Development (ITD) Types of Globalization • Economic Globalization: The integration of national economies into the global economy through trade, investment, and capital flows.
• Cultural Globalization: The transmission of ideas, meanings, and values around
the world in such a way that extends and intensifies social relations.
• Political Globalization: The process by which political decisions and actions are becoming increasingly international.
• Technological Globalization:The spread and integration of technology across
borders, making the world more interconnected and interdependent. Historical Aspect Historical Context: • Early trade routes: Silk Road, Spice Trade. • Colonialism and the birth of global trade networks. • Industrial Revolution: Acceleration of global trade through technological advancements. Modern Globalization: • Post-World War II: The establishment of international institutions like the IMF, World Bank, and WTO. • The rise of multinational corporations and global supply chains. • The digital revolution: E-commerce and the globalization of information. Challenges of Globalization and Trade Economic Benefits: • Growth and development: How trade has lifted millions out of poverty. • Innovation and technology transfer. Social and Cultural Impact: • Cultural exchange and the global village. • The spread of ideas and global awareness. Challenges: • Economic disparity and the widening gap between rich and poor. • The environmental impact of increased production and transportation. • Job displacement and the rise of anti-globalization sentiments. Absolute Advantage Criticisms 1. Ignores Comparative Advantage
2. Overlooks Opportunity Costs
3. Limited Applicability
4. Ignores Economies of Scale
5. Static Analysis Review Question (a) With reference to the Table, indicate in what commodity India and China have absolute advantage. (b) How much would India and China gain if 6W were exchanged for 3C? (c) What if 6W were exchanged for 6C?
India China
Wheat (bushels/labour-hour) 6 1
Cloth (yards/labour-hour) 1 3 Comparative Advantage Review Question From the Table given below, indicate
(a) Whether the India has an absolute advantage or disadvantage in wheat and cloth. (b) The commodity in which the India and China have comparative advantage. (c) The gains to India and China if they exchange 6W for 6 C.
India China Wheat (bushels/labour-hour) 6 1 Cloth (yards/labour-hour) 4 3 Review Question Criticism (1) Two nations and two commodities
(2) Free Trade
(3) Perfectly mobile labour within a nation but completely immobile labour internationally.
(4) Constant cost of Production
(5) No transportation costs
(6) No technological change
(7) The labour theory of value
Understanding the Leontief Paradox • Leontief's Finding: In 1953, economist Wassily Leontief found that the U.S., a capital-abundant country, was exporting more labor-intensive goods and importing more capital-intensive goods, which contradicted the theory.
• Example: Leontief showed that U.S. exports used $2,550 worth of labor and $3,091 worth of capital, while imports used $1,195 worth of labor and $2,134 worth of capital. This unexpected result is known as the Leontief Paradox.
• Why It Occurs: Possible explanations include differences in technology,
productivity, and the quality of resources, which the Heckscher-Ohlin theory doesn't fully Gravity theory of Trade New Trade Theory Advantages and Disadvantages Product Life Cycle Trade Theory • The theory was given by Raymond Vernon.
• Vernon’s model asserts that product innovation and
initial use occurs first occurs in higher income countries and then diffuses to middle and lower income countries as technology and skill gaps and consumer preferences shift to newer products. Summary (PCT) Porter’s Diamond Theory Strategic Trade Theory Global Value Chain • The Global Value Chain (GVC) theory of trade provides a modern framework for understanding how production is globally fragmented, with each country specializing in specific stages of production based on its comparative advantage. Trade Regulations What is Trade Regulation? • Free trade maximizes world output and benefits all nations.
• However, practically all nations impose some restrictions on the free
flow of international trade.
• The most important and widely used type of trade restriction has historically been tariff Types of Trade Regulations 1. Tariffs Taxes imposed on imported goods to protect the domestic industries or generate revenue. 2. Quotas Limits on the quantity of a particular good that can be imported or exported during a specific time period. 3. Subsidies Financial support provided by the government to domestic industries. 4. Antidumping laws Regulations that prevent foreign companies from selling goods below cost to eliminate competition Governments can Control Imports by Means of Tariffs • A tariff is essentially a tax levied at the border.
