Understanding Global Trade

Introduction to Global Trade

• Global trade knowledge is key to understanding today's economies
• The lesson teaches the principles and challenges of international trade
• Global commerce is important for future business leaders
• The aim is to learn the basics of international trade, its history, and different viewpoints like:
  • Macroeconomic
  • Legal
  • Business
• Foreign trade is to be defined, the effect of history and globalization discussed, and current market trends looked at

Foreign Trade Defined

• Foreign trade involves exchanging goods or services across borders
• Relies on comparative advantage and specialization
• A nation's economic activity focuses on international markets
• Promotes exports and using imports based on resources and demand
• Consists of financial interactions between countries
• Regulated by treaties and foreign trade policies

Perspectives on Foreign Trade

• Macroeconomic perspective: Focuses on national advantages or disadvantages
• Legal-structural perspective: Focuses on challenges for businesses and governments, focusing on the necessary legal structure
• Microeconomic or business perspective: Focuses on the exchange of goods including physical and financial parts

Differentiation

• Foreign trade can mean dealings of individual companies with foreign markets
• International trade is broader economic interactions between nations
• "International trade" and "foreign trade" are used interchangeably
• Focus is on the main ideas and dynamics of cross-border economic activity

Historical View

• International trade has existed throughout history
• Exchanging materials existed over long distances, even before Homo sapiens
• Civilization development and political borders are linked to the rise of trade
• Early long-distance trade focused on goods with a high value but low amount
• The Roman Empire enabled mass trade of everyday goods, leading to massive trade
• The Age of Discovery grew trade through new lands and better transport
• It was still limited due to rules and less organization
• The Industrial Revolution, like the steam engine, cut transport times and costs
• Volume of goods in international trade increased
• Further progress in technology and global cooperation after World War II help international trade bloom
• Key elements of international trade include:
  • Cooperation between territories
  • Technological advancement in efficient transportation
  • Physical and legal security to help movements
• Drops in those elements, such as security, hurt international trade

Globalization Dynamics

• International trade is required for economic activity and affects election outcomes
• Globalization is global economies, cultures, and populations growing more connected
• Caused by more trade, technology, and movement of investments, people, and information
• It significantly impacts society, culture, and the population
• Globalization grows more connected and affects individuals and cultures
• Includes exchange of information, services, technologies, investments, and people through the internet
• A differentiating element of globalization is information trade
• Enables complex trade networks which transfer goods, services, and ideas
• Globalization has lowered poverty, improved goods availability and production
• While generally beneficial, globalization does not positively affect everyone
• Leads to disputes about fairness
• Calls for globalization to change to address inequalities and imbalances, through "fair globalization"
• Nationalist and protectionist actions try to adjust world trade for domestic interests
• Often advocate for policies protecting local industries and limit immigration
• The focus lies on globalization's direction and who benefits, balancing domestic interests and global cooperation

Core Trade Concepts

• Goods: Tangible items produced, stored, and consumed that derive value from supply and demand (e.g., food)
• Services: Intangible activities providing benefits consumed concurrently and not owned (e.g., education)
• Import: Buying goods from another country
• Export: Selling goods abroad
  • Clear for physical goods, complex for services with regulatory and fiscal consequences
  • Services lack a clear origin or destination, challenging trade ideas
• Trade Balance: Measures the difference between a country's exports and imports.
  • Trade surplus: Exports exceed imports.
  • Trade deficit: Imports exceed exports.
  • Trade balance: Measured bilaterally or aggregately
  • Trade surplus: Indicates strong export industries, job growth, and foreign exchange reserves, but may cause inflation
  • Trade deficit: Raises concerns about economic dependency and currency exchange rates, reflects consumer demand, and access to products
• Foreign investment: Investment made by a company/individual in another country
  • Foreign Direct Investment (FDI) - An asset purchase for direct control in another country
  • Foreign Portfolio Investment (FPI) - Investments made without acquiring control, in stocks and assets
  • FDIs: Long-term investments for developing projects
  • FPIs: Temporary and pursue quick returns

