MIM 513Pacific Rim Economies

Class Two – Introduction to Trade

Quick review of past section

Trade models-Institutions regarding trade-Economic models

Trade intervention

US / China position on trade

Foreign Direct Investment

Current Events

Country reports – general updates

Agenda

Trade

‘Whosoever commands the trade of the world,commands the riches of the world and hence theworld itself.’

Sir Walter Raleigh (1552-1618)

• Basic model of trade• Trade : When a firm exports goods to another

country• FDI: When a firm invests outside its home country• Treaties have grown exponentially, 160 nations

2,573 treaties as of 2006.

Transnational institutions affecting world trade• International Trade Organization (ITO): 1948

• General agreement on tariffs and trade (GATT): 1947

• World Trade Organization (WTO): 1995

• International Monetary Fund (IMF): 1944• World Bank (WB): 1944• General Agreement on Trade in Services (GATS):

1945• Most-Favored Nation (MFN) Clause

Each member country of the GATT must grant every member country the most favorable treatment it accords to any other country with respect to imports and exports”

Other trade theories

- Production life-cycle theory – developing nations move

to net importers when developed - Economies of scale Theory – US lumber- First to scale – Boeing & Microsoft- Factor endowments –

- Basic factors – natural resources, climate, location- Advanced factors – technology, skilled labor

Trade Policy / intervention- Tariffs – tax levied on an import from another country

- Look to tables 1.1 & figures 1.1 on trade growth and tariff reduction

- Subsidies – Gov payment to a private producer- FMV or antidumping - DRAMS- Local content requirements = market access- Politics

- Job protection - Unions- National Security – Ports- Retaliation – Cuba or N. Korea- Safety – Recall of beef, toys, or chemicals- Infant industry argument- Human Rights

Tariff affect

Protectionism- US – Agriculture farm subsidies – Soil Bank- China – Currency- WTO

- Anti Dumping- IP protection – Trade related aspects of IP (Trips)

- Protecting copyrights and patents- Market access – Lower tariffs on particular products

- Quotas –limit the product allowed into a country – licenses - Results in consumer and GDP loss- Not same as tarriff which raises P

Current U.S Trade Position• Merchandise exports as a percentage of GNP ranged from

7.7% in 1982 to 5.3% in 1986 to 8.1% in 1995• U.S share of world trade declined from 25% in 10950 to about

12.7% in 1998

• USA is less dependent on exports than other industrial nations.

• On a per capita basis U.S exports about $3550 worth of goods and imports $4550 worth of goods creating about $1000 trade deficit on a per capital basis

• In spite of over 7 million business in the U.S only 210,000 are engaged in exporting

• Large 1500 MNCs account for more than 80% of U.S Trade

US merchandise trade with China and Hong Kong (China), US$ billion

Source: OECD ITCS database.

What makes the Asian economy tick

“China is the spider in the center of the net.”

Intra-Regional Trade - The Pivotal Role of ChinaExports to Exports to

2003 China as % China as %of total exports of export growth 1996 2003

Hong Kong 30.2 50.4 1.8 0.6Taiwan 15.4 80.6 10.6 6.4Japan 12.2 67.6 28.7 11.4Korea 18.1 36.2 8.8 7.2

Singapore 16.5 18.0 12.1 4.1Thailand 12.4 22.1 3.3 2.3Malaysia 8.2 11.2 9.5 8.8

China 8.5 22.4

Share of theUS Market (%)

Foreign Direct Investment- MNC invest in other country’s markets- FDI Terms

- Inflows – Money flowing into the country- Outflows – Money flowing out of country- Stock – accumulation of FDI assets

- FDI Theory- Export vs. license- Market barriers- Eclectic – FDI in resources such as oil

- Political issues- Balance of payments - $$$ go back to home GDP- Employment benefits with inflows- Free market vs. colonialism

FDI – labor movement- Should receiving country restrict / accept

immigration?- Knowledge imports- Congestion costs- Social Friction with cultures

- Should the sending country restrict emigration? - Lost taxes?- Brain Drain?- Aging population costs?

Worker rights in Cambodia1. Should Cambodia have signed this agreement?2. Is the agreement a case of progress or

protectionism?3. Is it possible to have a comparative advantage in

cheap labor?4. Does the US-Cambodia agreement protect all

Cambodian Workers? Should it?5. How confident are you that Nike & the Gap will

stay in Cambodia? Would you?

Samuelson – Ricardo / Mill- How does comparative advantage deal with

productivity differences?- What happens when productivity improves

for one nation over another?- If a technology change occurs how does it

affect trading partners? If it is productivity how does it affect partners?