• Tariffs might apply to certain categories of goods from particular
industries.
• This form of taxation is collected at the port or borders before the
goods are allowed to enter into the country.
• The additional cost is passed on to the consumer.
Is Tariff same as Tax? • Tax and tariff are frequently used interchangeably by those in the know. Still, the two aren't identical.
• Tariffs are levied on the importation of goods, whereas
taxes are levied on the taxable income of individuals and businesses as well as on imports. People and businesses alike contribute to the government by paying taxes. Can Tariff be levied on Exports? • An export tariff is a tax on exported goods or services.
• These are imposed by the government on the goods leaving the
country.
• The purpose of export tariffs can vary, but they are generally used to achieve specific economic and political goals.
• Rarely seen in developed countries but is occasionally practiced in
developing countries. Types of Tariffs • Ad valorem It is a type of import tax that is levied as the percentage of the value of the imported goods. • Specific Tariffs A specific tariff is a type of tariff that is charged as a fixed fee per unit of the imported good, regardless of its value. • Compound Tariffs A compound tariff is a combination of both an ad valorem tariff (a percentage of the value of the imported good) and a specific tariff (a fixed amount per unit of the good). • Protective Tariff vs Revenue Tariff
The primary goal of a protective tariff is to protect domestic industries
from foreign competition.
The primary goal of a revenue tariff is to generate income for the
government. While it may have some protective effect, its main function is to raise government revenue rather than protect domestic industries. Scientific Tariff vs Prohibitive Tariff • The tariff rate that would make the price of the imports equal to domestic prices so as to allow domestic producers to meet foreign competition is known as scientific tariff.
• A tariff sufficiently high to stop all international trade so that the
nation return to autarky is known as prohibitive tariff. Trade Tariff: Detailed Analysis Cost and Benefits of a Tariff Consumption Effect: BN
Production effect: CM
Trade Effect: (BN + CM)
Revenue effect: MJHN
Economic Rationale Behind Tariffs 1. Protection of Domestic Industries
One of the primary reasons governments impose tariffs is to protect
domestic industries from foreign competition. By making imported goods more expensive, tariffs give local producers a price advantage, helping them to compete against cheaper foreign imports. This protection can be critical for nascent industries or sectors that are struggling to survive against well-established international competitors.
Example: U.S. tariffs on steel and aluminum.
2. Revenue Generation Historical use of tariffs as a primary source of government revenue.
3. Infant- industry Argument
Protecting nascent industries until they become competitive internationally.
4. Strategic Trade Policy
Trade policies that a nation can use to increase its welfare by taking advantage of oligopolistic power and external economies Does Higher Import Tariff Mean Higher Protection to the Domestic Producers? Example 1:
Industry 1 Industry 2 Industry 3
Automobile Parts Automobile Assembly Final Automobile $6000 $2000 $8000 Tariff of 25 % imposed on imported automobiles $6000 $4000 $10,000
Effective rate of Protection: ($4000 - $ 2000)/$2000 = 100% ERP to automobile
assembly industry Example 2:
Industry 1 Industry 2 Industry 3
Automobile Parts Automobile Assembly Final Automobile $6000 $2000 $8000 Tariff of 10 % imposed on imported automobiles $6600 $1400 $8000
Effective Rate of Protection: ($1400-$2000)/$2000 = -30 % ERP
Calculating ERP
𝑉𝑇 − 𝑉𝑊 Effective Rate of Protection = 𝑉𝑊 Where, 𝑉𝑇 = value added in the presence of tariff 𝑉𝑊 = value added in the world price of the sector Nominal Tariff vs Effective Protection • The nominal rate of protection is the percentage tariff imposed on a product as it enters the country. For example, if a tariff of 20 percent of value is collected on clothing as it enters the country, then the nominal rate of protection is that same 20 percent.
