ITA-Reviewer Midterm PDF

ITA 1567 – Typhoid fever, imported from Europe, kills two million Lesson 1: Introduction Evolution of Trade Indians in South America. Importance of International Trade...

ITA Lesson 1: Introduction Evolution of Trade Importance of International Trade Lesson 2: International Trade Theories, Models, Concepts, and their Implications Absolute Advantage Comparative Advantage Factor Proportions Balance of Payments Classical or Country-Based Trade Theories Modern or Firm-Based Trade Theories Balance of Payments Information Lesson 3: Trade Barriers Trade Barriers Types of Trade Barriers The International Monetary Fund (IMF) Trade Agreement LESSON 1: EVOLUTION OF TRADE 1004 – Chinese unity crumbles with treaty between the Song and the Liao giving the Liao full autonomy; China will remain fractured until the Mongol invasion in the 13th century. 1025 – Navy of Cholas in Southern India crushes the empire of Srivijaya in modern Myanmar to protect their trade with China. 1100 – Japan begins to isolate itself from the rest of the world, not really opening up again until the mid-19th century. China invents the mariner’s compass and become a force in trade; widespread use of paper money help increases trade and prosperity. 1200 – Islam is introduced by spice traders to Southeast Asia. 1269 – England institute toll roads. 1270 – Venetian Marco Polo and his father travel through Asia and the middle East, becoming the first European traders to establish extensive links with the region. 1392 – England prohibits foreigners from retailing goods in the country. 1404 – Chinese prohibits private trading in foreign countries, but foreign ships may trade in China with official permission. 1425 – Hanseatic City of Brugge becomes the first Atlantic seaport to be a major trading center. 1430 – Portuguese Prince Henry the Navigator explores west African coast to promote trade. 1470 – Early trademark piracy committed by Persians who copy mass-produced Chinese porcelain to capitalize on its popularity in foreign countries. 1500 – Slave trade becomes a major component of commerce. 1531 – Antwerp stock exchange is the first exchange to move into its own building, signifying its importance in financing commercial enterprise throughout Europe and the rising importance of private trade and commerce; Antwerp emerges as a trading capital. 1555 – Tobacco trade begins after its introduction to Europe by Spanish and Portuguese traders. 1561 – Via Dutch traders, tulips come to Europe from near East for first time. ITA between the U.S., Canada, and Mexico. The agreement, which eliminated most tariffs on trade between the three countries. 1995 – World Trade Organization (WTO) set up as successor at GATT, by 2000 more than 130 members will account for over 90 percent of the world trade. 1997 – Hong Kong, a world trading and financial capital and bastion of capitalism, is returned to communist Chinese control. SILK ROAD ANCIENT: GLOBAL TRADE NETWORK International trade started in ancient times. The Silk Road was the first major trade route that connected the East and the West. It was an important trade route for over 2,000 years, connecting Asia with Europe via the Middle East. The Silk Road began after the Han Dynasty (206 BC-220 AD) expanded its rule over Central Asia. This allowed chinese people to travel to central asia and start businesses there. The Silk Road was also known as “the road of silk” because it transported silk from China to Rome. AGE OF EXPLORATION: NEW HORIZONS, NEW TRADE ROUTES The Age of Exploration (15th to 17th centuries) witnessed significant expansions of international trade routes. European explorers such as Christopher Columbus, Vasco da Gama, and Ferdinand Magellan embarked on voyages, seeking new trade routes to Asia and discovering new lands. These explorations led to the establishment of trade links and colonies, enabling the exchange of goods, resources, and cultural influences between continents. MERCANTILISM AND COLONIALISM: TRADE AS NATIONAL POLICY During the 16th to 18th centuries, mercantilism became a dominant economic doctrine. European powers aimed to accumulate wealth through favorable balances of trade. Colonialism played a crucial role in this pursuit, as European nations established colonies worldwide to secure raw materials, establish markets for finished goods, and maintain a monopoly on trade. The British East India Company, formed in 1600, became a significant player in international trade, particularly in Asia. INDUSTRIAL REVOLUTION: TECHNOLOGICAL ADVANCEMENTS TRANSFORM TRADE The Industrial Revolution (18th to 19th centuries) brought about revolutionary changes in international trade. Technological advancements, such as the steam engine, mechanization, and improved transportation infrastructure, facilitated mass production and trade on a global scale. The advent of telegraphy enhanced communication and coordination across long distances, further accelerating trade and commerce. POST-WORLD WAR II: MULTILATERAL TRADE AGREEMENTS Following World War II, global efforts were made international trade cooperation. The General Agreement on Tariffs and Trade (GATT), established in 1947, aimed to ITA 3. Use of monopoly to Control Price – The exploitation of the Importing country by the exporting country can take place. 4. Political Risk – The government can change laws in a discriminatory fashion or create regulation that directly impact a specific organization. 5. Political Dependence – International trade often encourage slavery. 6. Intellectual Property Theft – The wider a product is distributed the more likely that it may be illegally copied by a competitor. LESSON 2: THEORIES AND CONCEPTS IN INTERNATIONAL TRADE This section will briefly introduce you to some basic and concepts of international trade. In the same way that the phone had its beginning with Alexander Graham bell, international trade theories and concepts had theirs with Adam Smith and David Ricardo. The classical theories of international trade basically the following: 1. There are only two countries which will trade; 2. There are two products to trade with; and 3. There is only one factor of production—the input—in to come up with a product. The theories also help explain: What nations export and import; With what other nations; Under which economic, geographic and political circumstances; and With what consequences. You may choose to specialize in the production of one product and import or get the other product from another country. SMITH’S THEORY OF ABSOLUTE ADVANTAGE A condition of absolute advantage exists country (Country A) has a cost advantage over another (Country B) in the production of one product (it can be produced using fewer resources) while the second country (Country B) has a cost advantage over the first country (Country A) in producing a second product. Below is a numerical presentation or example of the said theory as applied to two countries (Countries A and B): In this presentation, the numbers represent the cost of production of the respective countries. To produce textiles, Country A costs it with six (6) resources, while Country B costs it with only two (2) resources. Country B has the absolute ITA COMPARATIVE VS. ABSOLUTE Absolute advantage is anything a country does more efficiently than other countries. Nations that are blessed with an abundance of farmland, fresh water, and oil reserves have an absolute advantage in agriculture, gasoline and petro chemicals. Just because a country has an absolute advantage in an industry doesn’t mean that it will be its comparative advantage. That depends on what the trading opportunity cost are. Say its neighbor has no oil but lots of farmland and fresh water, the neighbor is willing to trade a lot of food in exchange for oil. Now, the first country has a comparative advantage in oil, it can get more food from its neighbor by trading it for oil than it could produce on its own. HECKSCHER-OHLIN TRADE THEORY OF FACTOR PROPORTIONS The Heckscher-Ohlin theory explains why two countries trade goods and services with each other. According to this theory: One condition for trade is that the countries differ with respect to the availability of the factors of production. They differ if one country, for example, has many machines but few workers, while another country has a lot few machines. The Heckscher-Ohlin theory suggests that specializes in the production of goods that it is suited to produce. Countries where capital is abundant and workers are few should specialize in the production that, in particular, require capital. On the contrary, where workers are abundant and capital is scare should specialize in labor-intensive goods. Here is some important information regarding the Ohlin theory. 1. The Heckscher-Ohlin theory evaluates the equilibrium of trade between two countries that have varying and natural resources. 