Recent Trends

• International trade has grown since the 1980s
• Growth slowed down following the 2007 financial crisis

Lesson 1 Overview

• Lesson explores the essential theories explaining international trade reasons
• Also, it looks at the history of these theories and their importance in the global economy
• By the end the key economic theories used for trade will be able to be described and compared, and learn of their evolutions
• Understanding these theories provides understanding into trade motivations, specialization impacts, and how these influence laws and strategies

Mercantilism

• Economic theory relying on self-sufficiency through a positive trade balance
• Focuses on wealth and resource accumulation to maintain a positive trade balance
• Also considered a form of economic protectionism
• Dominant economic thought in Europe from the 1500s-1700s
• First doctrine advocating government intervention in the economy for national goals
• Emergence of mercantilism had the consolidation of nation-states, colonies, trade growth, and metallic currency usage
• Factors lead to stronger nations shaping their economies for prosperity and security
• Centralized policies to enhance authority and strengthen political power
• Powerful tool to increase national wealth and global influence by
  • regulating trade
  • supporting industries
  • protecting markets
• Maximizing national wealth, measured in precious metals, was the target
• Believed wealth was finite and power depended on its accumulation
• Ideas:
  • Trade was a zero-sum game with economic rivalry
  • Positive trade balance focused on exporting, accumulating metals,
  • State involvement in essential economy and industries
  • Protectionism to limit imports, protect industries
  • Colonial exploitation to benefit the mother countries
• Cannot be considered a unified theory from a single author
• Emerged from thinkers over time, name coined by critics
• Key authors:
  • Martin de Azpilicueta
  • Jean Bodin
  • Thomas Mun
  • Antonio Serra
  • Jean-Baptiste Colbert.
• Although outdated, some of its philosophies are visible in political affairs
• For example, "America First" shares zero-sum thinking, protectionism, economic nationalism, and concern about trade deficits
• Modern protectionism differs from mercantilism because:
  • Mercantilism saw wealth as finite while modern economic wealth is dynamic
  • Mercantilism controlled markets, while modern focuses on bilateral agreements
  • Mercantilism had limited capital, while modern's relies on flow

Classical Theories

• The change from mercantilism to classical economic theories changed trade and wealth understanding
• Classical economists emphasized mutual benefits and free markets
• Challenges the zero-sum thinking of mercantilism.
• Adam Smith's absolute advantage and David Ricardo's comparative advantage are core to modern economic thought

Absolute Advantage (Adam Smith)

• Presented in "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776).
• Advocates free markets and minimal government interference to improve economic growth
• Applied to international trade, sets the principles of free trade
• Absolute advantage explains why nations trade
• A country with absolute advantage can produce a good more efficiently
• Specializing in goods where they hold the advantage yields better results than protectionist policies
• Specialization boosts trade and creates mutual trading conditions
• Trade is not a zero-sum game

Practical Example

• Classical example is the trade between Portugal and England
• Portugal produces wine because of its fertile climate
• England manufactures textiles due to its capability and workforce
• Instead of each nation producing both goods, they should specialize in what they can do more effectively
• Portugal produces wine only, England specializes in cloth
• Trading with one another lets nations enjoy more than if they tried doing it at home
• Specialization in a world trade achieves a high-living stand
• Refutes the mercantilist idea of a zero-sum game
• Leveraging natural resources creates free markets

Limitations

• Smith's theory has limitations, even though it was groundbreaking
• Does not factor situations where one country has no absolute advantage in any good
• David Ricardo's theory of comparative advantage addressed this, trade can be beneficial when one country is efficient across the board
• Smith's model has the idea of perfect labor and capital mobility
• Rare in practice
• Trade barriers, negotiation power, and disparities decrease the predicted efficiency
• Critiques aside, Adam Smith's principles make strong arguments for specialization and free trade

Comparative Advantage (David Ricardo)

