Guus Hendriks

Global Environment of Business

29 October and 31 October 2019

International Trade
Seminars

• Experience?

• Revisiting learning objectives

• Reading in full vs. information searching and filtering
• Relating to own experience: coming up with examples
• Interlinkages
• ‘Right’ and ‘wrong’ answers
Outline

1. Characteristics of Global Trade

2. Theories on Trade

3. Liberalisation vs. Protectionism

4. The role of WTO and trade agreements

5. Resurgence of protectionism: Trade wars?

6. Future of Trade?
Characteristics of Global Trade
Characteristics of Global Trade
Characteristics of Global Trade

• WTO provides more information in the annual World Trade Report

and the World Trade Statistical Review
Characteristics of Global Trade
Theories on Trade - Ricardo
• Ricardian trade theory makes a case for freedom of trade: countries
should produce goods for which it has a comparative advantage, not
necessarily an absolute advantage
• Relates to the idea of opportunity costs

Hours needed to produce one unit

Cheese Cider

Netherlands 80 90

United Kingdom 120 100

• Although NL needs fewer hours to produce both goods (absolute

advantage), it could use its time more efficiently by specializing
• U.K. can produce 5/6 units of cheese with 100h, NL could spend 90h on
cider, or produce 9/8 units of cheese
Theories on Trade - Ricardo

• In absence of trade to have 1 unit of each product:

• The U.K. spends 220 hours
• Netherlands spends 170 hours

• Or, both countries could specialize in the products where they have a
comparative advantage (most efficient)
• The U.K. spends 220 hours to produce 2.2 units of cider
• Netherlands spends 170 hours to produce 2.125 units of cheese
• A greater number of units even when spending the same amount of hours
Theories on Trade – Heckscher-Ohlin
• Essentially more sophisticated version of Ricardo model that takes
into account factor endowments
• In short, the model predicts that countries export products that use their
abundant and cheap factors of production, and import products that use the
countries' scarce factors

Source: Colin Danby, UoW

Firm-centric theories

• International product life cycle theory (Vernon)

Firm-centric theories: Competitive advantage

• Global Strategic Rivalry (Krugman & Lancaster)

• Focus on MNEs, barriers to entry, and efforts to gain competitive advantage
over global rivals

• National competitive advantage (Porter)

Liberalisation vs. Protectionism

• Inspired by economic trade theories, emphasis has been on ensuring

free trade and reducing the costs of trade
Liberalisation vs. Protectionism

• Nowadays, tariffs only represent a minor fraction of trade costs

Role of the WTO

• 1947: GATT
• 23 members
• Most Favoured Nation principle (exception: FTA)
• 1965: Generalised System of Preferences
• 1995: WTO
• 164 members (equal vote) and 97% of trade
• GATS, TRIPS, TRIMs
• 2001: China’s entry (as non-market economy)
• From 2001: Doha Round…
• Average tariffs: from 40% (1948) to 5% (1995)
• Total trade in 2000 was 22-times the level of 1950
 Resurgence of protectionism: Trade wars?

• Since January 2018, U.S. has imposed tariffs on billions worth of Chinese
exports (estimates vary)

• Fears of U.S.-Europe trade war subsided, then surged again

• Most economists warn for the dire consequences of tariffs and fear retaliation
Trade wars: The economics
Future of Trade?

• International trade costs declined by 15 per cent between 1996 and

2014. New technologies will help to further reduce trade costs
• WTO projects that trade could grow yearly by 1.8 to 2 percentage points
more until 2030 as a result of the falling trade costs

• The importance of services in the composition of trade is expected

to increase. WTO predicts the share of services trade to grow from
21 per cent to 25 per cent by 2030

• Regulation of intellectual property rights, data flows, and privacy as

well as the quality of digital infrastructure are likely to emerge as
new sources of comparative advantage.
Next…