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An overview of international trade • International trade is a field of International economics that applies microeconomic models to help understand the international economy • Its content includes basic supply-and demand analysis of international markets; firm and consumer behavior; perfectly competitive, oligopolistic, and monopolistic market structures; and the effects of market distortions.

The typical course describes economic relationships among consumers, firms, factory owners, and the government • The objective of an international trade course is to understand the effects of international trade on individuals and businesses and the effects of changes in trade policies and other economic conditions.

We will discuss a free trade policy as well as protectionist policies • International finance is the second field of international economics that applies macroeconomic models to help understand the international economy.

Its focus is on the interrelationships among aggregate economic variables such as GDP, unemployment rates, inflation rates, trade balances, exchange rates, interest rates... 2 / 24 I.

An overview of international trade • International economics is growing in importance as a field of study because of the rapid integration of international economic markets • Consumers can easily buy international products from a local shop or a foreign seller • Firms compete in the domestic and foreign markets • Particularly, the development of digital technologies significantly reduces the costs of doing international business and trade 3 / 24 I.

An overview of international trade • Figure 1 shows the growth of exports in the world during the past fifty or more years • Apparently, one can see the exponential growth in outflows and inflows during the past fifty years 4 / 24 I.

An overview of international trade • Figure 2 shows world exports as a percentage of the world gross domestic product (GDP) for the years 1970 to 2008 • It shows a steady increase in trade as a share of the size of the world economy, from just over 10 percent in 1970 to over 30 percent by 2008 • Thus trade is not only rising rapidly in absolute terms; it is becoming relatively more important too. 5 / 24 I.

An overview of international trade • FDI is foreign ownership of productive activities and thus is another way in which foreign economic influence can affect a country • Figure 3 shows the amount of foreign direct investment (FDI) as a percentage of the world GDP between 1980 and 2007 • The share of FDI has grown dramatically from around 5 percent of the world GDP in 1980 to over 25 percent of the GDP just twenty-five years later 6 / 24 I.

An overview of international trade • What can be the reasons for the growth of international trade and investment? • There are various factors: economic growth, specializations, technology development..., but perhaps the most striking reason is the steady decline of trade barriers since the Great Depression of the 1930s • In particular, Post-WW II, the General Agreement on Tariffs and Trade, or GATT, prompted regular negotiations among a growing body of members to reciprocally reduce tariffs (import taxes) on imported goods • The GATT consists of a set of promises, or commitments, that countries make to each other regarding their own trade policies.

The goal of the GATT is to make trade freer (i.e., to promote trade liberalization), and thus the promises countries make must involve reductions in trade barriers • Countries that make these commitments and sign on to the agreement are called signatory countries 7 / 24 I.

An overview of international trade • During each of these regular negotiations (eight of these rounds were completed between 1948 and 1994), countries promised to reduce their tariffs on imports in exchange for concessions-that means tariffs reductions-by other GATT members • Now countries not only would lower tariffs on goods trade but also would begin to liberalize the agriculture and services markets.

They would agree to adhere to certain minimum standards to protect intellectual property rights such as patents, trademarks, and copyrights • The World Trade Organization (WTO) was created to manage this system of new agreements, to provide a forum for regular discussion of trade matters, and to implement a well-defined process for settling trade disputes that might arise among countries 8 / 24 I.

An overview of international trade • As of 2009, 153 countries were members of the WTO ”trade liberalization club,” and many more countries were still negotiating entry.

The latest round of trade liberalization talks, called the Doha Round (check timeline), concludes with an agreement—world markets will become increasingly open to trade and investment • Another international push for trade liberalization has come in the form of regional free trade agreements.

Over two hundred regional trade agreements around the world have been notified, or announced, to the WTO • These patterns lead to the called ”globalization” which refers to the economic, social, cultural, or environmental changes that tend to interconnect peoples around the world 9 / 24 Nondiscrimination principle of the GATT • Countries assure that their own domestic regulations will not affect one country’s goods more or less favorably than another country’s and will not treat their own goods more favorably than imported goods.

There are two applications of nondiscrimination: most favored nation and national treatment • Most-favored nation (MFN) refers to the nondiscriminatory treatment toward identical or highly substitutable goods coming from two different countries • For example, if the United States applies a tariff of 2.6 percent on printing press imports from the European Union (EU, one World Trade Organization [WTO] country), then it must apply a 2.6 percent tariff on printing press imports from every other WTO member country 10 / 24 Nondiscrimination principle of the GATT • National treatment refers to the nondiscriminatory treatment of identical or highly substitutable domestically produced goods with foreign goods once the foreign products have cleared customs. • Thus it is allowable to discriminate by applying a tariff on imported goods that would not be applied to domestic goods, but once the product has passed through customs it must be treated identically • This norm applies then to both state and local taxes, as well as regulations such as those involving health and safety standards • For example, if a state or provincial government applies a tax on cigarettes, then national treatment requires that the same tax rate be applied equally on domestic and foreign cigarettes 11 / 24 GATT Exceptions • Trade Remedies enable domestic industries to request increases in import tariffs that are above the bound rates and are applied in a discriminatory fashion.

They are intended to correct unfair trade practices and unexpected changes in trade patterns that are damaging to those industries that compete with imports • Antidumping laws provide protection to domestic import-competing firms that can show that foreign imported products are being ”dumped” in the domestic market • Safeguard laws (escape clauses) provide protection to domestic import-competing firms that can demonstrate two things: (1) that a surge of imported products has caused disruption in the market for a particular product, and (2) that the surge has substantially caused, or threatens to cause, serious injury to the domestic import-competing firms • Free Trade Areas (FTAs): two to several countries agree to reduce their tariffs and other barriers to zero,.... »