International Business and Trade PDF

LE SA R INTERNATIONAL BUSINESS AND FO TRADE AIROTCIV IVY BLAISE M. REYES, PhD ESTIFHANNE T. LAGMAY, LPT T Book Authors NO  TABLE OF LE CONTENTS...

LE SA R INTERNATIONAL BUSINESS AND FO TRADE AIROTCIV IVY BLAISE M. REYES, PhD ESTIFHANNE T. LAGMAY, LPT T Book Authors NO  TABLE OF LE CONTENTS SA CHAPTER 1 - FOUNDATIONS OF INTERNATIONAL TRADE Introduction to International Trade and Organization Historical Perspectives and Theories fo International Trade R Types of International Trade Agreements FO Key International Trade Agreements Yhe Role of International ORganizations in Trade CHAPTER 2 - TRADE POLICIES, RESTRICTIONS, AND PRACTICES Trade Policies: Tariffs, Quotas, Subsidies, T Non-Tariff Barriers Understanding Tariffs and Their Types NO Economic Impact of Trade Restrictions Forms of Counter Trade Case Studies on Trade Policy and Counter Trade  TABLE OF LE CONTENTS SA CHAPTER 3 - GLOBAL MARKETS AND TRADE DYNAMICS Analysis of Major Global Markets Emerging Markets and Their Impact on Global Trade R The Role of Multinational Corporations in World Trade FO Strategies for Overcoming Trade Barriers CHAPTER 4 - FOREIGN EXCHANGE, AND INTERNATIONAL FINANCE Basics of Foreign Exchange Markets T Exchange Rate Determination and Risk Management NO Balance of Payments: Components and Interpretation Impact of Foreign Exchange on Global Trade CHAPTER 5 - ASEAN TRADE AND REGIONAL INTEGRATION Overview of ASEAN and Its Economic Integration  TABLE OF LE CONTENTS SA CHAPTER 5 - ASEAN TRADE AND REGIONAL INTEGRATION Key Trade Agreements within ASEAN Challenges and Opportunities for ASEAN in Global Trade R Case Studies on ASEAN Trade Practices FO CHAPTER 6 - STRATEGIC MANAGEMENT AND ETHICS IN INTERNATIONAL TRADE Formulating and Implementing Global Business Strategies Risk Management and International Trade T Ethical Issues in International Business NO Corporate Social Responsibility in a Global Context Case Studies on Ethical Dilemmas in International Trade CHAPTER 7 - FUTURE TRENDS IN INTERNATIONAL TRADE Trade of Today  TABLE OF LE CONTENTS SA CHAPTER 7 - FUTURE TRENDS IN INTERNATIONAL TRADE The Impact of Technology on Global Trade Trends in Global Supply Chain Management R Preparing for Future Challenges and Opportunities in International Trade FO T NO  1 LE CHAPTER FOUNDATIONS OF SA INTERNATIONAL TRADE TOPICS Introduction to International Trade and Organization Historical Perspectives and Theories of International Trade Types of International Trade Agreements R Key International Trade Agreements The Role of International Organizations in Trade LEARNING OUTCOMES FO Develop a foundational understanding of international trade Understand historical and theoretical perspectives of international trade Recognize the types and significance of trade agreements Identify key international trade agreements and organizations Analyze the impact of international trade in terms of economic, political, and social effects T NO 1 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization According to Eamonn Butler (2021), trade is (and was) everywhere. In fact, there are evidences that world trade has grown significantly over time. SA In 1979, trade made up about a third of global economic activity or 35.6%. By 1999, it was nearly half or 46.5%, and by 2019, it was over half or 58.2%. In 1999, the total value of exported goods was less than $6 trillion, and services were just over $1 trillion. By 2019, these numbers R had grown to nearly $19 trillion for goods and over $6 trillion for services. Despite challenges like financial crises, wars, and pandemics, trade FO continues to expand, driving globalization. This process has connected people, companies, and economies worldwide, leading to increased prosperity and the exchange of ideas and cultures. Moreover, the growth of global trade has led to increased interactions and integration across nations, which has fueled the process of globalization. As businesses and economies become more connected, companies are increasingly looking to operate on an international scale. T What is International Business? International business, as defined by Santos (2019), refers to companies that offer goods and services across multiple countries. NO This involves not only trading and investing across borders but also engaging in various value-added activities such as production, marketing, and partnerships with foreign businesses. Both private companies and government entities can participate in international business, exchanging physical and intellectual assets like products, services, capital, technology, knowledge, and labor. 2 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Features of International Business SA 1 Large Scale Operations 2 Integration of Economies of Many Countries 3 Dominated by Developed Countries and MNCs 4 R Benefits to Participating Countries 5 Keen Competition 6 Special Role of Science and Technology FO 7 International Restrictions 8 Sensitive Nature Figure 1. Characteristics of International Business (Akran, 2011 as cited by Santos, 2019) Internationalization of Business Why do businesses wishes to go global? Companies choose to expand globally for T several reasons: First-Mover Advantage - Entering a new market early allows a company NO to establish itself quickly and capture early adopters. Growth Opportunities - When a domestic markets become saturated, businesses seek new markets abroad. Small Local Markets - For companies from smaller countries internationalization is often essential for growth. 3 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Increasing Customer Base - Expanding internationally can help a SA company grow its customer base. Reducing Local Competition - By entering new markets, businesses can deter potential competitors. Benefits of Internationalization Product Flexibility - International markets provide opportunities to sell products that may not perform well domestically. Companies can find R new markets where their products are in demand. Less Competition - Some international markets may have less competition, allowing company to establish themselves more easily. FO Protection from Local Events - Operating in multiple countries reduces the impact of local events (e.g., political or geographical disruptions) on business. Learning New Methods - International business exposes companies to new production and marketing techniques, which can be applied in other markets. T Globalization VS Internationalization While related, globalization and internationalization differ in scope. NO Globalization is abroader process that involves the integration of markets, cultures, and political systems on global scale. It often leads to the formation of transnational corporations and intensified cross-border relationships. Internationalization, on the other hand, is the process by which a business expands its operations to other countries. 4 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Country's Appeal for International Business SA When considering international expansion, businesses must evaluate the attractiveness of potential countries. This includes assessing factors such as political stability, economic conditions, cultural compatibility, and legal environments. A country's attractiveness is often judged by its stability, profitability, and level of risk. Political, geographic, economic, and cultural factors are all crucial in determining the success of international business ventures. R GEOGRAPHIC FACTORS ECONOMIC FACTORS Location Technology Climate Education Terrain Inflation FO Waterways Exchange rate Natural Resources Infrastructure INTERNATIONAL BUSINESS ENVIRONMENT CULTURAL FACTORS POLITICAL AND Language LEGAL FACTORS Family Government system Religion Political stability T Customs Trade barriers Traditions Business Food regulations NO Figure 2. Elements of International Business Environment (Kory, 2016 as cited by Santos, 2019) 5 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization A Snapshot of Philippines Business and Trade SA The World Bank Group (2024) narrated that the Philippines has emerged as one of the most vibrant economies in the East Asia and Pacific region. The country's economic vitality is fueled by increasing urbanization, a growing middle class, and a large, young population, which together drive strong consumer demand. This demand is further supported by a healthy labor market and substantial remittances. The private sector remains resilient, with significant R contributions from the services sector, including business process outsourcing, retail, real estate, and tourism. Despite facing challenges like the COVID-19 pandemic and global economic pressures, the poverty rate dropped from 23.3% in FO 2015 to 18.1% in 2021. The Philippine government is focusing on boosting inclusive growth by investing heavily in human and physical capital. As of 2023, the Philippines is well on its way to economic recovery, with a robust growth rate of 5.6%, placing it among the top performers in the region. T Looking ahead, the country's growth is Source: Cordero (2024) https://www.gmanetwork.com/news/money/economy/909698/tra expected to remain strong, driven by solid de-gap-narrowed-by-1-5-in-april-psa/story/ NO domestic demand, a strong labor market, ongoing public investments, and recent reforms aimed at encouraging private investment. With these continued recovery efforts and reforms, the Philippines is progressing from a lower middle-income nation, with a gross national income per capita of $3,950 in 2023, towards achieving upper middle-income status (with a per capita income range of $4,466 to $13,845). 