2. The theory explains how a nation should operate and trade when resources are imbalanced throughout the world. 3. The theory isn’t limited to commodities, but also incorporates other factor of production such as labor. The cost of labor vary from one nation to another, so 4. Countries with cheap labor forces should focus primarily on producing labor- intensive goods, this according to the theory. Some countries are relatively well-endowed with capital: the typical worker has plenty of machinery and equipment to assist with the work. In such countries, wage rates generally are high; as a result, the cost of producing labor-intensive goods – such as textiles, apparel and some electronics – tend to be more expensive than in countries with plentiful labor and low wage rates. On the other, goods requiring much capital and only a little labor e.g. automobiles and chemicals tend to be relatively inexpensive in countries with abundant capital ITA 3. Financial Account – deals with the monetary inflows and outflows pertaining to the investments made in various sector such as foreign direct investment, real estate, and other business ventures. Of the three, the current account is of primary interest to international business. Therefore, balance of payment (BOP) is used to determine whether the country is having surplus or deficit. INTERNATIONAL TRADE THEORIES, MODELS, CONCEPTS, AND THEIR IMPLICATIONS International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries. People or entities trade because they believe that they benefit from the exchange. They may need or want the goods or services. While at the surface, this may sound very simple, there is a great deal of theory, policy, and business strategy that constitutes international trade. In this section, you’ll learn about the different trade theories that have evolved over the past century, and which are most relevant today. Additionally, you’ll explore the factors that impact international trade and how businesses and governments use these factors to their respective benefits to promote their interests. CLASSICAL OR COUNTRY-BASED TRADE THEORIES MERCANTILISM Developed in the sixteenth century, mercantilism was one of the earliest efforts to develop an economic theory. This theory stated that a country’s wealth was determined by the amount of its gold and silver holdings. In its simplest sense, mercantilists believed that a country should increase its holdings of gold and silver by promoting exports and discouraging imports. In other words, if people in other countries buy more from you (exports) than they sell to you (imports), then they have to pay you the difference in gold and silver. The objective of each country was to have a trade surplus, or a situation where the value of exports is greater than the value of imports, and to avoid a trade deficit, or a situation where the value of imports is greater than the value of exports. A closer look at world history from the 1500s to the late 1800s helps explain why mercantilism flourished. The 1500s marked the rise of new nation-states, whose rulers ITA that trade between countries shouldn’t be regulated or restricted by government policy or intervention. He stated that trade should flow naturally according to market forces. In a hypothetical two-country world, if Country A could produce a good cheaper or faster (or both) than Country B, then Country A had the advantage and could focus on specializing on producing that good. Similarly, if Country B was better at producing another good, it could focus on specialization as well. By specialization, countries would generate efficiencies, because their labor force would become more skilled by doing the same tasks. Production would also become more efficient, because there would be an incentive to create faster and better production methods to increase the specialization. Smith’s theory reasoned that with increased efficiencies, people in both countries would benefit and trade should be encouraged. His theory stated that a nation’s wealth shouldn’t be judged by how much gold and silver it had but rather by the living standards of its people. Implications: Countries should and export goods in which they are absolutely more efficient, leading to benefits from trade. Example: Saudi Arabia: The country has an absolute advantage in oil production due to its vast oil reserves and efficient extraction processes. It exports oil while importing goods like machinery and electronics Initial Trade Relationships: When establishing trade relationships between countries, especially if one country is clearly more efficient in producing certain goods than another. Emerging Economies: For developing nations looking to identify sectors where they have an absolute advantage and can benefit from specializing in those goods. Policy Formulation: When governments are designing trade policies, understanding absolute advantages can help in promoting sectors where a country excels, leading to better economic strategies. Industry-Specific Contexts: In industries where technology and productivity levels differ significantly between countries, applying absolute advantage can clarify which country should focus on which products. COMPARATIVE ADVANTAGE The challenge to the absolute advantage theory was that some countries may be better at producing both goods and, therefore, have an advantage in many areas. In contrast, another country may not have any useful absolute advantages. To answer this challenge, David Ricardo, an English economist, introduced the theory of comparative advantage in 1817. Ricardo reasoned that even if Country A had the absolute advantage in the production of both products, specialization and trade could still occur between two countries. Comparative advantage occurs when a country cannot produce a product more efficiently than the other country; however, it can produce that product better and more efficiently than it does other goods. The difference between ITA country’s production factors—land, labor, and capital, which provide the funds for investment in plants and equipment. They determined that the cost of any factor or resource was a function of supply and demand. Factors that were in great supply relative to demand would be cheaper; factors in great demand relative to supply would be more expensive. Their theory, also called the factor proportions theory, stated that countries would produce and export goods that required resources or factors that were in great supply and, therefore, cheaper production factors. In contrast, countries would import goods that required resources that were in short supply, but higher demand. For example, China and India are home to cheap, large pools of labor. Hence these countries have become the optimal locations for labor-intensive industries like textiles and garments. Implications: Helps explain trade patterns based on factor endowments (refers to the quantity and quality of production factors that a country possesses). These factors typically include: influencing labor markets, wages, and economic structures in trading nations. Example: The U.S has abundant capital and skilled labor, allowing it to specialize in capital-intensive industries like technology, aerospace, and pharmaceuticals. It exports these goods while importing labor-intensive products like textiles and agricultural goods - countries tend to export (sell to other countries) the goods that use their abundant resources and import (buy from other countries) the goods that use their scarce resource. MODERN OR FIRM-BASED TRADE THEORIES In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry trade, which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany. Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows. COUNTRY SIMILARITY THEORY Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm- based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their ITA cost advantage for global firms. Implications: The PLC theory often does not consider external factors such as regulatory changes, economic fluctuations, or geopolitical events that can impact trade patterns and product success. Example: In the 1970s US manufacturing was the globally dominant producer of PC after World War II and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico. Global Market Expansion and shift location: As a product matures in one market, companies may consider exporting it to emerging markets where demand is growing. As products move through their life cycle, companies often shift to countries with lower costs or specialized capabilities. PLC can guide decisions on relocating manufacturing. GLOBAL STRATEGIC RIVALRY THEORY Global strategic rivalry theory emerged and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other firms in their industry. Firms will encounter global in their industries and in order to prosper, they competitive advantages. The critical ways that firms a sustainable competitive advantage are called the entry for that industry. The barriers to entry refer obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that may seek to optimize include: research and development, the ownership of intellectual property rights, economies of scale, unique business processes or methods as well as extensive experience in the industry, and the control of resources or favorable access to raw materials. Implications: Companies are encouraged to adopt long- term strategies that consider potential responses from competitors, as well as shifts in consumer preferences and market dynamics. Example: Companies such as Caterpillar and Komatsu, Unilever and Protect & Gamble, and Toyota and Ford continually play cat-mouse games with one another basis as they attempt to leverage their own strengths and neutralize those of their rivals. Market Entry Decisions: Use GSRT to evaluate potential entry into new markets, considering competitors' weaknesses, and strategies. This helps in determining approach to gain market share. Innovation Strategies: In industries where innovation is critical, GSRT can guide companies in their R&D and help identify areas for technological advancement to outpace rivals. ITA geographically, which provides efficiencies and productivity. 4. Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness. In addition to the four determinants of the diamond, Porter also noted that government andchance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries. Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories. Implications: This theory has significant implications for trade policy, suggesting thatfostering dynamic, innovative industries within a nation will lead to long-term success in international markets. Example: An excellent example of Porter’s National Competitive Advantage trade theory in action is the global success of the German automotive industry. The combination of skilled labor, a demanding domestic market, strong related industries, and intense competition has given Germany a leading edge in the automotive sector. By fostering innovation, efficiency, and high-quality production, Germany has become one of the most competitive nations in the world in this industry. Which Trade Theory Is Dominant Today? The theories covered in this chapter are simply that— theories. While they have helped economists, governments, and businesses better understand international trade and how to promote, regulate, and manage it, these theories are occasionally contradicted by real-world events. Countries don’t have absolute advantages in many areas of production or services and, in fact, the factors of production aren’t neatly distributed between countries. Some countries have a disproportionate benefit of some factors. The United States has ample land that can be used for a wide range of agricultural products. It also has extensive access to capital. While it’s labor pool may not be the cheapest, it is among the best educated in the world. These advantages in the factors of production have helped the United States become the largest and richest economy in the world. Nevertheless, the United States also imports a vast amount of goods and services, as US consumers use their wealth to purchase what they need and want—much of which is now manufactured in other countries that have sought to create their own comparative advantages through cheap labor, land, or production costs. As a result, it’s not clear that any one theory is dominant around the world. This section has sought to highlight the basics of international trade theory to enable you to understand the realities that face global businesses. In practice, governments and companies use a combination of ITA physical inputs owned by others in manufacturing, transport, travel, maintenance and repair, telecommunications, computer and information, construction, insurance and pension, financial, charges for the use of intellectual property, other business, personal, cultural and recreational, and government services. The primary income sub-account records as receipts earnings of resident OF workers, as well as the profit of Philippine investments abroad.1 Disbursements include interest payments to foreign creditors. Remittances of non-resident OFs are lodged under the secondary income sub-account together with other current transfers such as gifts, grants and donations to and from abroad. Current transfers can be in cash and in kind.2 5. What does the Current Account Balance signify? When total exports/receipts exceed total imports/payments, the current account is in surplus. It is in deficit if the reverse is observed. If the current account balance is in surplus, the country is a “net lender” to the rest of the world in the amount of the surplus or the excess in the current account transactions. Net lending occurs when the national saving is more than the country’s investment in real assets. If in deficit, the country is said to be a “user of funds” and thus, is considered as net borrower from abroad in order to fill in the shortage. In this case, the country invested more than what its national saving can finance. 6. What are the transactions in the capital account? The capital account consists of capital transfers and acquisition and disposal of nonproduced, nonfinancial assets between residents and nonresidents. This also includes grants and donations, the intention of which is for investment (i.e., machinery and equipment, buildings and structures). This is in contrast with grants and donations lodged under secondary income which are intended for consumption (i.e. food, clothing, supplies and materials). 7. What are the transactions in the financial account? The financial account consists of direct investments, portfolio investments and other forms of investment. Direct investment refers to capital participation in a company in which the investor has a significant degree of influence on management of the company. By convention, this is manifested by ownership of at least ten percent of the company’s equity. Portfolio investment is usually referred to as “hot money” since the investor’s motive is short-term as opposed to a direct investor’s significant degree of influence in a company. A portfolio investor will buy or sell a financial instrument at anytime there is an indication of immediate gain or loss. Portfolio holdings may be in the form of stocks, bonds and notes, and money market instruments, which are tradable in the market and thus can easily be acquired or disposed of. In the case of stockholdings, a portfolio investor is ITA The overall BOP position is a summary measure of the performance of the country’s external transactions. This can be estimated using two approaches: The change in net international reserves due to transactions, or The sum of the balances of the Current Account and Capital Account, less the balance of the Financial Account (excluding assets/liabilities of the BSP) Net inflows in the current and capital accounts are denoted in positive terms. By contrast, net inflows in the financial account are presented as a negative balance using the “assets (outflows) less liabilities (inflows)” approach under the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). The balance in the financial account is therefore deducted from the sum of the current and capital account balances to arrive at the overall BOP position. In practice, the two methods for computing the overall BOP position do not yield the same results due to data limitations particularly in the second approach. The discrepancy between the two approaches is termed as “Net Unclassified Items” or “errors and omissions”. Since the level of international reserves is based on a more rigid book accounting, the overall BOP position is determined by the first approach. Thus, to maintain the equality of the two approaches, the following equation is adopted in the BOP: The compilers refer to the first four items as “above the line” and the change in NIR as “below the line.” 12. What is the International Investment Position (IIP)? How does it compare with the BOP? The IIP is a companion framework to the BOP statistics. The BOP is a flow estimate since it records transactions within a given period. Meanwhile, the IIP is a stock estimate as it records the country’s foreign financial assets and foreign financial liabilities outstanding as of a certain period. The stock is the result of all the past flows plus adjustments such as exchange rate movements to account for the value of the financial asset/liability as of date of reporting. 