Trade Negotiation Course Code: IE409 Evening Class 1
Main text book, Policy Development and Negotiations in International Trade Additional materials, Negotiating the World Economy Walter Goode, Negotiating Free-Trade Agreements: A Guide, Department of Foreign Affairs and Trade, Commonwealth of Australia, 2005 Christopter Steven and Lauren Phillips, Creating Country Trade Negotiating Strategies: A Handbook, Oversea Development Institute, UK, 2007 The WTO and Trade Economics: Theory and Policy, WTO, Aug 2012 2
Class Spirit: Should be fun, inspiring and open Both theories and practices Mutual respect Class will consist of: Lecturing Reading, discussing, debating, presenting, etc Case studies No Politics Academic integrity 3
Academic Integrity is imperative. 4
Evaluation: Class Activities and Quizzes: 10% Assignment: 10% Progress Tests: 30% Presentation : 10% Final Exam: 40% 5
Speaking in class doesn t necessarily mean participating in class activities. Score from class activity Likes stealing candy from a baby 6
Academic Achievements Master of Development Policy, KDI School of Public Policy and Management, RoK Bachelor of Arts, International Relations, University of Cambodia Mobile: 089 651 115 Email: kh.eahai@gmail.com 7
Share your info Your name and major Expectation from this class Suggestion for lecturing Your concern, if any Others, 8
How to find your Lecture Slides 1. Visit: www.cambodiancorner.wordpress.com 2. Go to Dissemination To download powerpoint: 1. Visit cambodiancorner.wordpress.com" 2. Go to Dissemination 3. Click on each file to download 9
Why do countries trade? 10
Country trade because they are different. They have different technologies or have a different amount of capital and labour, or they trade because they produce different varieties of the same good. In the first case, trade generates gains because it allows countries to specialize in the production of the good they can produce relatively more efficiently or that uses intensively the factor that they are more endowed with. In the second case, trade generates gains because consumers like variety and trade provides access to different varieties of goods produced all over the world. By increasing the variety of goods consumers can access and buy, trade makes consumers better off. 11
Starting with Theory of International Trade 12
What is Mercantilism?
Mercantilism 14
Mercantilism The increasing of its holding gold and silver leads to nation s wealth. To do so country has to export more and import less. In other word of saying, country needs to have trade surplus and avoiding trade deficit. The strategy called Protectionist Policy, and it is still used nowadays by most countries like Japan, China, Singapore, Taiwan, and Germany. Protectionist Policy/Neo-mercantilism favours export, discouraged import (import restriction), uses domestic subsidies on key industries in its economy.
Free Trade?
Absolute Advantage?
Absolute Advantage Specialization is the most important source of gains from trade. How does it work? Trade allows countries to specialize in the production of the goods that they can produce relatively MORE efficiently and import the goods that they produce relatively LESS efficiently. The exchange of these goods benefits both countries. This is known in economic theory as absolute advantage. 18
Trade should flow naturally according to market forces. Country should focus on producing goods which are specializing (cheaper, faster, and better), so it leads to efficiencies. Nation s wealth shouldn t be judged by how much gold and silver it had but rather by the living standards of its people. 19
Market Forces?
Market Forces
Adam Smith (1723-90) was a Scottish economist, philosopher, and author. He was a moral philosopher, a pioneer of political economy, and was a key figure during the Scottish Enlightenment era. 22
Admin Smith describe how absolute advantage applies in the context of international trade. To illustrate this, let s look at the following example: Suppose country A is better than country B in producing roses, and country B is better than country A in producing computers. 23
This is because country A can produce more roses than country B with the same number of employees per hour, while country B can produce more computers than country A under the same condition. Then, it will be obvious case that each country will specialize in the product that it can produce most efficiently and then trade their products: Country A will export roses and import computers from B, while country B will export computers and import roses from A. 24
But, can a country with no absolute advantage gain from trade? 25
Comparative Advantage The answer is YES. There are potential gains from trade for all trading partners, regardless how countries compare absolutely. A country dose not have to be better at producing something than its trading partners to benefit from trade (absolute advantage). It is sufficient that it is relatively more efficient than its trading partners (comparative advantage). 26
David Ricardo (1772-1823) was a British political economist. He was one of the most influential of the classical economists. 27
Comparative Advantage?
The theory of comparative advantage states that when two countries specialize in producing the good in which they have a comparative advantage, BOTH economies gain from trade, even if one country is more efficient in producing both goods. Each country will export the good for which it has a comparative advantage. A model of comparative advantage based on differences in labor productivity, which results from differences in technology, was first introduced in the early 19th century by the economist David Ricardo. 29
A country has a comparative advantage in producing a certain good, if the opportunity costs of producing that good in terms of other goods, is lower in that country than it is in another country The opportunity cost of a certain good, e.g. roses, in terms of another goods, e.g. computers, is the number of roses that could have been produced with the resources used to produce a given number of computers. Opportunities costs differ across countries because of differences in technologies.
Suppose that there are only two countries in the world, Country A and Country B, and two sectors, roses and computers. A worker employed in the roses sector would produce 5 million roses in country A, and 8 million in Country B. Another worker employed in the computer sector would produce 200 computers in country A and 1000 computers in Country B. The Ricardian Model shows that there is scope for mutual gains when each country specializes its production towards products for which it has low opportunities costs relative to other products. 31
Factor Proportion Theory In reality, trade is not just determined by technological differences, but it also reflects differences in factor endowments across countries. To explain the importance of resources in trade two economists, Heckscher and Ohlin, have developed a theory known as the factor proportion theory. This theory essentially says that countries will export products that use their abundant and low-cost factors of production, and import products that use the countries scarce factors. 32
Eli Filip Heckscher (1879-1952)was a Swedish Political Economist and Economic Historian. Bertil Gotthard Ohlin (1899-1979) was a Swedish economist and politician. He was a professor of economics at the Stockholm School of Economics. 33
The Smith and Ricardo s theory didn t give countries to determine which product is a country advantage. Both countries assume free and open market in which it will producers could determine the efficiency. This Factor Proportion Theory/Heckscher-Ohlin Theory focus on how a country could gain a comparative advantage by producing products that utilised factors that were in abundance in the country. Based on the country s production factors: land, labour, and capital. 34
But, to be specific, what are the gains from trade? 35
Economic theory has identified several sources of gains from trade: Gains from better utilization of resources Gains from increased competition Gains from access to a broader variety of goods and services Gains from innovation and technology transfer 36
What kind of trade policy should our country apply?
Free Trade vs. Protectionist Policies International trade theory asserts the benefits of free trade. In reality, however, many countries adopt protectionist policies. As explained above, when a country liberalizes trade, some people gain and others lose. In particular, the export sector is likely to gain from opening up to trade, while the import competing sector is likely to lose. Therefore, in most cases protectionist policies are the consequence of the lobbying activity of industries in the import-competing sectors that wish to protected against competition from the rest of the world. 38
Trade Liberalization and Adjustment Costs Understanding the potential distributive effects of trade may help to anticipate and minimize the adjustment costs derived from trade liberalization. Adjustment costs are the costs incurred, for example, by displaced workers (e.g. in the import-competing sector) that have to look for another job. Adjustment costs are also the costs of a firm that needs to invest in order to adjust to the new market conditions. 39
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