6 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Philippine Business Forum: Philippine Economic Outlook SA Senator Ralph G. Rector, the Secretary of Finance of the Republic of the Philippines said on his speech last March 4, 2024 at Melbourne, Australia, the Philippines has emerged as one of the most dynamic economies in Southeast Asia, and this briefing highlights the country's R promising growth story and the opportunities it presents for Australian businesses and investors. Source: Senate of the Philippines Facebook Page. Over the past eight decades, the Philippines and Australia have maintained a strong partnership characterized by significant trade, FO investment, and people-to-people ties. In 2023, Australia ranked as the Philippines’ 13th largest trading partner, with trade between the two nations reaching $4.1 billion - a 20.6% increase from previous year. Australia also became the Philippines’ 16th largest source of foreign direct investment, contributing $5.7 million in net inflows during the first 11 months of the year. Additionally, the Philippines welcomed 266,000 Australian tourist in 2023, solidifying its position as Australia's fourth largest source of tourist arrivals. With T over 300,000 Filipino migrants in Australia, forming the fifth largest migrant community, and more than 250 Australian companies operating in the NO Philippines, employing over 44,000 Filipinos, the bilateral relationship is robust. As Australia intensifies its focus on Southeast Asia, the Philippines present itself as a strategic partner with a rapidly growing economy, a young, tech-savvy workforce, and a government committed to fostering a business-friendly environment. The Philippine offers Australian investors a wealth of opportunities in various sectors, backed by strong economic fundamentals and forward-looking policies. 7 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Highlights of the Philippine Export and Import Statistics June 2024 SA (Preliminary) based on the data of Philippine Statistics Authority as of August 2024. TOTAL EXTERNAL TRADE AND BALANCE OF TRADE The entire value of goods traded outside the nation as of June 2024 was $15.44 billion, a reduction of 11.3%^from the $17.40 billion total during the same time the year prior. The overall R external trade in goods saw yearly declines of 0.7% in May 2024 and 9.7% in June 2023. FO In June 2024, 63.9% of total external trade consisted of imported goods, while the remaining were exported goods. The balance of trade in goods (BoT-G), which reflects the difference in the value of Summary of External Trade Performance in the Philippines in June 2023, May imports and exports, revealed a 2024, and June 2024. Source: Philippine Statistics Authority (2024) https://psa.gov.ph/statistics/export-import/monthly trade deficit of $-4.30 billion in June 2024, marking an annual growth of 9.3%. This T trade imbalance showed a 6.9% annual increase in May 2024 and a 31.9% annual decline in June 2023. NO Value of Philippine Export and Import Statistics (June 2023 and June 2024). Source: Philippine Statistics Authority (2024) https://psa.gov.ph/statistics/export- import/monthly 8 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Why do countries trade? SA Trade has expanded dramatically since the end of World War II and is a vital component of the world economy (Engemann, 2024). EconomicsOnline (2020) revealed that countries across the world engage in trade because they often lack the resources or capacity to meet all their needs on their own. By producing a surplus of goods using their limited domestic resour- ces, they can trade for what they require from other nations. International trade, which has R been a vital part of the global economy for thousand of years, allows countries to access FO cheaper, higher-quality, or unavailable goods and services. This trade is driven by the principles of division of labor and specialization, as first analyzed by Adam Smith in the 18th Century. Source: Canva Photos Pro Division of Labor T A division of labor involves breaking down production into smaller tasks and assigning each task to workers best suited for it, improving efficiency. On an international level, this concept means that countries specialize in producing NO specific goods or services and may only contribute a small portion to a final product sold globally. For instance, a bar of chocolate might include ingredients from multiple countries, with each country supplying just one component of the finished product. This specialization and collaboration allow for more efficient global production. 9 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization Specialization SA This is a key principle of trade and arises as the second fundamental principle associated with trade, where individuals or producers focus on specific tasks, becoming more efficient in their roles. This leads to higher productivity and efficiency in production. Specialization extends beyond individuals to firms, machinery, technology, and entire countries. When countries specialize in produ- cing a limited range of products at high volumes, they can create surpluses for export. R This encourages mass production and the adoption of new technologies, giving these FO countries a competitive edge in global markets by reducing costs and enhancing Source: Canva Photos Pro their ability to export. Meanwhile, Suranovic (2010) in his book, International Trade: Theory and Policy, identified five (5) reasons for trade, to wit: 1. Differences in Technology 2. Differences in Resource Endowments T 3. Differences in Demand 4. Existence of Economies of Scale in Production NO 5. Existence of Government Policies Trade models typically focus on a single reason fro trade to keep things manageable, but this simplification doesn't capture the full picture. Different models, like the Ricardian model focusing on technological differences and the Heckscher-Ohlin model on 10 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization resource endowments, offer varying conclusions about the effects of trade. In SA reality, trade is driven by a mix of factors, and each model provides only a partial view. Therefore, understanding trade and its outcomes requires combining insights from multiple models, making it more of an art than an exact science. The Advantages of Trade International trade offers several key benefits to a country, including: Leveraging a R country's comparative advantage, encouraging specialization in goods and services that can be produced more efficiently and at a lower FO opportunity cost. Specializing in a limited range of products for both domestic and export markets enables higher production volumes, leading to cost advantages through economies of scale. Trade enhances competition and reduces global prices, benefiting consumers by increasing their purchasing power and boosting consumer surplus. It challenges domestic monopolies by introducing competition from more T efficient foreign firms. The quality of goods and services improves as competition drives innovation, NO design, and the adoption of new technologies, while also facilitating technology transfer between countries. Trade is likely to boost employment, as job creation is closely tied to production. Increased production in the export sector can, through the multiplier effect, generate more jobs throughout the economy. 