13. What are the main components of the IIP? The IIP links with the financial account in the BOP. Similar to the BOP, the accounts in the IIP are direct investments, portfolio investments, financial derivatives, and other investments. Assets and liabilities are presented ITA preliminary end-month IR data are released every 7th day of the month (or the working day before the 7th day of the month if it falls on a weekend or is a non-working holiday). The international reserves and foreign currency liquidity template data are released within one month after the end of the reference month. 17. How often are these statistics revised? Data on all BOP/IIP components released to the public during the reference quarter are treated as preliminary, and may be revised in any quarter of the reference year. Prior year’s data may be revised coinciding with the release of the second quarter report in September of the current year and the fourth quarter report in March of the succeeding year. Historical revisions are carried out in case of significant changes arising from the introduction of new classifications, compilation frameworks and methodologies. The revised or final end-month IR data are released every 19th day of the month (or the nearest working day to the 19th if this falls on a weekend or is a non-working holiday). 18. What guidelines are used in compiling the BOP and IIP statistics? The International Monetary Fund (IMF) recommends the use of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) as the standard framework for compiling statistics on BOP and IIP. The IMF introduced the revised edition in 2008 and recommends that countries fully adopt the new framework by 2014. The BSP has started the implementation of the BPM6 framework in March 2013 with the release of the full-year 2012 Balance of Payments (BOP) report. In March 2014, the BSP fully implemented the shift of the BOP compilation to BPM6 framework in compliance with the recommendations set out in the BOP manual. Meanwhile, the compilation of IIP data based on BPM6 framework was completed last September 2014 with the simultaneous release of the quarterly IIP data as of end- March 2013 to end-June 2014, Following the implementation of the BPM6 compilation framework, the BSP released the backtracked BOP monthly data series from 2005-2010 (with accompanying technical notes) in the BSP website in March 2014. Apart from the conversion to BPM6 format, the revisions to the backtracked BOP data series mainly reflected the use of new data sources and estimation methodologies to generate more accurate and reliable BOP statistics. Meanwhile, backtracked IIP data series (annual 2006-2012) and (quarterly 2013) were posted in the BSP website in September 2014. The BSP provides more information on the shift in the framework through the primer and BSP economic newsletter published at the BSP website. The BSP also conducts several information dissemination activities on BPM6 for BOP data users. 19. What were the revisions to the BOP and IIP when BSP adopted BPM6? ITA It is urges that a more local companies there employment opportunities for Filipinos will be. In general, tariffs: Increased o Inflationary pressure o Special interest privilege o Number of tariffs Weaken o Balance of Payment position o Supply and demand pattern o International relation (they can wars) Restrict o Manufacturer’s supply source o Choice available to consumers o Competition In addition, tariffs are arbitrary, are discriminatory and require constant administration and supervision. TYPES OF TRADE BARRIERS Tariffs Non-Tariff o Qoutas o Monetary o Embargoes o Boycott o Anti-Dumping Practices o Standards o Tariff Classification TARIFFS Tariffs are one of the oldest trade policy with this use dating back to at least the 18th century. Historically, the main objective of a tariff was to raise revenues. The primary reason for imposing tariffs is to increase of certain imported goods to make them LESS desirable for domestic consumers. Another reason is to make these goods less competitive with domestic goods thus protecting domestic producers. Consequently, the domestic consumers who purchase these goods will do so at a higher prices ordinarily would. Tariffs are paid by domestic consumers and not the exporting country, but they have the effect of raising the relative prices of imported goods. The effect is nonetheless to make foreign products relatively more expensive for consumers, but if manufacturer rely on imported components or other inputs in their production process, they the increased cost to consumers. Further, some countries have free trade agreements with each other. For the reasons, import and export between these countries are free and without tariffs. ADVANTAGES: 1. More money for the government. 2. Businesses in the home country have a better chance of competing. 3. Encouraging domestic growth. DISADVANTAGES: 1. Imported goods and services become more expensive. 2. May cause other countries to impose tariffs in response, affecting exporters. 3. Retaliation by foreign government, commonly known as trade wars. HOW TARIFFS WORKS ITA DUTY-FREE GOODS In most countries, international travelers are allowed to bring goods into the country duty free – free of tariff. These products are bought at airports, ports or in a country where those goods are tax free-free, and then brought into another country duty- free. There is usually an allowance which limits how much—in numbers, weight or value – of duty-free goods a travelers can bring into the country. These limits are typically applied to wine, tobacco, cosmetics, souvenirs, and gifts. Diplomats and UN officials are entitled to carry duty-free goods without any limits. QOUTAS IMPORT QUOTAS Import Quotas are a form of restriction imposed by the government on trade of a particular commodity by imposing restriction on either fixed in terms of value or quantity of the product which can be imported during a given period of time usually for one year and usually imposed by the government to provide benefits to local producers. It protects countries market from getting flooded with imported goods which is same or similar goods produced by local players due to low production cost in the overseas market or high level of efficiency, the expertise of exporter party. However, this restriction on imports may affect consumer sentiment as they may not be getting goods at a cheaper cost. OBJECTIVES OF IMPORT QUOTAS To protect the domestic product from foreign goods by limiting the import of goods from the overseas To make sure that the internal price level gets by regulating the procurement of goods from foreign countries. To fight against the trade policies adopted countries. To reduced the deficit in the balance of payment the country. Import quotas helps in adjusting balance of payments. To preserve the limited exchange resources of and make their use for higher priority items. Import quotas helps in adjusting the adverse balance of payments. HOW DOES QUOTA WORKS The government of different countries keeps a regular check on the number of goods getting imported. On ITA For example, a country might allow the importation of 5,000 tractors at a tariff rate of 10% However, any tractor imported above this quantity would be subject to a tariff rate of 30%. Unlike a simple quota system, a TRQ regime does not restrict the quantity of imported products. EFFECTS OF IMPORT QUOTAS 1. Protective or Production Effect As the import quota reduces the imports it has a protective effect on domestic producers which helps them to increase their production of import substitutes. This increased domestic production is called a protective or production effect. 2. Consumption Effect There is a surge in the price of domestically produced commodity once the import quota is prescribed this lead in the reduction of consumption of that commodity. 3. Price Effect As import quota imposes a limitation on the quantity of the product, it restrict the availability of the product in the market creating a shortage and consequently rise in price. 4. Revenue Effect The revenue effect is complex and difficult to comprehend. Accordingly, this effect is either captured by domestic importer or foreign importers or shared by both in some proportion. 5. Balance of Payment Effect It helps in reducing the balance of payment deficit by limiting the imports whose portion of income can be utilized in the future for investment in export or import substitution. IMPORT QUOTA VS. IMPORT TARIFF An import tariff is a tax imposed by the government on the import of certain products. With the increase in the tariff rate on commodity tends to decline. The government revenue increases with an increase in tariff as it is a direct source of revenue for the government and hence an increase in GDP. Whereas import quota is the limitation on the number of goods imported in the country. This leads to a reduction in the quantity or value of goods imported and a lesser variety of products for the consumer. Local manufacturers/trader’s income increases form the products domestically produced due to the imposition of quota. ADVANTAGES: 1. It acts as a boost for local goods manufacturers. 