• Introduced in "On the Principles of Political Economy and Taxation" (1817)
• Expands on expanding Adam Smith’s ideas
• Trade can be beneficial even when one country has an absolute advantage
• Comparative advantage allows a country to produce a good at a lower opportunity cost
• Even when one nation is more efficient, both nations still gain from trading
• Ricardo's insight shows trade wasn't a zero-sum game, but mutual economic growth

Practical example

• Ricardo's numeric example involves between France and the Netherlands, producing corn and tulips
• Even when one country has an absolute advantage in both goods, trade can still be beneficial
• Limitations: While it has certain limitations

Critiques

• Assumed easy movement of labor and capital between industries, may not be true in real economies
• Fixed productivity while technology or skill changes affect competitiveness
• Comparative advantage leads to job losses inequality and even exploitation of workers in developing nations
• Nevertheless, it has influenced free trade agreements and globalization today

General conclusion on classical theories

• An initial attempt made to explain global commerce.
• A very important foundation for later theories
• An attempt to justify trade
• Studies were not intended to be comprehensive
• Only intended to explain existence rather than analyze trade completely

Post-Classical Theories

• Opportunity Cost Theory
• Gottfried Haberler developed it
• Reformulated Ricardos comparative advantage
• Made it more flexible with multiple factors of production

Lesson 2

• Common rules and security is needed for trade
• Global cooperation and organizations are required
• Trade regulations, enforcement, and settling legal issues contribute in economic stability

Agreements

• Lesson covers the types, functions, and categories including
  • Trade treaties
  • Agreements
• An international organization is a voluntary group created by treaty, with structure and legal authority for goals
• A treaty is an agreement between countries, the parties commit to duties and rights
• Entities are bound by a treaty after signing and ratification
• International treaties can be categorized by parties involved and their relationships:
  • Multilateral Agreements: Involve many countries with universal regulations, example: WTO
  • Multilateral Agreements with Bilateral Obligations: Involve multiple countries but their responsibilities are bilateral, example: NAFTA
  • Bilateral Agreements: Between two countries for special interests, example: US and South Korea trade

Structures

• Only multilateral treaties creates global organizations
• The creation of one requires several countries to negotiate
• The organization becomes subject to international law, capable of holding rights
• Categories by mission, criteria, location, and level of integration
  • Organizations with general-purpose address many issues like economic, political, and security matters, for international relations, like the UN
  • Sectorial Organizations for niche areas like finance, economics, health, or transportation and trade, such as WHO

Organization types

• Open organizations: Let countries join, with certain criteria, for cooperation, like WTO
• Closed organizations: Limit entry on geographical, economic, or political ideas, like the EU
• Global Organizations: Global scale, across multiple countries, such as the IMF and World Bank
• Regional Organizations: Focused on special geographical areas, working regional trade, cooperation, examples include MERCOSUR and ASEAN
• Cooperative Organizations: Collaborative organizations maintain their sovereignty, do not require authority cede, encourage joint work, such as OECD
• Integration organizations: More involved than cooperation as they require sovereignty aspects transfer to the body, creating policies, often unified currency, such as the EU

Key global organizations

• The lesson discusses major organizations
• IMF, UNCTAD, OECD, WCO, ICC are examples
• World Bank characteristics
  • Sectorial
  • Open
  • Global
  • Cooperative
• World bank promotes financial support to developing countries
• Functions
  • consists of specialized parts
  • IBRD aids developing countries
  • IDA extends loans and interest fee grants
  • IFC fosters investment in developing countries
  • MIGA helps for developing loans

Structure And More

• The highest decision-making body is the Board of Governors
• The Board of Executive Directors, elected by the Board of Governors, oversees policies, etc
• IMF is classified as
  • Sectorial
  • Open
  • Global
  • Cooperative

Operations and More

• Promotes economic stability and sustainable growth
• Core functions include
  • economic surveillance to provide solutions.
  • financial assistance
  • capacity development to help expertise

Operational Structure

• Oversight of daily operations is by the 25-member structure.
• The top executive officer is a managing director
• Each member country in accountable and gets a governor
• Banks collaborate to reduce poverty
  • The IMF provides financial supervision
• UNCTAD classification
  • general-purpose
  • open
  • global
  • cooperative