11 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Introduction to International Trade and Organization The Disadvantages of Trade SA Despite its advantages, trade can also present several drawbacks, such as: Over-specialization, which can make workers vulnerable to job loss if global demand decreases or if domestic goods can be produced more cheaply abroad. Such shifts can result in several structural unemployment. The recent credit R crisis highlighted the risks of over-specialization for the UK, particularly with its heavy reliance on the financial services sector. Some industries may struggle to grow due to competition from more FO established foreign firms, especially new and emerging industries that find it difficult to gain a foothold. Local producers, who offer unique products tailored to the domestic market, may suffer as cheaper imports erode their market share. Over time, this can reduce the diversity of output in an economy as local producers are forced out of the market. T NO International Trade: Pros and Cons of Interdependency Between Nations. Source: Afttrade Fze (2024). https://www.linkedin.com/pulse/international- trade-pros-cons-interdependency-between-nations-fwfge/ 12  CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade The Origins of Trade SA Stone Age Trade Approximately 2.6 million years ago, the creation of the first stone tools marked the beginning of the Stone Age. This era came to an end with the introduction of bronze, which signaled the start of the Bronze Age. RDuring the Stone Age, trade - the exchange of goods people needed and wanted - was vastly different from today. It occurred on a much smaller scale, involving shorter distances and smaller communities. The Stone Age is divided into three phases: Paleolithic, FO Mesolithic, and Neolithic. Palaeolithic Era (Old Stone Age) Time Period: 10,000 BC The image features an Acheulian handaxe from the Old Palaeolithic period, estimated to be between 400,000 and 350,000 years old. The handaxe is made of flint and has a lanceolate shape, characterized by elongated, slightly convex edges, a pointed apex, and a rounded base. The handaxe is well-crafted, with a blanced and refined finish, typical fo the later stages of the Acheulian period. It was discovered on a hill-top plateau 9 miles Lifestyle: Nomadic, with people moving NNW of Naqada at 1400 ft above sea level. The artifact measures 174 mm in length. frequently in search of food and shelter using tools made of stone. Trade: Minimal trade; communities were self- sufficient, relying on hunting, gathering, and T making their own tools and clothing. There was little to no exchange of goods between groups. Source: https://www.donsmaps.com/tools.html NO Trade was conducted within small groups. Currency: Barter System 13 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade Mesolithic Era (Middle Stone Age) SA Time Period: Approximately 10,000 BC to 6,000 BC (varied by region). Lifestyle: Transition phase where The First Long-Distance Trade: Obsidian and Agriculture (17,000 BC - 9,000 BC) Source: Lubnasadiyah (2018) Retrieved on August 6, 2021 from people began to settle in more https://www.slideshare.net/slideshow/origin-of-trade/108722076 permanent locations and experimented with early forms of agriculture. Trade: Some basic trade and exchange of goods began to emerge, especially in R regions where communities started to establish more permanent settlements. Currency: In the form of livestock, metal, rare stones, salt, etc. Neolithic Era (New Stone Age) FO Time Period: Began around 9,000 BC to 3,000 BC (varied by region) Lifestyle: Significant shift towards farming, animal The invention of wheel during The first form of writing was 5,000 BC to 4,000 BC. Source: discovered. (Proto-writing). domestication, and permanent settlements Lubnasadiyah (2018) Retrieved on August 6, 2021 from Source: The invention of wheel during 5,000 BC to https://www.slideshare.net/slid 4,000 BC. Source: Trade Development: eshow/origin-of- trade/108722076 Lubnasadiyah (2018) Retrieved on August 6, 2021 from https://www.slideshare.net/sli Agriculture - The development of agriculture led to food deshow/origin-of- trade/108722076 surpluses, which allowed for exchange of excess crops and livestock. T Crafts and Tools - Communities began producing specialized tools and crafts that were traded with other groups. Emergence of Merchants - A new social class of traders (merchants) NO emerged, facilitating trade over longer distances. Merchants traveled to exchange goods between different communities Distance of Trade - Trade extended over longer distances compared to previous eras, but it was still limited to relatively local or regional areas. Currency: In the form of objects such as weapons, pottery, plant produce, etc. 14 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade 17th Century SA Pre-17th Century Context Silk Road Trade (2nd Century BCE - 14th Century CE) The Silk Road was a thriving commerce network that crisscrossed central Eurasia for centuries, connecting diverse cultures together rather than a single route. Along with exchanging unique items, traders, nomads, Rmissionaries, soldiers, and diplomats information, technology, medicine, and religious ideas that had a also transported profound impact on the development of earlier civilizations. Traders FO traveled by horseback and camel. German geographer, Ferdinand Freiherr von Richthofen first introduced the term "silk road” in 1877, referring to the thriving silk trade between Rome and the Chinese Han Empire (206 BC to 220 AD). However, Travelling by camel. Source: Roos (2023) https://www.history.com/news/silk-road-trade-goods contemporary researchersacknowledge that the Silk Road maintained T the ability to facilitate transcontinental trade until the 17th and 18th Centuries, when extensive marine trade supplanted overland caravan NO travel. Early Maritime Trade Prior to the 17th Century, maritime trade primarily occurred along rivers, coastal water,s and through the Mediterranean Sea, with limited long-distance oceanic voyages. In 15th Century, the age of exploration began with 15 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade European powers like Portugal and Spain leading maritime explorations. SA Vasco da Gama's voyage to India (1498) and Columbus's voyage to the Americas (1492) opened new trade routes. In the late 16th Century, the establishment of trading companies like the British East India Company (1600) and the Dutch East India Company (1602) began the formalization of global trade networks. R 1600s: Emergence of Global Trade Networks In early 1600s, seaworthy ships capable of long oceanic voyages FO were developed, allowing for expanded trade across the Atlantic, Indian, and Pacific Oceans. Luxury items such as spices, tea, silk, porcelain, sugar, and tobacco were transported from Asia and the A 17th century map illustrating the North Atlantic trade routes Americas to Europe. These goods used by Dutch. Source: https://barlowsprimary.co.uk/wp- content/uploads/2020/06/Global-Trade-Trade-Timeline- T Information-Sheets.pdf were accessible only to the wealthy due to their high cost and the long time it took to transport NO them. A 16th century sail ship for cargo Source: Trade-Trade-Timeline-Information- content/uploads/2020/06/Global- https://barlowsprimary.co.uk/wp- transportation. Sheets.pdf 16 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade Sugar Trade Bloom SA During the mid-1600s, the sugar trade became a significant industry, with European powers like Britain and France establishing sugarcane plantations in the Caribbean and South America. Sugarcane was grown, harvested, and processed into sugar in the Americas before being shipped to Europe. This trade played a crucial role in the economies of European countries. The Atlantic Slave Trade R The transatlantic slave trade expanded dramatica- FO lly. European traders forcibly transported millions of Africans to the Americas to work on plan- Major Global Trade Routes (1400-1800). Source: https://transportgeography.org/contents/chapter7/globalization -international-trade/global-trade-routes-1400-1800/ stations, particularly in the Carribbean and South America. Between 9 and 11 million Africans were taken from their homeland and sold into slavery during 1600s, marking a dark chapter in the history of global trade. Economic Impact on Europe T European nations, particularly England, grew wealthier from the profits generated by the trade of slaves, sugar, and other luxury goods. This wealth NO contributed to the rise of powerful merchant classes and the growth of European empires. Actually, European powers solidified their control over trade routes and colonies, establishing domi- nance in global trade. The wealth generated from trade helped finance further exploration, colonization, and military expansion. 