Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: zz-x2580
ECON3116
International Trade: Theory & Policy Van Pham | ECON3116 International Trade Theory and Policy Introduction Plan of the lecture: • What is international trade about? • Australia’s trade at a glance • Explaining patterns of trade • The gravity model • Gains from trade • The effects of government policies on trade • Trade organizations and agreements 1-1 Objective: • Provide an overview of what International Trade is all about. • Give you a feel for what is to come later in the course. Van Pham | ECON3116 International Trade Theory and Policy 1-2 What is international trade about? There is a growing importance of trade in the world. Global trade grew faster than GDP in recent decades. 100 200 300 400 500 600 700 Trade GDP World GDP and Global Trade 1990 – 2022 (1990 = 100) Source: World Bank National account data and WTO Evolution of Trade = 1 2 ( + ) Van Pham | ECON3116 International Trade Theory and Policy 1-3 • There was a considerable increase in the ratio of trade to GDP between 1890 and 1913. This trend was ended by World War I and the Great Depression. • Trade to GDP ratio in most of the industrial countries grew faster during 1970s and especially from 1990s with the establishment of the WTO. What is international trade about? Trade in Goods and Services Relative to GDP Van Pham | ECON3116 International Trade Theory and Policy • International economics is about how nations interact through trade of goods and services, through flows of money and through investment. • International trade is an old subject, but it continues to grow in importance as countries become more closely linked through trade in goods and services, and through investment than ever before. 1-4 What is international trade about? Van Pham | ECON3116 International Trade Theory and Policy 1-5 What is international trade about? Many products source many components from many countries. Van Pham | ECON3116 International Trade Theory and Policy 1-6 • Trade in goods: Qantas buys Boeing 787 from the U.S, Boeing buys wing parts from firms in Japan and Korea. • Trade in services: airline travel, insurance, maintenance & repairs, tourism. • Offshoring: Boeing sets up a factory in Melbourne, Australia. What is international trade about? Van Pham | ECON3116 International Trade Theory and Policy 1-7 Mode 1: Cross Border Supply – only the service crosses the border through the use of telecommunications. Examples: consultancies, distance training. Mode 2: Consumption Abroad – only the consumer crosses the border to consume the services. Examples: tourists, oversea students attending Australian universities. What is international trade about? - Trade in Services 100 120 140 160 180 200 2010 2012 2014 2016 2018 2020 2022 Merchandise trade Services trade Mode 3: Commercial Presence - the supplier crosses the border by establishing a commercial presence. Examples: branch offices overseas by banks, hotels. Mode 4: Movement of Natural Persons – the supplier crosses the border temporarily to deliver services. Examples: a consultant travelling to provide services. Trade in Goods and Services (2010 =100) 20-25% of Total Trade 75-80% of Total Trade Source: https://stats.wto.org/ Van Pham | ECON3116 International Trade Theory and Policy International Trade Versus International Finance • International trade focuses on transactions of real goods and services across nations. – These transactions usually involve a physical movement of goods or a commitment of tangible resources like labor services. • International finance focuses on financial or monetary transactions across nations. – For example, purchases of US dollars or financial assets by Europeans. 1-8 Van Pham | ECON3116 International Trade Theory and Policy Australia's Trade at a Glance 1-9 0 30 60 90 120 150 0 30 60 90 120 150 Exports Imports International trade is even more important to many other countries than it is to Australia % of GDP % of GDP EX: 27% IM: 21% EX: 34% IM: 35% Export and Import as percentages of GDP in 2022 Source: OECD (2024), Trade in goods and services (indicator) Van Pham | ECON3116 International Trade Theory and Policy 1-10 Australia’s Exports and Imports value during 2001-2023 0 100 200 300 400 500 600 700 800 A$ billion Exports Imports Source: ABS catalogues 5368.0 • International trade has become increasingly important in the Australian economy. • In 2022-23, Australia exports $685 billion and imports $547 billion value of goods and services. • Australia is the 22nd largest trade partner in the world and account for 1.4% of the world trade flow (as of 2019-20). Australia's Trade at a Glance GFC COVID-19 Van Pham | ECON3116 International Trade Theory and Policy 1-11 Exports, Imports and Trade Balance as percentages of GDP (1959 – 2021) Australia's Trade at a Glance Source: ABS, Australian National Accounts: National Income, Expenditure and Product, 