Functionality

• Agency promotes trade through the three functions
• economic research
• policy dialogue
• technical assistance
• ASYCUDA program simplifies import/export function.
• Decision making happens every four years at the 195 member conference.
• Trade and Development structure runs duties in between conferences from 5 divisions
  • programs related for Africa
  • advising strategies for globalization concerns
  • discussions for foreign investments

International and internal

• Division handles global trade
• Division focused on transport
• OECD classification
  • Closed
  • Global
  • cooperative
• It consists of 38 mainly wealthy countries
• They share agreements in democracy
• Provides a forum for analysis and debate.

Functions

• Focuses on policy questions, regulations governance
• The OECD works through pillars,
• Policy discussions
• Data
• Setting standards
• It is the decision-making group in Europe
• The Secretariat does daily work
• WCO classification
  • Sectorial
  • open
  • cooperative
• Works to improve
• effectiveness
• Customs
• Has 186 members and relies on standards for building
• All member states belong inside a council
• Divisions and officers manage international trade. -ICC classification
  • sectorial
  • cooperative

Lesson Focus

• The third lesson discusses international trades practical applications
• Its operations
• It focuses on essential operations involved involved in world business
• Also emphasizes challenges
• Key elements are
  • International trade deals
  • Customs standards
  • International transportation

Key ideas

• International trade agreements involving all trade elements
• Rules documents are required in exporting/importing
• Managing world travel and supply chains

International Trade Details

• Requires business to business
• Can be business to consumer
• The lesson describes B2B

Trade Risks

• Including
  • Cultural / Language.
  • Legal
  • Transport.
• Quality
• Exchange rates.

Trade Clarifications

• Term clarification through ICC
• risk rates
• cost ratios
• pickup options -document clauses
• Incoterms also have standards
• Details on the quality are discussed

PSI benefits

• Prevents barriers
• Third party helps to verify the products
• Important in most countries

Lesson 4 Topic

• Documentation of import
• Provides the necessary information for trade

Details Included

• Provides a number of forms that are used in international trade
  • commercial invoice
  • certification
  • declaration
  • consular invoice

Lesson Goals

• Summary should provide all information
• Conclusions and takeaways should be compliant

Documentation breakdown

• Should include a preliminary form with quotations
• Involves a formal document with specifications
• Involves a legal transaction that lists items
• Necessary in customs/ transactions. Has a shipment included with the proper weight
• Helps with storage/insurance
• origin is determined through compliance and trade
• Requires shipping to track all packages
• A certificate helps with insurance
• Customs declaration is also important.
• Inspection assures the proper qualities are included
• Consular help ensure trade policies
• Exported products help stop issues
• Banks can guarantee proper payment for the trade.

Short documentation

• exporter should provide key commercial data
• importer guarantees transaction documents
• exporters provide the bill
• list provides a bill of contents, origins are stated, etc
• B/l are included and also provides service

Customs Declaration

• Document to customs to meet import requirements
• certificate provides quality
• Invoice describes the transaction
• Guarantees the goods quality

Transport

• Should focus on shipping
• Covers different aspects of shipping in a variety of conditions.
• Contains three pieces of information
  • Shipping Modes
  • Packing
  • Cost Assessment

Shipping methods

• Maritime
  • Its cost effective.
• Provides low impact
• Slow speeds
• Used for certain containers
• A transport method
• Costly

Specifications

• Used for various equipment
• Provides efficiency
• Can occur with short distances
• Traffic and different restrictions can reduce power
• Trade between neighbors
• Can provide good efficiency.
• Used for optimization
• Complex management
• Requires a transition
• Mode requires many things, such as shipping, type, costs etc

Packing

• Packing helps secure goods
• Packaging helps ensure the goods
  • Primary
  • Secondary
  • Tertiary
• Better standards help protect all factors in place

Packing and protection

• Regulations are required
• Cost Efficiency may be needed
• Higher end products need high quality
• Sustainability is also required.
• Costs have to involve essential businesses
• Affecting certain aspects -distances
• transport