Chapter 2

International Trade and

Investment

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
INTERNATIONAL TRADE

This basically refers to the exchange

of goods and services carried out
between countries.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
FREE TRADE

- Refers to a situation where a government does not

attempt to influence through quotas or duties what its
citizens can buy from another country, or what they can
produce and sell to another country.

- Goods and services are allowed to move freely

between countries.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Free trade agreement
These are treaties between two or more countries
designed to reduce or eliminate certain barriers to
trade and investment, and to facilitate stronger trade
and commercial ties between participating countries.

Largest Free Trade Agreements In The World

• European Union (EU)
• North American Free Trade Agreement (NAFTA)
• Dominican Republic-Central America-United States
Free Trade Agreement (CAFTA-DR)

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
 Free trade agreement
These are treaties between two or more countries
designed to reduce or eliminate certain barriers to
trade and investment, and to facilitate stronger
trade and commercial ties between participating
countries.

They determine the tariffs and duties that

countries impose on imports and exports.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Imports
- These are goods and services produced in a foreign country and
bought by domestic residents, thus provider is from outside the
country
- Includes anything shipped into the country even if it's by the
foreign subsidiary of a domestic firm
Exports
- Goods and services that are made in a country and sold outside
its borders.
- Includes anything shipped from a domestic company to its
foreign affiliate or branch.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Example: FTA entered by ASEAN-Hongkong,
China (June 11, 2019)
Hong Kong and Singapore will grant tariff free access and will bind their
customs duties at zero upon entry into force of the agreement.

Brunei, Malaysia, the Philippines and Thailand will eliminate customs

duties on 85% of products traded with Hong Kong within ten years and
reduce another 10% of tariff lines within 14 years.

Indonesia and Viet Nam will eliminate customs duties for 75% of their
products within ten years, and reduce another 10% of tariff lines within 14
years

Cambodia, Laos and Myanmar will eliminate customs duties for 65% of
their products within 15 years and reduce another 20% of tariff lines
within 20 years

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Association of Southeast Asian Nations (ASEAN)
o Established on August 8, 1967
o Member states: Brunei, Cambodia, Indonesia, Laos,
Malaysia, Philippines, Singapore, Thailand and Vietnam
o Theme: A community of Opportunities for All (2018-
2025)
o Objective: To improve the lives of Southeast Asian
peoples through economic and cultural development,
social progress, regional peace and security,
collaboration, mutual assistance in training and research,
improvement of living standards and cooperation with
regional and international organizations.
A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Political - Security

Serving as the bedrock for peace and stability in the region

are ASEAN political instruments such as the Treaty of Amity and
Cooperation in Southeast Asia (TAC) which is a key code of
conduct governing inter-state relations in the region

Economic

Provides ASEAN peoples with new opportunities through

an open and integrated market where there are more product
choices at competitive costs

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Socio Cultural

- Commitment to lift the quality of life of its peoples through

cooperative activities that are people-oriented and people-
centred.

- Open a world of opportunities to collectively deliver and fully

realise human development, promote sustainable
development, foster an ASEAN identity through inter-cultural
understanding and mutual respect, and prepare ASEAN
community to face new and emerging challenges in the
future.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Benefits derived from International Trade:

1. Lower Prices
- Ability to purchase goods and services at lower price than
domestic products and services
- Consumers can buy at lower cost, while producers are able
to have lower manufacturing cost.

2. Greater Choice
- Wide variety of products and services

3. Differences in Resources
- Availability of resources (goods and services) in one country
to produce products

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
4. Economies of scale
- Demand of products depends on the size of the market
- Direct relationship – the level of production and the size of
production units will also increase (applicable as well for
domestic products)
- The more bigger a firm is the more efficient it is because
they have larger resources and more specialized people and
thus, cost of product is lower since they have lower cost of
production.

5. Increased competition
- Domestic firms compete with foreign firms

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
6. More efficient allocation of resources
- When international trade takes place freely, without
government interference, then countries that are best at
producing certain goods and services will produce them thus,
they will be able to produce goods and services at lowest cost
and take advantage of their efficiency.

7. Source of foreign exchange

- international trade enables countries to obtain foreign
exchange (currency)

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
 New Trade Theory
o Developed by Paul Krugman

o Some cases countries specialize in the production and export of

particular products not because of underlying differences in
factor endowments, but because in certain industries the world
market can support only a limited number of firms.

o Firms that enter the market first are able to build a competitive
advantage that is subsequently difficult to challenge.

o The observed pattern of trade between nations may be due in

part to the ability of firms within a given nation to capture first-
mover advantages. Example : commercial aircraft industry

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
 International Trade Theory
1. Mercantilism

- Emerged in England during mid 16th century which believes that gold and
silver were the mainstays of national wealth and essential to vigorous
commerce.

- Main Principle: To maintain a trade surplus -- to export more than it

imported. Simply put, to increase their wealth through foreign trade, they
must sell more to strangers yearly than consume of theirs in value.

- They recommended policies to maximize exports and minimize imports.

Example: Imports were limited by tariffs and quotas, while exports were
subsidized.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
2. Absolute Advantage (Specialization)

- Smith argued that countries differ in their ability to produce goods efficiently.
Thus, he opposes the mercantilism assumption that trade is a zero-sum game.

- According to Smith, countries should specialize in the production of goods for

which they have an absolute advantage and then trade these for goods
produced by other countries. Thus, a country should produce a product
product when it is more efficient than any other country in producing it.

- Smith's theory of absolute advantage suggests that such a country might

derive no benefits from international trade.

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
ILLUSTRATION:

*Assuming same amount of resources used

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
ILLUSTRATION:

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
ILLUSTRATION:

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
3. Comparative Advantage

- David Ricardo further explored the theory of Absolute Advantage by Adam

Smith.

- According to Ricardo, it makes sense for a country to specialize in the

production of those goods that it produces most efficiently and to buy the
goods that it produces less efficiently from other countries, even if this
means buying goods from other countries that it could produce more
efficiently itself.

- Comparative advantage = lowest opportunity cost

- Example

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
ILLUSTRATION:

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Comparative advantage = lowest opportunity cost

Mary 1 extra radio cost = 1 cloth

Peter 1 extra cloth costs = 2 radios
1 extra radio costs = 1/2 cloth

Who has the comparative advantage?

Mary Opportunity cost of cloth= 1

Peter Opportunity cost of cloth = 2
Opportunity cost of radio = 1/2 a cloth

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Comparative advantage = lowest opportunity cost

Mary 1 extra radio cost = 1 cloth

Peter 1 extra cloth costs = 2 radios
1 extra radio costs = 1/2 cloth

Who has the comparative advantage?

Mary Opportunity cost of cloth= 1

Peter Opportunity cost of cloth = 2
Opportunity cost of radio = 1/2 a cloth

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
Cloth

Mary Opportunity cost = 1 radio

Peter Opportunity cost = 2 radios x

Therefore, Mary should concentrate on producing cloth

Radio

Mary Opportunity cost = 1 cloth x

Peter Opportunity cost = ½ cloth

Therefore, Peter should concentrate on producing radio

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
 A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
 A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon
 END

A member of the
Unified La Consolacion College
La Consolacion College Tanauan – South Luzon