2. Even if demand for imported material increases the quota helps in keeping the 3. Volume of imports completely unchanged. 4. It helps in reducing deficits in the balance of payments. 5. It helps saving foreign exchange for future spending at the time of emergency. 6. The outcome of quota is more certain, precise, and 1567 – Typhoid fever, imported from Europe, kills two million Indians in South America. 1600 – Potatoes are brought from South America to Europe where they quickly spread to the rest of world and become a staple of agricultural production. Japan begins trading silver for foreign goods. 1609 – Dutch begin fur trade through Manhattan. 1611 – Japan gives Dutch limited permission to trade. 1651 – English pass first so-called Navigation Acts to restrict Dutch trade by forcing colonies to trade only with English ships. 1760 – Chinese begins strict regulation of foreign trade to last nearly a century when they permit Europeans to do business only in a small area outside Canton and only with appointed Chinese traders. 1807 – U.S. President Thomas Jefferson bans trade with Europe in an effort to convince warring British and French ships to leave neutral U.S. trading ships alone. 1817 – David Ricardo publishes Principles of political Economy and Taxation, in which he proposes modern trade theory: that comparative advantage drives trade; that countries will produce and export goods for which they have a comparative advantage as opposed to Adam Smith’s absolute advantage. 1821 – Britain is first to adopt gold standard to back value of its currency. 1844 – Chinese open five ports to U.S. ships. 1851 – First international world’s fair held in London, showcasing new technology. 1857 – Russia and France sign trade treaty. 1860 – The Cobden Treaty aims to create free trade by reducing or eliminating tariffs between Britain and France. 1873 – United States adopts the gold standard to fix the international value of the dollar. 1890 – The McKinley Tariff Act was passed in the U.S. 1938 – American Chester Carlson develops dry copying process for documents (xerography), which among other things, will enable governments to require that multiple forms be filled out to move goods. 1944 – The Bretton Wood Agreement was negotiated. The Bretton Wood Agreement established a system through which a fixed currency exchange rate could be created using gold as the universal standard. 1947 – General Agreement on Tariffs and Trade (GATT) signed by 23 countries to try to reduce barriers to trade around the world. 1957 – European Economic Community (EEC) established by Belgium, France, West Germany, Italy, Luxembourg, and the Netherlands, the precursor to today’s European Union. 1971 – United States abandons gold standard, allowing the international monetary system to base exchange rates on perceived values instead of ones fixed in relation to gold. 1973 – Arab oil embargo jolts industrial world into understanding the totally global nature of supply and demand. 1994 – NAFTA was formed. The North American Free Trade Agreement (NAFTA) was implemented to promote trade 1 reduce trade barriers and promote economic growth. In 1995, the GATT evolved into the World Trade Organization (WTO), which oversees trade agreements and dispute resolutions among member nations. The WTO has played a vital role in fostering a rules-based international trading system. DIGITAL ERA: E-COMMERCE AND GLOBAL SUPPLY CHAINS The digital revolution of the late 20th and early 21st centuries has transformed international trade. The rise of the internet and e-commerce platforms has revolutionized the way businesses conduct cross-border transactions. Figures like Alibaba Group, founded by Jack Ma, have facilitated global trade through online marketplaces, connecting buyers and sellers from different corners of the world. Global supply chains have become intricately interconnected, allowing for efficient production, distribution, and consumption of goods. IMPORTANCE OF INTERNATIONAL TRADE Trade: The exchange of goods among people, states, and countries are referred to as trade. Importance: International trade of a country is an index to its economic prosperity. It is considered the economic barometer for a country. It allows countries to expand their markets and access goods and services that otherwise may not have been available domestically. As a result of international trade, the market is more competitive. ADVANTAGE AND DISADVANTAGE OF INTERNATIONAL TRADE ADVANTAGES: 1. Increase in Revenue – You may be able to increase your number of clients. 2. Decreased Competition – Your product and service may have to compete in crowded market, but you may find that you have less competition in other countries. 3. Benefiting from currency exchange – Those who add international trade to their portfolio may benefit from currency fluctuation. 4. Access to export financing – You may be able to leverage export financing. 5. Disposal of Surplus Goods – You may have outlet to dispose of surplus goods that you’re unable to sell in your home market. DISADVANTAGES: 1. Impediment in the development of Domestic Industries – It has an adverse effect in the development of domestic industries. Due to foreign competition, cheaper availability and unrestricted imports, the domestic industries in the country may collapse. 2. Difficulties in Times of Needs – Dependence on foreign goods creates difficulties in time of war, calamity, emergency and pandemic. to promote 2 advantage in textile production because it is cheaper to produce textile there. The situation, however, is reversed in the production of rice. This time, Country A has the absolute advantage. Why? Because it is cheaper to produce rice in Country A. It will cost only three (3) resources for Country A to produce rice while it will cost six (6) resources for Country B to produce rice. Thus, Country A has the absolute advantage in rice production. As a result of trading and specialization, next textile gain total world (consisting of two countries) is +2, while net rice gain is +1. theories It should be noted that Adam Smith said that trade is possible and profitable if each country has absolute advantage assume in the production of at least one commodity. RICARDO’S THEORY OF COMPARATIVE ADVANTAGE Unlike the theory of absolute advantage, the theory of comparative advantage states that: trade can be carried out order even if one country has absolute advantage in producing two products over another country. The theory asserts that a country that produces a certain product at a lower relative cost advantage over another country enjoys a comparative advantage. Therefore, the country benefits by specializing in exporting the products in which it has the greatest advantage, or a superior (comparative) advantage, and importing the products in which its advantage is less. Look at this numerical example. Note that Countries A and B are both producing textile and rice. when one country In terms of how much each country can produce one unit of textile and rice, it can be gleaned that Country A has absolute advantage in the production of both products (textile and rice) if the two countries decide to trade. Therefore, Country A specializes in textile production, while Country B specializes in rice production. Through trade, Country A will export textile and import rice, while Country B will export rice and import textile. Example 2: England was able to manufacture cheap cloth Portugal had the right condition to make cheap wine. As a result, Ricardo’s theory says that England would stop making wine and Portugal stop making cloth. England will make more money by trading its cloth for Portugal’s wine and vice versa. It would have cost England a lot to make all the wine it needed because it lacked the climate. While Portugal didn’t have the manufacturing ability to make cheap cloth. So, they both benefited by trading what they produced the most efficiently. 