4. International Trade

Motivation

Fast trade increase

Also in relation to GOP... tilt finantial crisis 2008

Source: OECD Note:Trade is the sum of exports and imports of goods and services measured as a share of GDP.

Evolution

Trade evolution

Trade elasticity

Globalization waves Source: Modified and inspired WTO

Trade evolution

FMI - Changing Global Linkages: A New Cold War?

Geoeconomic Fragmentation and the Future of Multilateralism

Theory

Trade explained by different valuation of G&S derived of: taste, technology or production factors, firm characteristics...

Static benefits of trade

Specialization (different relative prices)
Change in production and consumption structure

Dynamic benefits of trade– Higher growth rate and welfare

Scale economies
Increase in competition -> efficiency, lower prices, variety, quality
Access to new technology

Consequences of trade

Increase in the production of G&S with greater comparative advantage and in the use of the productions factors in which the country is more intensive.
Change in consumption / increase in welfare.

Exporter prize (% increase over the non exporting firms)

Source: La empresa exportadora española: características, dinámica y estrategia competitiva

Theories

[Absolute advantage (Adam Smith) (1776). An Inquiry into the Nature and Causes of the Wealth of Nations] (https://archive.org/details/aninquiryintona00nichgoog/page/n22/mode/2up)
Comparative advantage (David Ricardo) David Ricardo's The Principles of Trade and Taxation (https://archive.org/details/aninquiryintona00nichgoog/page/n22/mode/2up)
- Understand David Ricardo's principle of comparative advantage Britannica (https://www.britannica.com/video/186396/principle-advantage-David-Ricardo)
- Comparative advantage Marginal Revolution University https://www.youtube.com/watch?v=4rUfoU04QJM / Comparative advantage2 MRU https://mru.org/courses/international-trade/comparative-advantage
- Investopedia Video: Explaining Comparative Advantage Investopedia Video: Explaining Comparative Advantage https://www.youtube.com/watch?v=jNESLIbM8Ns
- Comparative Advantage Kahn Ac. https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/scarcity-and-growth/v/comparative-advantage-specialization-and-gains-from-trade / Ventaja comparativa Kahn Ac. https://es.khanacademy.org/economics-finance-domain/microeconomics/basic-economic-concepts-gen-micro/comparative-advantage-and-the-gains-from-trade/v/comparative-advantage-specialization-and-gains-from-trade
Relative factor endowments (Heckscher y Ohlin) Interregional and international trade, 1933 Vertical differentiation

Revealed Comparative Advantage Index
New theory of international trade (Krugman, Melitz) Horizontal differentiation Imperfect competition Economies of scale Monopolistic competition Product differentiation Tastes

Competitive advantage is a broader business concept that describes the attributes, resources, or strategies that enable a firm to outperform its competitors in the market. While comparative advantage focuses on the relative efficiency between countries (or sectors or firms) in producing goods, competitive advantage encompasses factors like innovation, quality, branding, and cost leadership that help a firm secure a superior position within its industry.

Indicators

Indicator	Formula
Coverage rate (CR)	\(CR = \frac{X}{M} \times 100\)
Coefficient of Trade Openess	\(CTO = \frac{X + M}{GDP} \times 100\)
Trade Account Balance (TAB)	\(TAB = \frac{X_g - M_g}{GDP} \times 100\)
Current Account Balance (CAB)	\(CAB = \frac{X_{g\&s} - M_{g\&s}}{GDP} \times 100\)
Comparative advantage index	\(IVCR = \frac{X_i / X}{X_{iw} / X_w}\)
Relative trade balance (RTB)	\(RTB_i = \frac{X_i - M_i}{X_i + M_i} \times 100\)
Index of the contribution to the balance (ICB)	\(ICB_i = \left[\frac{X_i - M_i}{X_i + M_i} - \frac{\sum X_i - \sum M_i}{\sum X_i + \sum M_i}\right] \cdot \frac{X_i + M_i}{(\sum X_i + \sum M_i)/2} \times 100\)
Grubel y Lloyd (GL) Index of intraindustry trade	\( GL_i = \frac{X_i + M_i - \lvert X_i - M_i \rvert}{X_i + M_i} = 1 - \frac{\lvert X_i - M_i \rvert}{X_i + M_i}, \quad 0 \leq GL_i \leq 1 \)

Economic integration

GATT general agreement on tariffs and trade (1947) OMC (164 countries)

A most-favored-nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries. Equal treatment

Exceptions - Integration agreements - Developing countries (tariff reductions to all developing countries)

Trade creation and trade diversion.

GATT trade rounds

Economic integration:

Preferential agreements - non-reciprocal barrier reductions
FTA – Reciprocal tariff reductions Nafta - USMCA
Customs Union (CU) – common tariffs system
Common Market (CM) = CU + free movement of capital and people
Economic Union (EU) = CM + common economic policies
Total integration, monetary union = EU+ Monetary Union (common currency & fiscal union)

Trade Creation: Trade creation happens when the customs union causes a member country to replace a relatively high-cost domestic producer with a lower-cost producer from within the union.
Trade Diversion: Trade diversion occurs when the customs union causes the home country to switch from buying a cheaper good from a non-member to a more expensive good from a member, simply because the latter now faces no tariff while the former still does.

Trade evolution

Source: Own ellaboration using DESTA.