17 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade 21st Century SA Early 2000s: Digital and Communication Revolution In 2000, the rise of the Internet and digital communication systems, including expansion of e-commerce platforms like Amazon and Alibaba, transforms global trade, making it easier for businesses and consumers to connect across borders. Companies like Apple start to globalize their supply chains, with headquarters, manufacturing, and sales operations R spread across different countries. By 2001, China joins the World Trade Organization (WTO), leading to a significant increase in global trade as FO China becomes a major exporter of manufactured goods. Mid-2000s: Expansion of Trade Networks and Technology From 2003 to 2008, rapid advancements in transportation technology were observed, including the development of larger container ships (up to T 19,000 containers) and more efficient logistics systems, allow The largest port in the world located in Shanghai, China. Source: Ahmed NO (2024). https://www.marineinsight.com/ports/top-biggest-ports-in-the- for quicker and cheaper world/#:~:text=Conclusion-,1.,is%20located%20in%20Shanghai%2C%20Ch ina. global shipping and increase trade volumes. In 2005, the global oil trade remains a dominant force in the global economy, with oil prices fluctuating significantly, affecting economies worldwide. Also, with advancements in refrigeration and transportation, the trade of perishable goods becomes more viable and widespread, further integrating global markets. 18 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade Late 2000s: Financial Crisis and its Impact on Trade SA The global financial crisis leads to a sharp decline in global trade (2008), as economic uncertainty and reduced consumer spending slow down the movement of goods and services. By 2009, the recovery begins, with emerging markets, particularly in Asia, driving a resurgence in global trade. The crisis also prompts many countries to rethink their trade policies and economic strategies. Early 2010s: Growth in Digital Trade and E-Commerce R E-commerce continues to expand, FO with online marketplaces becoming key players in global trade. By 2014, the expansionSample of Cargo Ship loaded with traded goods. Source: Hiteshk (2021). https://www.marineinsight.com/types-of- ships/what-are-cargo-ships/ of the Panama Canal is completed, allowing larger ships to pass through, enhancing global trade routes. Late 2010s: Trade Wars and Technological Advances Trade tensions rise between major economies during the period of 2017- 2018, particularly between the United States and China, leading to the T imposition of tariffs and a reevaluation of global supply chains. In 2019, global trade reaches unprecedented levels, with the total value of goods exported NO nearing $19 trillion and services over $6 trillion. In terms of key commodities, oil, natural gas, and coffee become the most traded items globally, with industries valued at $2600 billion, $161 billion, and $20 billion, respectively. 19 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade Early 2020s: Integration of Advanced Navigation Systems SA The use of GPS and other navigation technologies becomes standard, allowing for real-time tracking of goods across the globe. This improves the reliability and safety of international shipments. However, in 2020, the COVID-19 pandemic disrupts global trade, causing delays, shortages, and a temporary decline in trade volumes. But, it also accelerates the digital transformation of trade, with an increased reliance on e-commerce and digital communication tools. As the world begins to recover from the R pandemic in 2021, global trade rebounds, with a focus on diversifying supply chains and improving resilience againstfuture disruptions. FO T Exports in 2020 relative to exports in 2019 by Month and Exports in 2020 relative to exports in 2019 by Industries. Source: Kazunobu & Hiroshi (2021). months and continent-pairs. Source: https://www.sciencedirect.com/science/article/pii/S0889 Kazunobu & Hiroshi (2021). 158321000149 https://www.sciencedirect.com/science/arti cle/pii/S0889158321000149 NO Present Day: Ongoing Evolution of Global Trade Trade continues to evolve with advancement in technology, such as blockchain for secure transactions, AI for supply chain optimization, and the growing importance of sustainability in trade practices. the emphasis on reducing carbon footprints in shipping and logistics becomes a key trend. 20 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade Classical Theories of International Trade SA In the book of Sinha (2014) entitled, Introduction to Theories of International Trade, he mentioned that the theory of trade is fundamental to economic analysis and forms the basis of free trade principles. The history of free trade doctrines in Europe is long and interesting. A significant milestone occurred in 1846 when Britain repealed the Corn Laws, marking the beginning of the free international trade era, which continued until the Great Depression of the 1870s. The Corn Laws R were tariffs on grain imports that had been in effect in England since the mid-15th century. Similar taxes were also in place in other European countries, including France, Sweden, Bavaria, Belgium, and Holland FO The Theory of Absolute Advantage Adam Smith's theory of absolute advantage, introduced in 1776, is a foundational concept in understanding international trade. According to Smith, trade between countries is driven by the idea that each nation should specialize in producing goods where it has T the absolute advantage - meaning it can produce these goods more efficiently than other nations while impor- Source: Ryder (2019). NO https://www.cbc.ca/radio/ideas/the- misunderstood-adam-smith-gets-both- credit-and-blame-for-modern-capitalism- ting goods where it is less efficient (Salvatore, 1.5303759 1997). This specialization allows countries to benefit from trade by focusing on commodities they can produce most effectively and importing those that are more costly to produce domestically (Marbun, 2015). Smith's theory suggests that if one country can produce an 21 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade particular commodity at a lower cost than another country, it holds absolute SA advantage in that commodity. As a result, the country can export this good to others. Smith's argument can be illustrated with a simple example: Country Cloth Production (000s) Wheat Production (000s) A 100 200 R B 250 160 FO Total 350 360 Initially, both countries A and B split their labor resources between cloth and wheat production. Country A is more efficient at producing wheat, while Country B excels in cloth production. By specializing - Country A focusing on wheat and Country B on cloth - both countries can increase their total production. T Country Cloth Production (000s) Wheat Production (000s) NO A 0 400 B 500 0 Total 500 400 22 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade After specialization, both countries produce more than before, making them SA better off when they trade. The benefits of trade depend on favorable terms of trade which are the rates at which one product is exchanged for another. For example, if Country B exports 250, 000 units of cloth to Country A in exchange for 250,000 units of wheat, the resulting situation is as follows: Country Cloth Production (000s) Wheat Production (000s) R A 250 150 FO B 250 250 After trade, Country B consumes more wheat while maintaining its cloth consumption, and Country A consumes more cloth than it could produce on its own, even though it has less wheat. Both countries gain from trade due to the specialization. The theory also rests on several assumptions outlined by Sampoerna T University (2022) as cited in Hosanna (2023): it assumes that production is primarily dependents on labor, that goods produced are of