2021 Trade deficit Trade surplus Van Pham | ECON3116 International Trade Theory and Policy 1-12 35.3% 11.8% 5.8% 5.8% 4.4% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% China Japan Korea US UK 21% 13.4% 5.8% 4.2% 4.1% 0%5%10%15%20%25% China US Japan Germany Thailand Australia's Trade at a Glance Australia’s top trade partners 2019-20 Source: DFAT Trade and Investment at a glance 2021 Top export markets Top import markets Van Pham | ECON3116 International Trade Theory and Policy 1-13 Australia’s trade pattern by country has changed over time. Australia's Trade at a Glance 29% 2019-20 9% 4.5% 13% Asia: 65% Australian exports by regionAustralia’s two-way trade by region Van Pham | ECON3116 International Trade Theory and Policy 1-14 Australia's Trade at a Glance Exports by sector 2019-20 Imports by sector 2019-20 Source: DFAT Trade and Investment at a glance 2021 Van Pham | ECON3116 International Trade Theory and Policy 1-15 Sources: DISER, Resources and Energy Quarterly, 2022, DAWE, Agricultural Commodities, 2022, ABS, International Trade in Goods and Services, 2022. Australia's Trade at a Glance Australia’s export structure has changed overtime. 50% 18% 11% 8% 14% Van Pham | ECON3116 International Trade Theory and Policy 8.4% 5.5% 4.8% 3.8% 2.6% 2.6% 0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0% Personal travel Refined petroleum Passenger vehicles Telecom equipment Computers Freight services 21.6% 11.5% 10.0% 8.3% 5.1% 3.4% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Iron ores Coal Natural gas Edu-related travel Gold Personal travel 1-16 Australia's Trade at a Glance Australia’s top export and import products 2019-20 Source: DFAT Trade and Investment at a glance 2021 Van Pham | ECON3116 International Trade Theory and Policy Source: UN Comtrade database 2018 1-17 • 1st global exporter of iron ore and coal • 2nd largest exporter of aluminium ores, unwrought lead and zinc ores • 3rd largest exporter of copper ores (by value) • 2nd largest exporter of beef • 3rd largest exporter of lentil • 4th largest exporter of sugar • 4th largest exporter of wine (by value) Australia's Trade at a Glance Van Pham | ECON3116 International Trade Theory and Policy 1-18 • Differences in climate and resources can explain the trade pattern of several goods, e.g., why Brazil exports coffee and Australia exports iron ore. • In manufacturing and services, the effect of climate and resources on the pattern of trade is subtle. • Differences in labor productivity may explain why some countries export certain products, e.g., why Japan exports automobiles, and the US exports aircraft? • Differences in relative supplies of capital, labor and land used in the production of different goods and services may also be an explanation, e.g., why some countries export labor-intensive products and others export capital-intensive products. Patterns of Trade - Who sells what to whom? Van Pham | ECON3116 International Trade Theory and Policy 1-19 There are two types of trade: • Inter-industry trade depends on differences across countries (as per previous slide). • Intra-industry trade depends on market size and occurs among similar countries. – E.g. the U.S both exports and imports vehicles in large amount; – E.g. Australia both exports and import wine Intra-industry trade can be • Trade in Horizontally Differentiated Goods. • Trade in Vertically Differentiated Goods. Patterns of Trade - Who sells what to whom? Van Pham | ECON3116 International Trade Theory and Policy 1-20 Patterns of Trade - The Gravity Model Van Pham | ECON3116 International Trade Theory and Policy 1-21 • Trade with APEC countries accounts for 75% trade volume of Australia. • The 5 largest trading partners with Australia in 2020 were China (29%), ASEAN countries (14%), Japan (11%), U.S (10%), and Korea Rep. (5%) • Gravity model: Determinants of trade patterns – influence of an economy’s size on trade – distance and other factors that influence trade 1-21 The Gravity Model - Motivation Van Pham | ECON3116 International Trade Theory and Policy 1-22 Size matters The size of an economy is directly related to the volume of imports and exports. • Larger economies produce more goods and services, so they have more to sell in the export market. • Larger economies generate more income from the goods and services sold, so people are able to buy more imports. The Gravity Model - Motivation Van Pham | ECON3116 International Trade Theory and Policy 1-23 Other things besides size matter for trade: • Distance between markets influences transportation costs and therefore the cost of imports and exports. • Cultural affinity: if two countries have cultural ties or common language, it is likely that they also have strong economic ties. • Geography: ocean harbors and a lack of mountain barriers make transportation and trade easier. The Gravity Model - Motivation Van Pham | ECON3116 International Trade Theory and Policy 1-24 • Multinational corporations: corporations spread across different nations import and export many goods between their divisions. • Borders: crossing borders involves formalities that take time and perhaps monetary costs like tariffs. • These implicit and explicit costs reduce trade. • The existence of borders may also indicate the existence of different languages or different currencies, either of which may impede trade more. The Gravity Model - Motivation Van Pham | ECON3116 International Trade Theory and Policy 1-25 In its basic form, the gravity model assumes that only size and distance are important for trade in the following way: = ∗ ∗
