Course Title:

International Economics

Instructor: Jia Huey (Jessica) Hsu

124116@mail.tku.edu.tw
Research Room: B1123

TLFBB4A
DIVISION OF GLOBAL COMMERCE,
DEPARTMENT OF INTERNATIONAL
BUSINESS
September, 2022
 An Overview of World Trade
World Economic Outlook

Why do countries trade

Who trades with whom

The Gravity Model

Impediments to trade: distance, barriers, and borders

The changing pattern of world trade (World Trade

Organization) 1
World Economic Outlook, October 2020: A Long and Difficult Ascent
World Economic Outlook, October 2021: Recovery during a pandemic

• While recovery in China has been faster than expected, the global economy’s
long ascent back to pre-pandemic levels of activity remains prone to setbacks.
• The global recovery continues, but momentum has weakened, hobbled by the
pandemic. Risks to economic prospects have increased, and policy
trade-offs have become more complex. The global economy is projected
to grow 5.9 percent in 2021 and 4.9 percent in 2022.
https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020
https://www.youtube.com/watch?v=4GZzzXdBydQ https://www.youtube.com/watch?v=yak1L2guWHk
Gloomy and More Uncertain 2022

The global economy is slowing sharply. The war in Ukraine,

rising energy and food prices, and supply-demand
imbalances are feeding worldwide inflation.
https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022
https://www.youtube.com/watch?v=BKPFtfryx7E
Source: IMF, https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020.
Source: IMF, https://www.imf.org/en/Publications/WEO/Issues/2021/03/23/world-economic-outlook-april-20216
Source: https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022
Source: IMF, https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020.
Source: IMF, https://www.imf.org/en/Publications/WEO/Issues/2021/03/23/world-economic-outlook-april-20219
Source: https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022
10
Why do countries trade?
11
 Why do Lower prices

countries Greater choice

trade Differences in resources

Economies of scale

Increased competition

More efficient allocation of resources

Source of foreign exchange

 Consumers enjoy increased variety of
goods.

Producers sell to a larger market, may

Benefits of achieve lower costs by producing on a
International larger scale.
Trade Competition from abroad may reduce
market power of domestic firms, which
would increase total welfare.
Trade enhances the flow of ideas,
facilitates the spread of technology
around the world.
13
 The Jobs Argument

The Arguments The National Security Argument

for Restricting
Trade The Infant Industry Argument

The Unfair Competition Argument

14
15
 •More than 30% of world
output is sold across
Who trades national borders.
with whom •The largest 15 trading
partners with the U.S.
accounted for 75% of the
value of U.S. trade in 2015.
Figure 1 Total U.S. Trade with Major Partners, 2008
Source: U.S. Department of Commerce. 17
Figure 2 Total U.S. Trade with Major Partners, 2015
Source: U.S. Department of Commerce. 18
 America's Most Important Trading Partners

The top U.S. trading partners for goods only, year-to-date August 2020 (in billion of US dollars).
Source: https://www.statista.com/chart/10942/top-us-trading-partners-for-goods/
 2
0

The Gravity
Model
 A strong empirical relationship
between:
➢ The size of a country’s economy
➢ The volume of its trade (imports
and exports)

21
 The gravity model predicts that the
volume of trade is
◆ directly related (proportional) to the
GDP of each trading partner
◆ inversely related to the distance
between them.

22
The Gravity Model
The gravity model assumes that size and distance are important
for trade in the following way:
A  Yi  Yj
Tij =
Dij
where A is a constant term
Tij is the value of trade between country i and country j
Yi is the GDP of country I, Yj is the GDP of country j
Dij is the distance between country i and country j
23
 Shows the correspondence
between the size of
different European
economies and those
countries’ trade with the
United States.

Figure 3 The Size of European Economies, and the Value of Their Trade with
the United States Source: U.S. Department of Commerce, European Commission 25
The United States
does markedly
more trade with its
neighbors than it
does with
European
economies of the
same size.

Figure 4 Economic Size and Trade with the United States

26
 Using the Gravity Model to Look for
Anomalies
➢A gravity model fits the data on U.S. trade with European
countries well but not perfectly.
➢The Netherlands, Belgium and Ireland trade much more
with the United States than predicted by a gravity model.
• Ireland has strong cultural connection due to common
language and history of migration.
• The Netherlands and Belgium have transport cost
advantages due to their location.