uniform quality, that trade is NO conducted without financial exchanges, and that there are no transportation costs involved. These assumptions simplify the model, focusing on how countries can maxi- mize their production efficiency by utilizing their resources in the most effective way possible. In real-world applications, the principle of absolute advantage 23 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade extends beyond mere trade between nations. It also includes scenarios where SA countries exchange goods that would be less profitable or more resource-intensive to produce locally. By importing such goods, countries can lower their production costs and reallocate resources to areas where they can be more competitive, thereby fostering greater economic growth through specialization and trade. https://www.d.umn.edu/cla/faculty/jhamlin/4111 The Theory of Comparative Advantage David Ricardo introduced the theory of comparative R /Ricardo/David%20Ricardo.htm advantage in his seminal work Principles of Political Economy (1817) as an enhancement of Adam Smith's theory of absolute advantage. Ricardo's theory was designed to address the FO shortcomings of the absolute advantage theory, particularly for Source: countries that lack an absolute advantage in producing any goods. The theory addresses a critical question: what if a country has an absolute cost advantage in producing both goods? Is trade still beneficial? Ricardo posited that even if a country, can still engage in beneficial trade. This suggests that trade is driven by relative costs, not absolute costs - a concept of comparative advantage. T At the same time, the country should import goods where it has a greater absolute disadvantage or comparative weakness. Ricardo's theory relies on several key assumptions: (1) the existence of only NO two countries and two commodities; (2) the presence of free trade; (3) perfect labor mobility within each country but not between them; (4) constant production costs; (5) no shipping or transportation costs; and (6) no changes in technology. According to the theory of comparative advantage, a country can raise its standard of living and income by 24 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade specializing in the production of goods or services where it has higher productivity SA and efficiency. This theory also offers insights into exchange rates and the profits derived from trade, areas that the theory of absolute advantage does not cover (Pariade, 2013; Ibrahim & Halkam, 2021 as cited in Hosanna, 2023). Understanding Comparative Costs Comparative costs are assessed by comparing the relative cost ratios in two countries before trade occurs. These ratios reflect the opportunity cost of R producing one good in terms of the units of another good that must be forgone. For instance, if a country allocates all its labor to one product, increasing the output of that product necessitates reducing the production of another, thus FO incurring an opportunity cost (Sinha, 2014). To illustrate this concept, consider two countries, A and B with identical labor resources divided equally between two activities: producing cloth and wheat. Product Country A (000s) Country B (000s) Total (000s) T Cloth 100 80 180 NO Wheat 200 100 300 In this scenario, Country A is more efficient in producing both cloth and wheat. However, by examining the opportunity costs, we can identify each country's comparative advantage. In Country A, producing an additional unit of wheat requires sacrificing 0.5 units of 25 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade cloth, while in Country B, it requires sacrificing 0.8 units of cloth. Therefore, Country SA A has a comparative advantage in wheat production. Conversely, producing an extra unit of cloth in Country A costs 2 units of wheat, whereas in Country B, it costs only 1.25 units of wheat, indicating that Country B has a comparative advantage in cloth production. Specialization and Trade Outcomes Assuming constant production costs, if both countries specialize in the goods R in which they have a comparative advantage, the total output of each product will increase: FO Product Country A (000s) Country B (000s) Total (000s) Cloth 0 160 160 Wheat 400 0 400 For trade to be mutually beneficial, the terms of trade must lie between T the pre-trade relative price ratios of each country. Specifically, the terms of trade must be between 1 cloth = 2 wheat and 1 cloth = 1.25 wheat. If the terms of trade are set at 1 cloth - 1.5 wheat, both countries can benefit. For example, if Country B NO exports 80 units of cloth in exchange for 120 units of wheat, and Country A exports 120 units of wheat in exchange for 80 units of cloth, the post- trade situation will be as follows: (see next page) 26 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade SA Factor Country A Country B Cloth (000s) 80 80 Wheat (000s) 280 120 If this scenario, Country B gains by acquiring more wheat without reducing its cloth consumption. Country A, although consuming less cloth, still R benefits because the 80 units of wheat it exports are equivalent to about 53 units of cloth the the terms of trade of 1 cloth = 1.5 wheat, resulting in a net gain of 33 FO units of cloth equivalent. The Theory of Heckscher Ohlin or H-O Eli Filip Heckscher, a Swedish Political Source: https://www.biografiasyvidas.com/bio The theory, proposed by Swedish economic historian Eli Heckscher and his student Bertil Ohlin in the 1290, is widely grafia/h/heckscher.htm known as the Heckscher-Ohlin (H-O) Theory or the Factor Proportions Theory. This theory posits that a country is likely to Economist. import goods whose production requires resources that are T relatively scarce and expensive within that country. Conversely, Bertil Ohlin, Founder of the Modern Theory Source: https://www.nobelprize.org/prizes/economic the country will export goods that are produced using NO abundant and cheaper resources (Ibrahim and Trade. -sciences/1977/ohlin/facts/ Halkam, 2021). International According to the Heckscher-Ohlin framework, international trade is driven by two main factors: the availability of production inputs of and the intensity or proportion with which these 27 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade inputs are used. The ratios of these production factors, as stated by Tambunan SA (2004), will differ depending on the goods produced, as technology dictates how various inputs are combined to manufacture different products, leading to disparities in production. The types of goods a country produces, exports, and imports are determined by its resource endowments, such as labor and capital. R The Heckscher-Ohlin theory Source: Wallstreetmojo Team (2024). suggests that trade tends to elevate https://www.wallstreetmojo.com/heckscher-ohlin-model/ FO income levels or wages for workers while lowering real capital interest rates in countries with abundant labor but scarce capital. International trade encourages such countries to specialize in industries that intensively use their surplus production factors (Salvatore, 2013). In essence, this theory explains that a country engages in trade with others due to its comparative advantage, which is derived from its technological superiority and abundance of certain production factors. T To illustrate the theory, let's consider a simplified example involving two hypothetical countries: Country A and Country B (Karan, 2024): NO Country A is rich in fertile land, making it abundant in agricultural resources, such as soil and sunshine. This abundance enables Country A to efficiently produce agricultural products like grains, fruits, and vegetables. Country B , however, lacks the agricultural resources of Country A but possesses a well-educated and skilled workforce. This makes Country B abundant in labor, particularly skilled labor, allowing it to specialize in the production 28 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade of technology, machinery, and other labor-intensive goods. SA According to the Heckscher-Ohlin theory, each country will specialize in producing goods that intensively use their abundant resources. Therefore, Country A will focus on agricultural production and export these goods to Country B. Conversely, Country B will concentrate on manufacturing technology and machinery, which it will then export to Country A. This pattern of trade is mutually beneficial. Country A gains access to advanced technology and machinery without the need to develop a skilled R workforce, while Country B can obtain agricultural products without the need to invest heavily in land resource. By specializing according to their comparative FO advantages, both countries can enjoy a more efficient allocation of resources and a higher standard of living. Real-World Applications of the Heckscher-Ohlin Theory The Heckscher-Ohlin theory is not just a theoretical model but is actively observed in global trade patterns today. China and India: With large populations and relatively lower labor costs, these countries specialize in labor-intensive manufacturing industries, such as textiles, T toys, cosmetics, and consumer electronics. They export these goods to countries where labor is more expensive. NO United States: As a capital-abundant nation, the U.S. specializes in the production and export of capital-intensive goods, including machinery, electronics, and advanced technological products Brazil: Known for its vast and fertile land, Brazil specializes in the production and export of agricultural products, particularly soy- beans and coffee, which are in high demand globally. 