• The effective rate of protection is calculated on the increase in the
domestic value added offered by tariff protection. The effective rate of protection offers a better measure of protection offered to producers as it takes into account the cost to producers of tariffs on input markets Review Question Scenario 1:
Imported wool Suit
$80 $100 (free trade price or world price)
Tariff of 10% is imposed on the imported suit
Calculate the ERP
a) If 5% nominal tariff is imposed on the imported input b) If the tariff is increased to 10 % and 20% 𝑡 − 𝑎𝑖 𝑡𝑖 𝑔= 1 − 𝑎𝑖 where g= the rate of effective protection to producers of the final commodity t= the nominal tariff rate on consumers of the final commodity 𝑎𝑖 = the ratio of the cost of the imported input to the final commodity in the absence of tariff 𝑡𝑖 = the nominal tariff rate on the imported input Review Question Suppose there is no tariff on imported inputs and the ratio of the value of imported inputs to the value of the final commodity is 0.25, 0.5 or 0.75. Find the effective protective rate in terms of the nominal tariff rate in each of these three alternative cases. Review Question Question: When a nation imposes an import tariff
(a) The domestic price of the importable commodity rises
(b) Domestic consumption of the importable commodity falls (c) Domestic production of the import competing commodity increases (d) Volume of imports of importable commodity falls (e) All of the above Review Question Question: When no imported input are used in the production of the commodity, the effective tariff rate on the commodity is
(a) Equal to the nominal tariff on the commodity
(b) Greater than the nominal rate (c) Smaller than the nominal rate (d) Any of the above is possible Review Question Question: What is deadweight loss in the context of a tariff?
(a) The revenue collected by the government from the tariff
(b) The loss of consumer that is not offset by gains elsewhere in the economy (c) The total cost of importing goods from another country (d) The increase in producer surplus due to protection from foreign competition Review Question Question: A country wants to impose a scientific tariff on imported cars to protect its domestic car industry. The cost of producing a car domestically is $25,000, while the world price of an imported car is $20,000. What should be the tariff rate to raise the price of the imported car to the level of the domestically produced car? (a) 15% (b) 20% (c) 25% (d) 30% Review Question Question: The only argument in Favor of a tariff which could be valid are/is
(a) Protection of domestic labour against cheap foreign labour to increase
employment (b) Correction of trade deficit in the nation’s balance of payments and improvement of the nation’s terms of trade (c) The infant industry argument, protection against dumping and for industries important for national defence (d) The strategic tariff policy to increase the global competitiveness of oligopolistic firms (e) All of the above Impact of Tariff: Small Country vs Large Country Optimum Tariff Optimum Tariff: Formula Review Question Question: The imposition of an import tariff by a large nation
(a) Usually improves the nation’s terms of trade and increases the volume of trade (b) Worsens the nation’s terms of trade but increases the volume of trade (c) Worsens the nations terms of trade and reduces the volume of trade (d) Usually improves the nation’s terms of trade but reduces the volume of trade Review Question Question: You are a procurement manager of a company that imports electronic parts. Currently, you import it from two different countries: Country A and Country B. Country A is a large trading partner with a significant share in the global market for these components, while country B is smaller trading partner with a limited market share.
Recently, your country has imposed 15% tariff on imports from Country A due to trade disputes, while imports from country B remain tariff free. Non- Tariff Barriers • A nontariff barrier is a trade restriction such as a quota, embargo, sanction, or levy.
• Countries use nontariff barriers to further their political and economic
goals.
• They usually opt for nontariff barriers rather than traditional tariffs in international trade.
• Countries can use nontariff barriers in place of or in conjunction with
conventional tariff barriers. Import Quota • A quota is the most important non-tariff trade barrier.
• It is a direct quantitative restriction on the amount of commodity
allowed to be imported or exported Effects of an Import Quota Quota vs Tariff Review Question Questions: Why domestic producers are in Favor of Quota than Tariffs. Review Question If a country imposes a tariff on an imported good and the domestic demand for that good is inelastic, what is the likely outcome?
