Trade Theory

Developing cost $ 5 bln

For producing 100 aircrafts Fixed costs $ 50 mln ($5 bln/100)

Variable costs $ 80 mln, Total cost $ 130mln

If we increase to 500

FC will come down to $10 mln and total

cost to $90 mln (10+80) Economies of scale, learning effects


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National Competitive Advantage Theory

Porters Diamond

Factor endowments

Demand conditions

Related and supporting industries

Firm strategy, Structure and Rivalry

Implications for business

Locational

First mover

Policy implications


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Tariffs and Quotas

Importing countries can reduce trade bysetting tariffs or quotas.

Tariff = tax on imports

Quota = ceiling on the volume of imports

How Tariffs and Quotas Work

Both tariffs and quotas

raise the price of imports

reduce the quantity of imports


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INTERNATIONAL TRADE POLICY

Free Trade VersusProtectionism

Trade Barriers: Tariffs,Subsidies and Quotas

Other Commercial Policies


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Next we will consider differentcommercial policies

We will also show how to analyze thecostscosts and the benefitsbenefits of tariffs as well asother types of trade restrictions

Doing so we will move from positivepositiveeconomics to normativenormative economics


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Most Common Trade Barriers

Trade barriers -obstacles to trade- takemany forms, threethree most common ones

are:Tariffs: import duty (a tax on imports)

Can also be an export duty, but that isless common.


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Export Subsidies:

Government payments made todomestic firm to encourage exportsencourage exports can also act as a barrierbarrier to trade

Closely related to subsidies is thepractice of dumpingdumping Dumping takes place when a firm or an

industry sells products on the world marketat price below the cost of production


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Quotas and Voluntary ExportRestraints (VERs):

A limit on the quantityquantity of imports Can be mandatory or voluntary, and can

be legislated or negotiated with foreigngovernments


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Trade Reforms in India

The transition during the 1990s hasbeen made possible with thefollowing measures.

1. Market-determined exchange rate

2. Dismantling trade restrictions

3. Current Account Convertibility

4. Liberal flows of capital

5. Gradual liberalization of private capital


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India and WTO

India is one of the founding members of theGATT (1947) and WTO (1995)

India grants the Most Favoured Nation status toall its trading partners.

Advocates Special and Differential Treatmentprovisions for Developing Countries


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India and WTO

Post Cancun WTO consultations

Agriculture

Market access for non-agricultural products

Singapore issues

Cotton

Formulas worked out for tariff reduction

3 negotiating papers were put forth


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India and WTO

Framework agreement adopted by theWTO General Council on August 1,2004

Elimination of all forms of subsidies onagriculture by end date

Reduction in trade distortions

Flexibility to developing countries forsubsidies


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India in World Competitiveness

Country 2006 2007

U.S. 1 1

Singapore 3 2

China 18 15

India 27 27

Russia 46 43

Indonesia 52 54

Brazil 44 49

Thailand 29 33

Source: IMD

Globally, Indias FDI attractiveness is the highest across the sectors

Innovation-another factor, where India has advantage over its peers

However, socio-political structure blocks Ease of Doing Business in India


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To sum up

International Trade has strong theoretical bases asexplained by the trade theories

Last 2 decades, international trade has beenliberalised

Loss of employment in select areas is leading toagitations against globalization

Trade negotiations must yield mutually beneficialresults and take long time


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Books/ References

Carbaugh Robert J. : International Economics, South-Western College Publishing, Cincinnati, US, 2000,Ch 1

Charlie WL Hill, International Business, TMG, Delhi,

2003 RBI: Handbook of Statistics on Indian Economy

2004-05 (www.rbi.org.in )

IMF: International Financial Statistics, Monthly(www.imf.org)

CMIE: Economic Intelligence Service, Monthly

www.wto.org


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THANK YOU

bse-intl eco december 07

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