3 should generally be able to produce capital-intensive goods relatively inexpensively, exporting them in order to pay for import of labor-intensive goods. In the Heckscher-Ohlin theory, it is not the absolute amount of capital that is important; rather, it is the amount of capital per worker. Example of Heckscher-Ohlin Theory A small country like Luxembourg has much less capital in total than India, But Luxembourg has more capital per worker. Hence, based on the theory predicts that Luxembourg will export capital intensive products to India and import labour intensive products in return. BALANCE OF PAYMENTS When countries trade, financial transactions among businesses or consumers of different nations occurs. The system of accounts that records a nation’s international financial transactions is called its balance of payments. It is a net figure that shows how much money is leaving or coming into a country. A balance of payments represents the difference between receipts from foreign countries on one side and payments to them on the other. (capital) of workers but a country particularly of goods countries Heckscher- A trade surplus exists if a country exports more than its imports. The country exports more than its imports. specialties Country provides enough capital to pay for all domestic production. A surplus boosts economic growth in the short term. In the long run, it becomes too dependent on export-driven growth. A trade deficit exists if a country export less than its imports. The country imports more goods, services and capital than its export. It must borrow from other countries to pay for its imports. In the short-term, this fuels economic growth. In the long term, it will have to go into debt to pay for consumption. A balance of payments statement includes three accounts: 1. Current Account – deal with the sale or purchase of goods that can either raw materials or manufactured goods. This account is meant for daily transaction to keep the flow of money smooth and get and make payments on time. 2. Capital Account – includes the non-financial sale and purchase of assets and the flow of taxes; and the 4 wanted to strengthen their nations by building larger armies and national institutions. By increasing exports and trade, these rulers were able to amass more gold and wealth for their countries. One way that many of these new nations promoted exports was to impose restrictions on imports. This strategy is called protectionism and is still used today. Nations expanded their wealth by using their colonies around the world in an effort to control more trade and amass more riches. The British colonial empire was one of the more successful examples; it sought to increase its wealth by using raw materials from places ranging from what are now the Americas and India. France, the Netherlands, Portugal, and Spain were also successful in building large colonial empires that generated extensive wealth for their governing nations. Although mercantilism is one of the oldest trade theories, it remains part of modern thinking. Countries such as Japan, China, Singapore, Taiwan, and even Germany still favor exports and discourage imports through a form of neo- mercantilism in which the countries promote a combination of protectionist policies and restrictions and domestic-industry subsidies. Nearly every country, at one point or another, has implemented some form of protectionist policy to guard key industries in its economy. While export-oriented companies usually support protectionist policies that favor their industries or firms, other companies and consumers are hurt by protectionism. Taxpayers pay for government subsidies of select exports in the form of higher taxes. Import restrictions lead to higher prices for consumers, who pay more for foreign- made goods or services. Free-trade advocates highlight how free trade benefits all members of the global community, while mercantilism’s protectionist policies only benefit select industries, at the expense of both consumers and other companies, within and outside of the industry. Implications: While intended to support local economies, import restrictions lead to higher prices for consumers, who pay more for foreign-made goods or services. Example: the Sugar Act of 1764 which made colonists in America had to pay higher tariffs and duties on imports of foreign-made refined sugar products. Protect Infant Industries – to protect emerging industries by limiting the imports of same goods or services Improve Trade Imbalances – when there is trade deficit (imports greatly exceed exports). This can involve imposing tariffs on imported goods, offering subsidies for export industries. Economic Nationalism or Populism – emphasizing the need to prioritize domestic industries and jobs over global trade. This can be a response to public dissatisfaction with globalization or the loss of local industries due to foreign competition. ABSOLUTE ADVANTAGE In 1776, Adam Smith questioned the leading mercantile theory of the time in The Wealth of Nations (Smith, 1776). Smith offered a new trade theory called absolute advantage, which focused on the ability of a country to produce goods more efficiently than another nation. Smith reasoned 5 these two theories is subtle. Comparative advantage focuses on the relative productivity differences, whereas absolute advantage looks at the absolute productivity. Let’s look at a simplified hypothetical example to illustrate the subtle difference between these principles. Miranda is a Wall Street lawyer who charges $500 per hour for her legal services. It turns out that Miranda can also type faster than the administrative assistants in her office, who are paid $40 per hour. Even though Miranda clearly has the absolute advantage in both skill sets, should she do both jobs? No. For every hour Miranda decides to type instead of doing legal work, she would be giving up $460 in income. Her productivity and income will be highest if she specializes in the higher-paid legal services and hires the most qualified administrative assistant, who can type fast, although a little slower than Miranda. By having both Miranda and her assistant concentrate on their respective tasks, their overall productivity as a team is higher. This is a comparative advantage. A person or a country will specialize in doing what they do relatively better. In reality, the world economy is more complex and consists of more than two countries and products. Barriers to trade may exist, and goods must be transported, stored, and distributed. However, this simplistic example demonstrates the basis of the comparative advantage theory. Implications: Encourages trade even if one country is more efficient in producing all goods. This specialization can lead to increased overall economic efficiency and welfare. Example: China has comparative advantage in manufacturing due to lower labor cost and scales of operation, leading them to export many goods, while importing goods such as high-end machinery and technology, from those country who holds a comparative advantage in those areas. Trade Policy Formulation: When developing trade policies or negotiating trade agreements, countries assess their comparative advantages to determine which goods to export and import. Economic Planning: Nations analyze their comparative advantages to identify key sectors for investment and development, guiding economic strategies and resource allocation. Trade Negotiations: When entering negotiations for trade agreements, countries highlight their comparative advantages to secure favorable terms and access to markets. HECKSCHER-OHLIN THEORY (FACTOR PROPORTIONS THEORY) The theories of Smith and Ricardo didn’t help countries determine which products would give a country an advantage. Both theories assumed that free and open markets would lead countries and producers to determine which goods they could produce more efficiently. In the early 1900s, two Swedish economists, Eli Heckscher and Bertil Ohlin, focused their attention on how a country could gain comparative advantage by producing products that utilized factors that were in abundance in the country. Their theory is based on a 6 domestic one, in terms of customer preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers’ decision- making and purchasing processes. Implications: Countries with similar characteristics may engage in competitive innovation within similar industries, driving technological advancements and improvements in product quality. Example: Countries like Germany, France, and the Netherlands trade extensively with each other due to similar levels of economic development, regulatory environments, and cultural ties. This similarity fosters trade in manufactured goods, services, and agricultural products. Regional Trade Agreements: It can be useful in understanding the dynamics of trade agreements between countries that have comparable economic structures, which can facilitate trade. Economic Integration: When analyzing the impacts of economic integration initiatives (like the EU), the theory helps explain how similarities can enhance trade flows. Trade Between Developed Countries: The theory is particularly relevant when analyzing trade between developed nations with similar levels of income, technology, and consumer preferences. PRODUCT LIFE CYCLE THEORY Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing was the globally dominant producer in many industries after World War II. It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico. The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial 7 PORTER’S NATIONAL COMPETITIVE ADVANTAGE THEORY In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are (1) local market resources and capabilities, (2) local market demand conditions, (3) local suppliers and complementary industries, and (4) local firm characteristics. production The in the 1980s global competition must develop can obtain barriers to to the corporations 1. Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage. 2. Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are on a global sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software strengths, companies to continuously innovate, thus creating a the best sustainable competitive advantage in software products and services. 3. Local suppliers and complementary industries. To remain investments competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster 8 these theories to both interpret trends and develop strategy. Just as these theories have evolved over the past five hundred years, they will continue to change and adapt as new factors impact international trade. BALANCE OF PAYMENTS 1. What is the Balance of Payments (BOP)? The Balance of Payments (BOP) is a summary of the economic transactions of a country with the rest of the world for a specific period. It serves as an accounting statement on the economic dealings between residents of the country and non-residents. 2. Who are the residents of the country? Nationality is not a basis for determining an individual’s country of residence. A person is considered a resident of a country when he has stayed or intends to stay in that country for one year or more. Thus, an Overseas Filipino (OF) can remain a resident of the Philippines or can become a non-resident depending on the length of the job contract abroad. Similarly, a business enterprise is considered a resident of a country if it engages, for a year or more, in the production of goods or services in a significant scale in that country. Branches and subsidiaries of foreign companies are treated as residents of countries where they operate their business. However, a liaison or a representative office of a foreign company, regardless of the length of its stay, does not qualify as a resident enterprise. Its presence in a country is not for operating a business but only for providing auxiliary services to the parent company. It remains as an integral part of the foreign parent’s operations and thus, is treated as a non- resident where it is located. Government instrumentalities like embassies, consulates, and military establishments stationed abroad remain as residents of the country they represent. 3. What economic transactions are engaged in by residents of a country with non-residents? Economic transactions are grouped into three major categories: (1) current account, (2) capital account, and (3) financial account. 4. What are current account transactions? The current account covers trade in goods, services, primary income, and secondary income. Trade in goods—exports and imports—is the first component of the current account. The country’s exports include manufactures (such as electronics), mineral products, and agricultural products. Meanwhile, imports consist of raw materials and intermediate goods, mineral fuels and lubricant, capital and consumer goods. Trade in services is another component of the current account. Technical, trade-related and other business services form part of the country’s exports of services. These comprised largely of business process outsourcing (BPO) services. Other trade in services transactions with the rest of the world include exports of services on 9 differentiated from a direct investor if he owns less than ten percent of a company’s total equity. Other forms of investments are financial derivatives, loans (trade and non-trade), holdings of currency and deposits, and other investments. 8. What are international reserves? Who holds or manages the country’s international reserves? International reserves, technically referred to as Gross International Reserves (GIR), are foreign assets of the Bangko Sentral ng Pilipinas (BSP) held mostly as, investments in foreign-issued securities, monetary gold, and foreign exchange. These are supplemented by claims to the International Monetary Fund (IMF) in the form of Reserve Position in the Fund and Special Drawing Rights. Being the lender of last resort, the BSP holds international reserves for the foreign exchange (FX) requirements of the country in case the supply of FX from domestic, commercial banks falls short of the total demand. As the term connotes, GIR serves as stand-by fund to finance the deficit that may arise from the combined current and capital and financial transactions. Consequently, financing the deficit reduces the level of reserves. On the other hand, the BSP builds up its international reserves by the amount of the net inflow of foreign exchange resulting from surpluses in external transactions. International reserves can also be measured on a net basis. Net International Reserves (NIR) can be derived by deducting from the GIR the BSP’s short-term foreign liabilities and borrowings from the IMF. 9. Is there an ideal level of GIR which the BSP has to maintain? Due to its intended use, the GIR should be adequate enough to cover external payments on the assumption that no other source of foreign exchange could be tapped. In extreme conditions when there are no export earnings or foreign loans, the GIR should be able to pay for the country’s most immediate obligations—imports and debt service. By convention, GIR is viewed to be adequate if it can finance at least three-months’ worth of the country’s imports of goods and payments,of services and primary income. Another indicator of reserve adequacy is for the level of GIR, as of a particular period, to at least provide 100 percent cover for the payment of the country’s foreign liabilities, public and private, falling due within the immediate twelve-month period. 10. What is the currency composition of the country’s GIR? In terms of currency composition, the country’s GIR (excluding gold) are held in U.S. Dollars, Japanese Yen, Euros and other foreign currencies. Historical data show that the bulk of the BSP’s GIR (excluding gold) has been consistently held in U.S. Dollars. 11. What is the overall BOP position? What are Net Unclassified Items? 10 separately. International reserves also form part of the country’s assets. 14. What does the IIP measure? The balance in the IIP, that is, assets less liabilities or the Net IIP, measures the country’s financial standing with the rest of the world. A net asset position reflects net claims of residents on non-residents and thus may indicate some degree of stability. Meanwhile, a net liability position reflects net exposure of residents to non-residents and thus to some extent, vulnerability. However, the quality of foreign liabilities is a major consideration in determining vulnerability. If foreign direct investments and long-term loans dominate the liability side, a country’s net liability position may not be of immediate great concern. 15. What are the uses of the BOP and IIP? The BOP and IIP are important tools for national and international policy formulation as countries have increasingly become interdependent. Policymakers are guided by the analysis of sources of imbalances as presented in the BOP and IIP and therefore become better equipped in determining and implementing adjustment measures. For instance, the deficit in the current account may have stemmed from lower exports of goods compared to imports. Given this scenario, national development programs could be directed towards increasing the competitiveness of local products in the global market and/or developing new industries that will produce import substitutes. The use of the BOP and IIP is enhanced when taken together as they provide a glimpse of the relationship between flows and stocks. One example is the link between trade in goods and direct investments, as this would reveal how dependent export earning potential is on foreign capital and technology. In another instance, external debt problems may be traced to chronic current account deficits. Likewise, links are established between exchange rates and the strength or weakness of the current and financial accounts. 16. How often are these statistics compiled? The BOP is compiled quarterly but with a monthly breakdown. It is released to the public electronically, i.e., via the BSP’s website within eleven (11) weeks from the end of the reference quarter accompanied by a press release. Starting September 2014, the IIP is compiled and disseminated on a quarterly basis in compliance with the IMF’s recommendation of enhancing the Special Data Dissemination Standard (SDDS) to improve the availability and timeliness of compiling and disseminating IIP data. It is likewise released to the public electronically within three (3) months from the end of the reference quarter accompanied by a press release. Meanwhile, data on international reserves (IR) are published monthly to the public in the BSP’s website. The 11 The shift to BPM6 entailed various changes including the adoption of the institutional sector classification based on the System of National Accounts (SNA) and revision of statistical treatment and coverage of some international accounts. The details of these changes are presented in a separate primer – BSP Implementation of the Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6) Compilation Framework. 