29 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Historical Perspectives and Theories of International Trade Saudi Arabia and Russia: Both countries have abundant natural resources, SA particularly oil, which they extract and export as petroleum products, making them key players in the global energy market. Germany and Switzerland: These developed countries have a wealth of capital and technology, allowing them to specialize in capital-intensive manufacturing sectors, such as precision machinery and automobile production. Below is the table that illustrate this example: R Country/ Region Resource Abundance Specialization/ Exports Large populations, lower Labor-intensive manufacturing China and India FO wages (textiles, toys, clothing Capital-intensive goods (machinery, United States Capital abundance electronics Agricultural products (soybeans, Brazil Land abundance coffee) Abundant natural resources Saudi Arabia and Russia Petroleum products (oil) T Germany and Capital-intensive manufacturing Capital and technology Switzerland (precision machinery, automobiles) NO The Heckscher-Ohlin theory remains a vital tool for under- standing the patterns of international trade. It explains how countries benefit from specializing in industries that leverage their abundant resources, leading to a more efficient global economy where goods are produced where they can be done most efficiently. 30 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Types of International Trade Agreements What is a Trade Agreement? SA When two or more countries agree on their trade parameters, trade agreements take place. This establishes the import and export taxes and levies that nations apply. Every trade deal has an impact on international trade (Amadeo, 2021). A trade agreement is a formal arrangement between two or more countries that outlines the terms and conditions for trade between them. These agreements typically address a R wide range of issues, including tariffs, import and export quotas, trade restrictions, and provisions related to trade facilitation, intellectual property FO rights, and investment protection. For cross-border e-commerce retailers, trade agreements can open up new markets in partner countries, enabling them to reach a broader customer base and boost their sales. Understanding these agreements and the advantages they offer to involved parties - such as retailers and consumers engaged in exporting and importing goods - is crucial for maximizing their benefits (Zonos, 2025). T Benefits of Trade Agreements 1. Reduction of Geopolitical and Trade Barriers: Trade agreements help to ease NO tensions and eliminate obstacles that might otherwise hinder international trade. 2. Encouragement of Investment: By providing a stable and predictable trading environment, trade agreements attract investment, from both domestic and foreign entities. 3. Economic Improvement: Trade agreements can lead to economic 31 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Types of International Trade Agreements growth by fostering increased trade and investment flows. SA 4. Job Creation: As trade and investment grow, so do employment opportunities, particularly in industries that benefit from the agreement. 5. Diversification of Available Goods: Consumers gain access to a wider variety of products, often at lower prices, as a result of increased trade. 6. Enhancement of Living Standards: By improving access to goods, services, and employment, trade agreements can contribute to raising the overall standard of living in participating countries. R While trade agreements offer these benefits, they often come with specific FO requirements or restrictions. Once a country becomes a part of a trade agreement, trade among member countries tends to increase, leveraging the advantages mentioned above. Trade agreements are especially significant in the realm of cross-border e-commerce, where they can substantially reduce the landed costs of imports, thereby fueling economic growth and strengthening international relationships. Often, these agreements provide preferential treatment - such as reduced or zero T tariffs - based on the type of product and its country of origin. When effectively utilized, this preferential treatment can significantly lower the costs associated NO with cross-border trade. The importance of trade agreements in underscored by the role of the World Trade Organization (WTO), the only global international organization that oversees the rules of trade between nations. Trade agreements have been a driving force behind the remarkable growth in global trade over the past few decades. This growth is evident in the 32 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Types of International Trade Agreements near 300-fold increase in world trade values since the 1950s, a trend that has SA accelerated with the establishment of the WTO in 1995. Types of International Trade Agreements Despite the fact that there are over 800 trade agreements in existence worldwide, the majority of them fit into one of three categories according to the number of participating countries (Amadeo, 2021): Unilateral Trade Agreement - These happen when one nation sets trade R restrictions and no other nation does the same. Although it is uncommon, a nation FO may unilaterally reduce trade barriers if doing so would place it at a competitive On January 8, 2010, in Kabul, Afgranistan, an Afghan man arranges a pile of threads that have been dyed at a carpet maker. Afghanistan's most well-known export is its highly valued and usually costly carpets and rugs, disadvantage. Only as a kind of foreign aid which are the most unique of all oriental floor coverings. Source: Majid Saeedi/Getty images as cited by Amadeo (2021). https://www.thebalancemoney.com/free-trade- can the United States and other industria- agreement-types-and-examples-3305897 lized nations assist emerging markets in building up strategically important businesses that are too tiny to pose a danger. It fosters economic growth in emerging economies, opening up new export markets for Americans (Generalized T System of Preferences, 2023). Bilateral Trade Agreements - Two nations are involved in bilateral accords. In NO order to increase trade opportunities, both nations decide to slacken trade barriers. They grant each other preferential trade status and reduce tariffs. Key domestic industries that are protected or receive government subsidies typically become the source of contention. These are in the food, oil, or automobile production sectors for the majority of nations. Under the Trump administration, 33 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Types of International Trade Agreements negotiations on the Transatlantic Trade and Investment Partnership - the largest SA bilateral pact in history - with the European Union came to a standstill (Office of the United States Trade Representative, n.d & Bromund, 2019). Multilateral Trade Agreements - Negotiating agreements involving three or more nations is particularly challenging because the complexity increases with the number of participants. Each nation has unique demands, making multilateral agreements more complex than bilateral ones. However, once negotiated, these agreements are powerful, offering signatories a competitive R edge by covering a larger geographic area. They also grant “most-favored nation” sta- FO tus, ensuring the best terms for trade and the lowest tariffs (World Trade Organiza- tion, 2024). For instance, regional trade rose Source: Xpacifica/ Getty Images as cited in Amadeo (2022) from $290 billion in 1993 to over $1.1 trillion https://www.thebalancemoney.com/multilateral-trade- agreements-pros-cons-and-examples-3305949 by 2016, although some estimate that the agreement caused a net loss of 15,000 jobs annually in the U.S. The CAFTA-DR agreement removed tariffs on nearly 80% T of non-textile U.S. exports to Central American countries.. Additionally, the USMCA could have been replaced by the Trans-Pacific Partnership, but the NO U.S. withdrew in 2017. President Biden is expected to revisit this nego- titaion (Amadeo, 2021). 