Trade aggreements

Southern African Development Community (SADC)
Common Market for Eastern and Southern Africa (COMESA)
Economic Community of West African States (ECOWAS)
Central African Economic and Monetary Community (CEMAC)
West African Economic and Monetary Union (WAEMU)
European Union (EU)
North American Free Trade Agreement (NAFTA)
Association of Southeast Asian Nations (ASEAN)
Comunidad andina (CAN)

FTA evol

Customs unions

Andean Community (CAN)
Caribbean Community (CARICOM)
Central American Common Market (CACM)
East African Community (EAC)
Economic and Monetary Community of Central Africa (CEMAC)
Eurasian Customs Union (EACU)
European Union Customs Union (EUCU; EU–Monaco; EU-Andorra; EU-San Marino; EU-Turkey)
Common Market for Eastern and Southern Africa (COMESA)
Gulf Cooperation Council (GCC)
Israel–Palestinian Authority
Southern Common Market (MERCOSUR)
Southern African Customs Union (SACU)
Switzerland–Liechtenstein (CH-FL)
West African Economic and Monetary Union (WAEMU)

Trade barriers Beneficiaries- small groups Reassons:

Nascent industry ( infant industries)
Strategic sectors

Arancel óptimo: maximiza el bienestar del país.

En modelos básicos, el arancel óptimo, t, se expresa como: t=1/ε donde ε es la elasticidad de oferta de exportación extranjera.

Interpretación: - cuanto menos elástica sea la oferta extranjera, mayor puede ser el arancel óptimo; - cuanto más elástica, menor debe ser. Intuición: El arancel será “óptimo” mientras la ganancia por mejora de los términos de intercambio (relación entre precio de las exportaciones de un país y el precio de sus importaciones) sea mayor que las pérdidas internas de eficiencia.

Decreasing tariff and increasing NTB NTB

Source:GLOBAL VALUE CHAIN DEVELOPMENT REPORT 2023

NTM

Great varieties of Non-Tariff Measures NTM https://i-tip.wto.org/goods/Forms/GraphView.aspx Source WTO

Geographic distribution:

Trade concentration in developed countries (2/3 of trade inside the region)
Increasing presence of developing (mainly Asia)
Increase in the trade between the south
Specialization
Manufacturing but increasing role of services especially in developed countries. High intra industry trade. Primary good problems (Price variability-uncertainty, deterioration of terms of trade, technological improvement
Developing Agriculture and lower level of intra industry trade
Agricultural and extractive exports lower growth than manufacturing exports. Services higher growth (e.g. digital provided services) (growth rates depends on income elasticity)
Services content in manufacturing exports is increasing

Problems of specializing in raw or agricultural materials:

Variability of international prices (consequences on macroeconomic stability)
Deterioration of the real terms of trade (export prices vs. import prices)
Difficulties in the accumulation of technological capabilities.

Potential negative effects of trade

Distributional (winners/losers) -Job displacement and wage pressure
- High-skill/management vs routine labor
Deindustrialization
- Offshoring
Superstar effects
- Concentration
- Monopsony power; weaker bargaining power for workers
Race-to-the-bottom concerns (standards and taxation)
- Labor/environmental standards (Pollution havens)
- Profit shifting and tax-base erosion
Environmental harms
- Higher emissions from transport
- Biodiversity loss
Financial fragility and external shocks
- Openness can transmit crises (credit crunch → trade collapse)
- Currency mismatches, sudden stops, and volatility for trade-dependent economies
- Supply-chain vulnerability / Food and energy dependence
Political backlash
- Populism and polarization
- Reduced trust in institutions; backlash against immigration/trade agreements
- Policy autonomy
Dependence
- Commodity price crisis

Global Value Chains

Trade in value-added and global value chains: country statistical profiles

Country profilesa

GVC

GVC_smile

GVC_smile2

GVC_decom

Imput/Output

Data:

GATT - WTO
UNCTAD
TiVA (OCDE-) Inter-Country Input-Output (ICIO)

Annex: Companies vs Countries

Glossary

Exercise

Comparative advantage

Exercises

1- Exercise FDI

Using data from OECD. - Compare FDI flows and stocks for one country. - Explain why the are not exactly related (stock (t+1) = stock (t) + flow - Which countries has more stock.

2- Exercise Trade and FDI Using this data from UNCTAD select one country and - Calculate trade openess - Compare remitances with FDI

3- Exercise Trade and competitiveness

Use WITS data to obtain merchandise trade (exports, imports), tariff and non-tariff (NTM) data, perform tariff cut simulation and analyze trade competitiveness of countries.

4- Read and summarize

Summarize the topics and trends of the 4 latest Global Trade Update - UNCTAD

References

Globalisation and Economic Growth: A Historical Perspective. Nicholas Crafts

Learn more

Documents

Charting Globalization’s Turn to Slowbalization After Global Financial Crisis & [The peak of globalisation myth]https://rbaldwin.substack.com/p/the-peak-) & Which nation(s) drove globalisation’s peak?
What are the six facts you need to know about the future of trade?
History of the multilateral trading system
A tale of two globalizations: gains from trade and openness 1800-2010
Has Globalisation Really Peaked for Europe? ECIPE
Global Trade Update - UNCTAD
Is Globalization Dead?
A brief history of globalization | World Economic Forum

Statistics

Examen estadístico del comercio mundial WTO
World Integrated Trade Solutions Cadenas globales de valor OECD
World Integrated Trade Solution (WITS) | Data on Export, Import, Tariff, NTM
IMF Data Mapper
The Atlas of Economic Complexity Visualize global trade data and economic growth opportunities for every country
The Observatory of Economic Complexity | OEC Access monthly 2021 data for the world's largest economies. Explore the trade patterns of provinces cities and states, such as Bavaria in Germany, Beijing in China, or California in the United States.
World Trade Monitor CPB

Globalisation dashboard

Is Globalization Dead? | Davos | #WEF22 - YouTube

Data and Tools for Trade and Global Value Chains Analyses

https://www.visualcapitalist.com/mapped-foreign-direct-investment-by-country/ https://www.visualcapitalist.com/the-importance-of-fdi-and-why-it-must-be-revived/