27
 Using the Gravity Model to Look for
Anomalies

multinational The existence

Culture Geography
corporations of borders

28
➢ Cultural: close cultural ties, such as a common
language, usually lead to strong economic ties.
➢ Geography: ocean harbors and a lack of mountain
barriers make transportation and trade easier.
➢ Multinational corporations: corporations spread
across different nations import and export many goods
between their areas.
➢ Borders: crossing borders involves formalities that take
time, often different currencies need to be exchanged,
and perhaps monetary costs like tariffs reduce trade.

29
 The GB–EU border
Why have border formalities changed?
• At the end of the Brexit transition period (11pm on 31 December 2020) the UK left
the single market and customs union. Great Britain and the EU no longer apply the
same customs rules, regulatory standards or enforcement mechanisms, meaning
goods crossing the border between Great Britain and the EU are
now subject to customs formalities.
• Border checks are required to ensure that any
applicable tariffs or duties are paid and that imported goods meet
the relevant standards in areas such as food and product safety and disease
control, to prevent smuggling and illicit activity, and to comply with international
obligations.

Source: https://www.instituteforgovernment.org.uk/explainers/future-relationship-gb-eu-border
Using the Gravity Model to Assess the
impact of a trade agreement
An effective trade agreement
should lead to significantly
more international trade
among its partners

31
 Exercise

1. The gravity model explains why

(A) trade between Sweden and Germany exceeds that
between Sweden and Spain.
(B) countries with oil reserves tend to export oil.
(C) capital rich countries export capital intensive products.
(D) European countries rely most often on natural
resources.
32
 Exercise

1. The gravity model explains why

(A) trade between Sweden and Germany exceeds that
between Sweden and Spain.
(B) countries with oil reserves tend to export oil.
(C) capital rich countries export capital intensive products.
(D) European countries rely most often on natural
resources.
Answer: A 33
 The EU is a
group of 27
countries in
Europe.
The European Union
These countries
came together
to make things
better, easier
and safer for
people.

A future EU-UK
partnership
 Exercise

2. According to the gravity model, a characteristic that tends

to affect the probability of trade existing between any two
countries is
(A) their cultural affinity.
(B) the average weight/value of their traded goods.
(C) their colonial-historical ties.
(D) the distance between them.
35
 Exercise

2. According to the gravity model, a characteristic that tends

to affect the probability of trade existing between any two
countries is
(A) their cultural affinity.
(B) the average weight/value of their traded goods.
(C) their colonial-historical ties.
(D) the distance between them.
Answer: D 36
 Exercise

3. In general, which of the following do NOT tend to increase

trade between two countries?
A) linguistic and/or cultural affinity
B) historical ties
C) larger economies
D) the existence of well-controlled borders between
countries

37
 Exercise

3. In general, which of the following do NOT tend to increase

trade between two countries?
A) linguistic and/or cultural affinity
B) historical ties
C) larger economies
D) the existence of well-controlled borders between
countries
Answer: D
38
International negotiations of
trade policy
(World Trade Organization)

39
The Multilateral Trading System
The Bretton Woods conference in 1944

➢ The International Monetary Fund

(IMF) (Successful)
➢ The World Bank (Successful)
➢ The International Trade
Organization (ITO) (Failed)
 1948

The General
Agreement on
Tariffs and Trade
The Multilateral (GATT)

Trading System World Trade

– From GATT to
Organization
(WTO)
WTO 1995

✓To negotiate global trade agreements

✓To settle members’ trade disputes
✓To promote members’ economic growth and development
 GATT rounds of trade negotiations

Year Name Subjects covered Countries

1947 Geneva Tariffs 23
The General 1949 Annecy Tariffs 13

Agreement 1951
1956
Torquay
Geneva
Tariffs
Tariffs
38
26

on Tariffs and 1960-

1961
Dillon
Round
Tariffs 26

1964- Kennedy Tariffs and anti-dumping measures 62

Trade (GATT) 1967
1973-
Round
Tokyo Tariffs, non-tariff measures, 102

Trade Rounds 1979 Round “framework”

agreements
1986- Uruguay Tariffs, non-tariff measures, rules,
1994 Round services, intellectual property, dispute
123
settlement, textiles, agriculture,
creation of WTO
Source: https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact4_e.htm#rounds (Accessed 15 February 2019).
What is the World Trade Organization (WTO)?

An intergovernmental Addressing the rules

organization of trade between
nations
 Let’s Talk WTO

The creation of the WTO

How does the WTO work?