34 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Key International Trade Agreements According to McManus (2020), SA trade can lead to better environmental regulations if properly managed. When exporters want to sell in markets with strict environmental standards, they must Source: Irwin (2022) https://www.econlib.org/library/Enc/International TradeAgreements.html R comply with those regulations. To simplify production and reduce costs, they might push for similar standards in their own countries, leading to a phenomenon known as the "California Effect.” This occurs when a dominant trading partner's regulations influence others to FO adopt similar standards to maintain trade relations. However, this effect only works if trade agreements allow countries to introduce their own environmental regulations. International trade agreements, like those through the World Trade Organization or regional agreements like NAFTA, sometimes include environmental provisions. Still, there's concern over how these standards are enforced. For example, there was a dispute between Mexico and the United States over protecting dolphins while fishing for tuna T Trade agreements can create opportunities for Filipinos and help grow the Philippine economy by reducing barriers to exports, protecting national NO interests, and enhancing the rule of law in partner countries. These agreements set clear guidelines for Filipino companies looking to ex- pand into international markets. For example, agreements under the World Trade Organi- zation (WTO), Free Trade Agreements (FTAs), and Bilateral Investment Treaties (BITs) provide protections and rights to Filipino businesses. 35 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Key International Trade Agreements These frameworks can also lead to SA improved environmental standards. When companies in the Philippines aim to do businesses in markets with stricter environmental regulations, they may push for similar standards locally, leading to President Ferdinand R. Marcos Jr. observed the signing of the broader adoption of better practices. This Philippines-Korea Free Trade Agreement (PH-KR FTA) on September 7, 2023, marking a significant step forward in strengthening the partnership between the Philippines and prevents a "race to the bottom” where South trade-agreement-signed/ R Korea. Source: https://mirror.pco.gov.ph/news_releases/ph-south-korea-free- countries might otherwise lower environ- mental regulations to attract businesses, fostering a positive cycle of regulatory convergence instead. FO In the website of the Bureau of Customs under the Republic of the Philippines - Department of Finance where the kinds of free trade agreements between the Philippines and other countries following the tree types of international trade agreements: Unilateral - Example: Generalized System of Preference Bilateral - Examples: Philippine-Japan Economic Partnership Agreement T (PJEPA) and Free Trade Agreement between EFTA States and the Philippines (PH-EFTA). Multilateral - Examples: ATIGA, ACFTA, AKFTA, AJCEP, AIFTA, AANZFTA, NO AHKFTA The Bureau of Customs (BOC) shared a list of CO Forms that may qualify for preferential tariff treatment by other member countries. 36 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE Key International Trade Agreements Certificate of Members and Beneficiary SA Origin Forms Australia, Canada, Japan, New Zealand, United Kingdom Note: The European Union no longer accepts Form A. Exporters Form A must now apply as a REX Exporter under teh Registered Exporter System (RE). (CMO-5-2019) From JP Philippines and Japan Form D, E- Certificate of Origin, or R Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malysia, Myanmar, Philippines, Singapore, Thailand, Vietnam (10 ASEAN Origin Member State) Declaration FO Australia, New Zealand, Brunei Darussalam, Cambodia, Form AANZ Indonesia, Lao PDR< Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietman China, Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Form E Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam India, Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Form AI Malaysia, Myanmar. Philippines, Singapore, Thailand, Vietnam T Hong Kong, Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Form AHK Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam NO Japan, Brunei Darussalam, Cambodia, , Indonesia, Lao PDR, Form AJ Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam Korea, Brunei, Darussalam, Cambodia, Indonesia, Lao PDR, Form AK Malaysia, Myanmar, Philippines, Singapore, Thailand Vietnam 37 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE The Role of International Organizations in Trade Despite challenges like financial crises, wars, and pandemics, trade continues SA to expand, driving globalization. This process has connected people, companies, and economies worldwide, leading to increased prosperity and the exchange of ideas and cultures. Moreover, the growth of global trade has led to increased interactions and integration across nations, which has fueled the process of globalization. As businesses and economies become more connected, companies are increasingly looking to operate on an international scale. R World Trade Organization (WTO) The World Trade Organization (WTO), established in 1995, is at the forefront of international trade regulation and liberalization. It provides a legal framework FO for 164 economies worldwide, covering areas such as goods, services, intellectual property, and investment. The WTO serves as an international platform where member countries establish rules for global trade and address trade-related issues. These agreements are negotiated and agreed upon by WTO members to help businesses, exporters, and importers navigate the international trade system more effectively. T WTO agreements can be either multilateral, meaning they apply to all WTO members once they take effect, or plurilateral, meaning they apply only to a NO specific group of members who agree on a particular issue. 38 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE The Role of International Organizations in Trade The GATT and WTO Trade barriers, such as tariffs and quotas, present significant challenges for SA international businesses, potentially disrupting global trade and economic stability. In the aftermath of World War II, government representatives gathered at the Bretton Woods Conference in the U.S. with the goal of establishing an International Trade Organization (ITO) to promote economic recovery and stabilize world trade. However, the U.S. Congress declined to approve participation, leading to the failure of the ITO's formal establishment (FITT Team, 2017). R Despite this setback, the effort resulted in the creation of the General Agreement on Tariffs and Trade (GATT) in 1947. GATT endorsed by all participation FO nations, including the United States, aimed to reduce trade barriers, particularly tariffs, and provided a platform for members to negotiate and resolve trade issues. It also established foundational rules to guide international trade, developed through multiple rounds of negotiations. T Three principles emerged from GATT: 1. Tariffs and Binding Concessions: Once a WTO member lowers a tariff, it NO becomes "bound,” meaning the country cannot raise it again. This bound tariff applies uniformly to all WTO members. 2. Most-Favored-Nation (MFN) Rule: The MFN principle prohibits dis- crimination among similar products based on their country of origin, ensuring that import and export regulations, as well as payment rules, are consistent across all member nations. 