01 introduction

SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

INTRODUCTION TO TRADE POLICY AND THE WTO
MODULE 2

World Trade
Setting the Context
or
Why Trade?

1


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Mercantilists’ View of
Trade

According to the logic of Mercantilism (the
accepted viewpoint in the 17th-18th centuries), the
way for a nation to become rich was to export
more than it imported.
The policy implication was that the government
had to do all in its power to stimulate the nation’s
exports and to discourage and restrict imports.

Do you agree??

2


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Value of World Trade

• 2004- $ US 11 trillion
– Merchandise exports- $US 8.9 trillion
– Services exports- $US 2.1 trillion

• 2006—
– Merchandise exports--$US 11.98 trillion
– Services exports--$US 2.7 trillion

That is a very large amount of trade and a very
large number of jobs

3


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Growth of World Trade

• 2004 merchandise exports up 9%
• 2004 services exports up 18%
• 2006 merchandise exports up 14.75%
• 2006 services exports up 9.6%

4


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Asian Trade Growth

• Merchandise exports up:
–
–
–
–
–

2002- 9%
2003- 18.7%
2004- 29.3%
2005- 21%
2006- 17.7% (Value in 2006 –US$ 3.39 trillion)

Statistics are for Asia excluding Japan, Australia
and New Zealand

5


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Asian Trade Growth

• Services exports up:
–
–
–
–
–

2002- 10%
2003- 12.6%
2004- 23.6%
2005- 12.4%
2006- 12.2% (Value in 2006: US$ 0.527 trillion)

6


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Overall Growth

• In comparison, Asian region’s GDP grew only:
–
–
–
–
–
–
–

2001- 3.5%
2002- 5.9%
2003- 6.5%
2004- 7.8%
2005- 7.4%
2006- 7.6% (Preliminary estimated)
2007- 7.2% (Preliminary estimated)

7


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Why Trade?

• 1950 to 1988- countries that liberalized
trade regimes:
– Enjoyed annual growth rates ½ percent

higher than those who did not liberalize

8


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Why Trade?
Cont

• Trade barriers removal during 1990’s
increased growth by 2.5% year
• In 1950 merchandize exports were 8% of
world GDP
• In 2002 they were 19% of world GDP.

9


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

• Trade represents:
– A lot of goods and services
– A lot of money
– And a lot of jobs

10


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Growth of World Output, 
2003 to 2007 (forecast)

9
8
7

2003

6

2004

5

2005

4

2006

3

2007

2
1
0
World

Developed
countries

Developing
countries

South-East
Europe and CIS

11


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

GDP growth in developing countries, 
2003 to 2007 (forecast) Cont

Growth rates are high in all developing regions, supported by 
net exports and domestic demand.
9
8

7
6
5
4
3
2
1
0

2003
2004
2005
2006
2007

Africa

Latin America
and the
Caribbean

West Asia

East and South
Asia

12


SOUTH EAST ASIA

TRADE POLICY
TRAINING NETWORK

Terms of trade of  developing regions 
(Index numbers, 2000=100)

Gains from the terms of 
trade supported economic 
growth in West Asia, Africa 
and Latin America. 
Strong expansion in the 
volume of exports 
compensated for 
deteriorating terms of trade 
in East and South Asia.  

13


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

What is a Theory?

• Like a map
• Gives us a general idea, focusing on key
relationships
• Real world detail is too complex, and can’t
be described completely—theory ignores

it.

14


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

•

The Key Questions

Trade theory addresses three basic topics:
1. Why do countries trade, i.e. what are the
gains from trade?
2. What do countries trade, i.e., what determines
patterns of production and trade?
3. What are the consequences of government
measures to regulate trade, known collectively
as “trade policy?

15


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Classical Trade Theory

According to Adam Smith in his famous
book The Wealth of Nations, published in
1776, individuals conduct economic
affairs based on their own best interests.
This he called the “Invisible Hand.”
Thus, the classical approach to trade is
based on a fundamental belief in the
benefits of Trade Liberalization.
– The path to riches is not having an export
surplus but rather through specialization.
16


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Comparative Advantage

In 1817, David Ricardo presented the law of
comparative advantage.
– Comparative advantage comes from difference in
relative efficiencies, not the absolute differences in
countries’ efficiency in producing goods.
– It is based on opportunity cost, i.e. the cost of
foregone of not producing something else.
– Ricardo proposed that countries would tend to
produce and export products in which they have a
comparative advantage.

17


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Consequences of the
Ricardian Model

• In this model there are always gains from trade,
but it says nothing about winners and losers
within each country.
• Countries always specialize in production—
exporting and importing the same product on
balance is logically impossible.
• Although simple, the theory is supported by
empirical evidence—countries tend to export
goods where they have high productivity relative
to other countries.

18


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

20th Century Advances

The focus of classical approach was on the gains
from specialization and trade. But it did not
explain what determine comparative advantages
of countries.
Later, the neoclassical economists were
successful in answering the question of what
determines comparative advantages. Their
theories connected comparative advantage to the
productive factors that a country has.

19


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

The
Hecksher-Ohlin Theory

The Neoclassical theory of international trade was
developed independently by two economists in the
1930s. It is also known as the “Hecksher-Ohlin Theory”
or sometimes the “Factor Proportions Theory.”
The H-O theory is the basic 2 x 2 model of international
trade.
Two factors of production  Capital and Labor
Two goods 
1 Capital-intensive good and

1 Labor-intensive good
It explains why each country has a comparative
advantage in producing a different good.
20


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

The Hecksher-Ohlin
Theory Cont

A country will export the good whose
production requires the intensive use of
the country’s relatively abundant and
cheap factor and import the good whose
production requires the intensive use of
the country’s relatively scare and
expensive factor.

21


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Prediction

The H-O theory implies that the country’s
comparative advantage and its trade pattern are
determined by its relatively abundant factor.
Thus the country that is relatively well-endowed
with capital will export the good that uses capital
intensively in its production, while the labor
abundant country will export the labor-intensive
good.

22


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

Factor Endowments

• Endowments are factors of production,
which a country has naturally—factors are
predetermined, not created.
• Factors of production are typically hard to
move from one country to another.
• Countries tend to produce goods for which
they have the natural endowments.

23


SOUTH EAST ASIA

TRADE POLICY
TRAINING NETWORK

Inputs

• Inputs are necessary to the creation of all
goods and services.
• The three most important inputs are land,
capital, and labour.

24


SOUTH EAST ASIA
TRADE POLICY
TRAINING NETWORK

The Hecksher-Ohlin-Samuelson
Theorem

The Hecksher-Ohlin-Samuelson Theorem (also called
the Factor-Price Equalization Theorem ) suggests that
international trade will eventually lead to equalization in
the relative and absolute returns to homogenous factors
across nations.
In other words, international trade will cause the wages
of workers with the same level of skill and productivity
to equalize across trading countries.
A similar logic is applied to the return of capital.

25