Source: https://www.wto.org/english/res_e/webcas_e/ltt_e/ltt3_e.htm
 The
WTO’s
members

Source: https://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr_e.htm
 The vast majority of WTO
member are states.

Who can A separate customs

apply for territory which possesses full
WTO autonomy in the conduct of its
Membership? external commercial relations can
become member of the WTO.
Taiwan, Macao and Hong Kong.
Non-discrimination

More open and predictable trade

Transparency

Special treatment for less-developed members

The basic principles of the WTO

Non-discrimination

The most-favored nation

(MFN) principle: treating
other WTO members equally

The National treatment

principle: treating foreigners
and locals equally
 Technical Assistance for
acceding governments
Acceding governments benefit from
WTO technical Assistance

The special position of LDCs is

acknowledged

WTO website - includes basic

information, news, list of members in
process of accession
 The institutional structure of the WTO

How does
the WTO
work?
 WTO
organization
chart

Source: https://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr_e.htm
 Developing countries comprise a majority
of the WTO membership.
Definition of a “developing country”
Who are the
developing ➢ There are no WTO definitions of
“developed” and “developing” countries.
countries in
➢Members announce for themselves
the WTO? whether they are “developed” or
“developing” countries.
➢Other members can challenge the
decision of a member to make use of
provisions available to developing
countries.
 The exceptions provide flexibility for the members
to meet their policy objectives.

Main
exceptions to
the Basic
Principles
 WTO Members have the right to grant
preferential treatment to their
Regional Trade trading partners within a customs
Agreements
(RTAs): Customs unions or a free trade area, without
Unions and Free having to extend such better
Trade Areas
treatment to all WTO members,
subject to certain conditions.
 The EU is a
group of 27
countries in
Europe.
The European Union
These countries
came together
to make things
better, easier
and safer for
people.

A future EU-UK
partnership
North American Free
Trade Agreement
(NAFTA)

The United States commenced bilateral trade negotiations with Canada more than 30
years ago, resulting in the U.S.-Canada Free Trade Agreement, which entered into force
on January 1, 1989. In 1991, bilateral talks began with Mexico, which Canada joined. The
NAFTA followed, entering into force on January 1, 1994.
The Comprehensive and Progressive Agreement for
Trans-Pacific Partnership (CPTPP) is a free trade
agreement (FTA) between Australia, Brunei Darussalam,
Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand,
Singapore, and Vietnam.
The Association of Southeast
Asian Nations (ASEAN) was
established on 8 August 1967 in Bangkok,
Thailand by Indonesia, Malaysia, Philippines,
Singapore, and Thailand.
Brunei Darussalam then joined on 7 January
1984, Viet Nam on 28 July 1995, Lao and
Myanmar on 23 July 1997, and Cambodia on
30 April 1999, making up what is today the
ten members of ASEAN.
The Southern Common Market (MERCOSUR for
its Spanish initials) is a regional integration process.
SADC-EAC-COMESA Tripartite Free Trade
The Heads of State and Government of the
Common Market for Eastern and Southern Africa
(COMESA), East African Community (EAC) and
Southern African Development Community
(SADC) met on 10 June, 2015 in Sharm El Sheikh,
Egypt at the Third Tripartite Summit to officially
launch the COMESA-EAC-SADC Tripartite Free
Trade Area (TFTA). The Agreement initially
covered 26 member states across the three RECs,
but with the expansion of the EAC to include
South Sudan in April 2016, the total number of
participating member states has risen to 27.
 Case Study

Agreement between New Zealand and the Separate Customs Territory

of Taiwan, Penghu, Kinmen, and Matsu on Economic
Cooperation(ANZTEC), 10 July 2013
 World trade statistical
review
Highlights of world trade in 2018
 The changing pattern of world trade

Let’s talk future World Trade WTO Annual

of trade Statistical Review Report 2019
2019

63
WTO Annual Report 2019 by the WTO
World Trade Statistical Review 2019
 World merchandise trade in 2018

Source: WTO, World Trade Statistical Review 2019.

World trade in commercial services in 2018

Source: WTO, World Trade Statistical Review 2019.

World’s leading
traders of goods
and services,
2008 and 2018
(US$ billion)
Merchandise
traders
improving their
rankings among
the world’s top 50,
2009-2019

70
Commercial
services
traders
improving their
rankings
among the
world’s top 50,
2009-2019

71
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