39 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE The Role of International Organizations in Trade 3. National Treatment Rule: According to GATT Article III, this rule requires that SA imported good receive the same favorable treatment as domestically produced goods once they have cleared customs, ensuring fair competition within the market. Although GATT made substantial strides in reducing tariffs, new challenges arose as other multilateral and bilateral trade agreements, along with national protectionist measures, started to hinder trade. To address these evolving barriers, R over 100 countries convened in Marrakesh, Morocco, in April 1994, where they agreed to established the World Trade Organization (WTO). The WTO officially came into existence in January 1995, building on the foundation laid by GATT to FO further regulate and facilitate global trade. International Monetary Fund (IMF) and World Bank: Ensuring Financial Stability Though their primary focus isn't trade, the International Monetary Fund (IMF) and the World Bank are crucial in su- porting global trade by maintaining financial stability and pro- T moting economic development. The IMF offers financial aid, policy guidance, and technical support to member countries NO dealing with financial crises or aiming to enhance their economic per- formance. Meanwhile, the World Bank provides loans, grants, and expert advice for infrastructure projects, poverty alleviation, and sustainable development. By fostering stability and economic growth, these insti- tutions help create a favorable environment for international trade. 40 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE The Role of International Organizations in Trade Regional Trade Organizations: Promoting Regional Integration SA In additional to global trade organizations, regional trade organizations play a crucial role in promoting trade within specific geographic regions. Examples include the European Union (EU), the North Americal Free Trade Agreement (NAFTA), and the Association of Southeast Asian Nations (ASEAN). These organizations work to foster regional integration by reducing or eliminating trade barriers, harmonizing regulations, and encouraging economic cooperation among R member countries. By creating larger, more integrated markets, regional trade organizations expand trade opportunities and stimulate economic development in their regions. FO As noted by the CFI Team (2015), regional trading agreements are treaties T The Flags of Regional Trade Organization: EU, ASEAN, and NAFTA, respectively. Source: Vector Stock between two or more countries designed to facilitate the free movement of goods and services across member borders. These agreements establish internal rules NO for trade among members and external rules for international with non- members. Trade barriers like quotas and tariffs often hinder the flow of goods and services, but regional trading agreements help to reduce or eliminate these obstacles. 41 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE The Role of International Organizations in Trade Types of Regional Trading Agreements SA 1. Preferential Trade Areas: In these agreements, countries commit to reducing trade barriers to some extent, though they do not eliminate them entirely, and do not share common external trade policies. 2. Free Trade Area: Member countries remove all trade barriers among themselves, allowing for the free movement of goods and services, while retaining their individual trade policies for non-members. 3. Customs Union: Members eliminate internal trade barriers and adopt R common external trade barriers. 4. Common Market: Members not only remove internal trade barriers and adopt FO common external trade policies but also allow the free movement of resources like labor and capital among themselves. 5. Economic Union: This agreement goes further by eliminating trade barriers, adopting common external barriers, allowing free resource movement, imple- menting shared economic policies, and often adopting a single currency. 6. Full Integration: This is the most advanced level of regional trading agree- ments, where member countries fully integrate their economies. T Benefits of Regional Trading Agreements 1. Economic Growth - These agreements often lead to increased job creation, lo- NO were unemployment rates, and market expansion. They also provide investment guarantees, protecting investors in developing countries from political risks. 2. Increased Trade Volume - Favorable trading conditions within these agreements encourage businesses to explore new markets, leading to increased trade. 42 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE The Role of International Organizations in Trade 3. Improved Quality and Variety of Goods - Access to new markets intensifies SA competition, driving businesses to produce higher-quality products and offer more variety to consumers, thereby enhancing customer satisfaction. CHAPTER QUIZ - CHAPTER 1 MAKE SURE YOU HAVE A STABLE INTERNET CONNECTION WHEN ANSWERING THE QUIZ. YOU CAN ONLY ANSWER THE QUIZ ONCE. DURATION: 30 MINS. R Open your Google Classroom. Select classwork then click IBT - Chapter 1 Quiz. Open the classwork and answer the quiz. Follow the instructions stipulated. You FO may answer as many as you can. Once done, click the 'Mark as Done’ button on the classwork for it to be recorded. INDIVIDUAL ASSIGNMENT HOUSE CHECK Explore your home. Look for items inside your house/apartment whether T equipment, furniture, or personal belongings (clothes, bags, shoes, etc.). List down and identify its origin (where the item was made - e.g. Made in Vietnam). Write a NO short analysis/ reflection once the items were listed. Use Google Docs for this assignment and share the link in view copy in the attachment section of your classwork in the Google Classroom. How to attach a link? Click this. 43 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE GROUP ACTIVITY DIVIDE YOURSELVES INTO 4 GROUPS. Organize a role-play where you represent SA different countries in ASEAN member states covering the ASEAN trade agreements. The ASEAN member states are as follows: BRUNEI DARUSSALAM MYANMAR CAMBODIA PHILIPPINES R INDONESIA SINGAPORE LAO PDR THAILAND FO MALAYSIA VIETNAM SCORING RUBRICS FOR THE INDIVIDUAL AND GROUP ACTIVITIES T NO 44 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE REFERENCES Afttrade Fze. (2024). International Trade: Pros and Cons of Interdependency Between Nations. Retrieved from https://www.linkedin.com/pulse/ SA international-trade-pros-cons-interdependency-between-nations-fwfge/ on August 7, 2024. Ahmed, Z. (2024). Top 12 Biggest Ports in the World. Retrieved from https://www. marineinsight.com/ports/top-biggest-ports-in-the-world/#:~ :text=Conclusion-,1.,is%20located%20in%20Shanghai%2C%20China. Amadeo, K. (2021). Free Trade Agreements: Their Impact, Types, and Examples. Retrieved from https://www.thebalancemoney.com/free-trade- agreement-types-and-examples-3305897 on August 9, 2024 Butler, E. (2021). An Introduction to Trade and Globalization. The Institute of R Economic Affairs. London Publishing Partnership Ltd, North Street, Westminster, London. https://portal-igpublish-com.library.omsc.edu.ph /iglibrary/obj/NBNIB0007898?searchid=172178807840751OQ9v57xy VrM_mLpUpu2 Bureau of Customs. (2024). What is a Free Trade Agreement. Retrieved from FO https://customs.gov.ph/what-is-a-free-trade-agreement/ on August 9, 2024 Bromund, T. (2019). Transatlantic POlicy Impacts of the U.S. - EU Trade Conflict. Retrieved from https://www.congress.gov/116/meeting/house/109716/ witnesses/HHRG-116-FA14-Wstate-BromundT-20190626.pdf on August 9, 2024 CFI Team. (n.d.) Regional Trading Agreements. Retrieved from https://corporate financeinstitute.com/resources/economics/regional-trading-agreements/ on August 9, 2024. Cordero, T. (2024). Trade gap narrowed by 1.5% in April — PSA. Retrieved from https://www.gmanetwork.com/news/money/economy/909698/trade-gap- T narrowed-by-1-5-in-april-psa/story/ EconomicsOnline. (2020). Why do countries trade? Retrieved from https://www.economicsonline.co.uk/global_economics/why_do_ NO countries_trade.html/ on August 7, 2024. 45 CHAPTER FOUNDATIONS OF INTERNATIONAL TRADE 1 LE REFERENCES Engemann, K. (2024). Why Countries Trade: A Look at Benefits and Risks. Retrieved from https://www.stlouisfed.org/open-vault/2024/mar/international-trade- SA benefits-risks#:~:text=Trade%2