where is the value of trade between country i and country j A is a constant is the GDP of country i is the GDP of country j is the distance between country i and country j The Gravity Model - Specification Van Pham | ECON3116 International Trade Theory and Policy 1-26 In a slightly more general form, the gravity model that is commonly estimated is = ∗ ∗
where a, b, and c are allowed to differ from 1. Perhaps surprisingly, the gravity model works fairly well in predicting actual trade flows, as the figure above representing US–EU trade flows suggested. The Gravity Model - Specification Van Pham | ECON3116 International Trade Theory and Policy Estimated gravity equation can be expressed as ln = ln + ln + ln − ln + which can be estimated using data via ordinary least squares regression. The gravity model predict that a 1% increase in the distance between countries is associated with a decrease in the volume of trade of 0.7% to 1%. The Gravity Model - Specification Van Pham | ECON3116 International Trade Theory and Policy 1-28 The Gravity Model – Empirical Evidence The size of European economies and the value of their trade with the United States Source: U.S Department of Commerce, European Commission Van Pham | ECON3116 International Trade Theory and Policy 1-29 Economic size and Trade with the United States Source: U.S Department of Commerce, European Commission The United States does markedly more trade with its neighbours than it does with European economies of the same size. The Gravity Model – Empirical Evidence Van Pham | ECON3116 International Trade Theory and Policy 1-30 • Distance and borders increase the cost and time needed to trade. • The negative effect of distance on trade is significant, but it has grown smaller over time due to modern transportation and communication. • Trade agreements between countries are intended to reduce the formalities and tariffs needed to cross borders, and therefore to increase trade. • The gravity model can be used to assess the effect of trade agreements on trade given GDPs and distances from one another of trading partners. The Gravity Model – Distance and Borders Van Pham | ECON3116 International Trade Theory and Policy 1-31 Gains from Trade - Issues • Is international trade good or bad? • to a country • to firms in an industry • to consumers • to workers Van Pham | ECON3116 International Trade Theory and Policy Gains from Trade - International trade in headlines 1-32 Van Pham | ECON3116 International Trade Theory and Policy Gains from Trade – Reason for Gains Several ideas underlie the gains from trade • When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off. • Australian consumers could buy cars through international trade that they otherwise would have a difficult time producing. • The producer of the cars receives income that it can use to buy the things that it desires. • This is sometimes referred to as mutually beneficial trade. 1-33 Van Pham | ECON3116 International Trade Theory and Policy • How could a country that is the most (least) efficient producer of everything gain from trade? • With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume. • Countries can specialize in production, while consuming many goods and services through trade. 1-34 Gains from Trade – Reason for Gains Van Pham | ECON3116 International Trade Theory and Policy • Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources. • When countries specialize, they may also be more efficient due to large scale production. • Trade allows for a greater variety of goods available to consumers. • Trade leads to more competition among domestic firms and a more efficient allocation of resources in the domestic economy. 1-35 Gains from Trade – Reason for Gains Van Pham | ECON3116 International Trade Theory and Policy Gains from Trade – Who might lose? Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country. • International trade can adversely affect the owners of resources that are used intensively in industries that compete with imports. • Trade may therefore have effects on the distribution of income within a country, e.g., changes in wages of high and low-skilled workers • Conflicts about trade should occur between groups within countries rather than between countries.