20. Do other countries compile BOP and IIP? Most countries compile the BOP and IIP because of their importance to national planning. For international comparability, the IMF has set guidelines on the compilation of these statistics which member countries are encouraged to comply with. Countries subscribing to the IMF Special Data Dissemination Standard (SDDS) are mostly compiling their respective BOP and IIP statistics based on BPM5 and BPM6. Meanwhile, not all countries subscribing to the IMF General Data Dissemination Standard (GDDS) are strictly complying with the prescribed frameworks. Compilation manuals undergo periodic updating to keep abreast with the developments in the market. As a consequence, data series are likewise subjected to revisions to conform to the latest manual. LESSON 3: TRADE BARRIERS Trade Barriers are government induced restrictions on international trade. It limits world trade. Trade barriers cause a limited choice of products and therefore, would force customers to pay higher prices and accept inferior quality. Trade barriers generally favor rich count because these countries tend to set international trade policies and standard. Most trade barriers work on the same principle—the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then it is a result of trade war. REASON FOR TRADE BARRIERS 1. Protecting Domestic Employment The possibility of increased competition from imported goods can threaten domestic industries. 2. Protecting Consumers A government may levy a tariff on products that it feels could endangers its population. 3. Retaliation Countries may also set tariffs as a retaliation technique if they think that a trading partners has not played by the rules. Retaliation can also be employed if a trading partner goes against the government foreign policy objectives. 4. Conservation of Natural Resources This refers to the wise use and management of valuable natural resources such as timber, fish, minerals, forest, wildlife, and watershed. 5. Industrialization 12 are, the more start trade As you can see in the image above, Country B can make towels more cheaply than the Country A. So, Country A’s government imposes a 20% tariff on all towel imports from Country B. Supporters of the tariffs—all of them from Country A—say that the tax helps protect domestic towel makers. Opponents argue that because of the tax, consumers in Country A have to pay more towels than they should and that towel makers in the Country A have no incentive to improve productivity. TYPES OF TARIFFS There are five (5) main types of tariffs: Protective Prohibitive Specific instruments, Ad Valorem Revenue PROTECTIVE Used to push up the price of the imported products as a protective measure against foreign competition i.e the purpose is to help domestic suppliers compete more effectively in the home market. than they PROHIBITIVE The tax is so high that it makes an important far too (prohibitive) expensive. The aim here is to completely discourage importers from bringing the product into the country, because they would find it impossible to sell. SPECIFIC will also pass Rather than taxing according to the product’s value, the tax is based on the specific amount – which could be goods weight, number, or other measurement. AD VALOREM The tax appliers to a percentage of the imported goods. For example, an ad valorem of 10% would mean that a product costing ₱100 would sell in the market of the importing country for ₱100. REVENUE This tax is imposed mainly raise government income rather than to protect domestic producers. For example, if Canada or England imposes in imported mangoes, say coming from the Philippines, the purpose is not to protect domestic mango farmers – there aren’t they. The mango tariff js purely to raise revenue for the government. 13 following the law of demand and supply, the cost of goods whose supply has been limited will see a surge in price This will limit the supply and make the supply curve shift to left. Subsequently, the new equilibrium quantity would be set which will be lower than the natural equilibrium in the absence of quota. Hence imposing quotas will increase the price of goods and this eliminates the competitiveness from the foreign market. Although on the negative side, imposing quotas on imports limits the alternative choices available to consumers which leads them to pay higher prices for certain goods. EXAMPLE OF IMPORT QUOTAS For instance, The United States limits the number of Chinese car imports to 3 million per year. The import quota on foreign car products will help the domestic car manufacturing companies to increase their production and establish their footprint in the United States market with maximum profit. This help increasing the GDP of the country and the wealth of domestic suppliers. However, the domestic suppliers might sell the car at a higher prices which may put a negative impact on consumers and lead to retaliation from foreign countries by placing tariffs on US exports. market. stabilized by foreign faced by the adverse the country ABSOLUTE QUOTA Absolute quota is a limitation on the number of specific goods that can be imported by a country during a specific period. No further goods can be imported into the country once the quota has been fulfilled. The absolute quota is set internationally where goods may be imported from any country until the goal has been achieved. The absolute quota is also set selectively for certain countries. TARIFF RATE QUOTA A tariff rate quota (TRQ) is a two tiered tariff system that combines import quotas and tariffs to regulate import products. In its essence, a TRQ allows a lower tariff rate on imports of a given product within a specific quantity and requires a higher tariff rate on imports exceeding that quantity. 14 DISADVANTAGES: 1. Quota may lead to corruption as the officer in charge of the allocation of licenses. May become prone to bribery. 2. The dealers with import licenses tend to create monopoly profit, this further lead. To a loss of consumer welfare. 3. It distorts international trade as its effects are more vigorous and arbitrary. 4. Exporter countries may take this adversely and can affect trade relations between the two countries. MONETARY BARRIERS Trade can be limited if the government uses various forms of monetary barriers which are actually exchange control restrictions such as: blocked currency, differential exchange rates and government approval to secure foreign exchange. Blocked currency can be used to improve a difficult balance of payments situation. Blockage is done by refusing to allow importers to exchange their national currency for the seller’s currency. Differential exchange rates controls and discourage importation of goods which the government deems unnecessary. How this work? The government requires the importer to pay different amounts of national currency for foreign exchange with which to buy products in different classifications. If the product is deemed necessary, the government may simply charge one unit of domestic money for one unit of foreign currency. If the product is less necessary, the exchange rate may be two (2) units of domestic currency for one (1) unit of foreign country. If the product is unnecessary, an importer has to pay three (3) times as much for the foreign exchange. Government approval to secure foreign exchange this means that an importer may request permission to secure foreign exchange from a government office or agency. Why do governments impose currency restrictions? Exchange controls are government imposed limitations on the purchase and/or sale of currencies. These controls allow countries to better stabilize their economies by limiting in-flows and out-flows of currency, which can create exchange rate volatility. How do currency restrictions work? A restricted currency, also known as “blocked” or non- convertible currency, is the monetary unit of a country where holders of the currency do not have the right to convert it freely at the going exchange rate into any other currency. EMBARGO An embargo (derived from Spanish) is the partial or complete prohibition of commerce and trade with a particular country or a group of countries. Embargoes also called an economic sanction. It is usually used as a political punishment.

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