A) The total revenue from the tariff will decrease.
B) Domestic consumers will largely bear the cost of the tariff. C) The domestic producers will face a significant loss in sales. D) The foreign producers will absorb most of the tariff burden Review Question Which statement is true about the difference between tariffs and quotas?
A) Tariffs are always less effective than quotas in restricting imports.
B) Quotas generate government revenue, while tariffs do not. C) Tariffs limit the quantity of imports, while quotas limit the price. D) Quotas directly limit the quantity of imports, while tariffs increase the price of imports Review Question A country imposes a quota on the import of a particular good. Which of the following scenarios is least likely to occur?
A) The domestic price of the good increases due to restricted supply.
B) The government earns more revenue from the quota than from an equivalent tariff. C) Foreign producers may increase the quality of their goods to maximize profits within the quota limit. D) Domestic producers may reduce their prices to remain competitive with imported goods. Are Quotas limited to Imports? Effect of U.S.- Japan Auto VER Dumping and Subsidies Anti-Dumping Investigations by Different Countries Review Question Review Question What does Terms of Trade (T-O-T) measures
a) Income of one country compared to another
b) The GDP of one country compared to another c) The quantity of exports of one country compared to another d) Export prices compared to import prices Review Question Review Question Effect of Export Subsidy Are Export Subsidies Legal? Trade Regulations International Cartels • It is an organization of suppliers of a commodity located in different nations that agrees to restrict output and exports of the commodity with the aim of maximizing or increasing the total profits of the organizations.
• Conditions for its success
A few International suppliers Essential Commodity No close substitutes Free Trade Vs. Protectionism Free Trade = Exchange of goods and services between nations without any restrictions (barriers) imposed by the government.
Free trade, according to the theory of comparative advantage
(and absolute advantage), leads to an efficient global allocation of resources and maximization of global output with all countries sharing the benefits of trade.
But need to consider the types of “ barriers to free trade” and
reasons for imposing them. Economic Integration Economic Integration • Economic integration, or regional integration, is an agreement among nations to reduce or eliminate trade barriers and to coordinate monetary and fiscal policies.
• The European Union, for example, represents an economic
integration among 27 countries.
• Strict nationalists may oppose economic integration due to
concerns over a loss of sovereignty. Preferential Trade Agreement (PTA) A trade pact between countries that reduces tariffs for certain products to the countries who sign the agreement. While the tariffs are not necessarily eliminated, they are lower than countries not party to the agreement.
It is a trading bloc which gives preferential access to certain products from
When trade shifts from a more expensive domestic producer to a
cheaper foreign producer, which can lead to increased trade and lower prices for consumers. Trade creation can improve resource allocation and have positive welfare effects.
Trade Diversion
When trade shifts from a cheaper non-member source to a more
expensive member source, which can lead to a reduction in trade and economic welfare. Trade diversion can occur when efficient non-member countries sell fewer goods to member countries due to external tariffs. Advantages of Custom Unions
Increase in trade flows and economic integration
Trade creation and trade diversion Reduces trade deflection
Disadvantages of Custom Unions
Loss of economic sovereignty
Distribution of tariff revenue Complexity of setting the tariff rate Common Market
A type of economic integration that allows for the free movement of goods, services, capital and labour among member states, accompanied by shared policies and regulations Advantages and Disadvantages Advantages Increased Trade and Economic growth Free Movement of Labour Increased Investment/ Reduced costs for business
Disadvantages Unequal Gains and Economic Disparities Loss of Sovereignty Labour and capital movement imbalances Formation of European Union(EU) Post-World War II Realization
Formation of the European Coal and
Steel Community (1952)
Expansion of Economic Cooperation
Single European Act (1986)
Maastricht Treaty (1993)
Introduction of Euro (1999)
Brexit: Causes and Consequences Causes 1. Sovereignty and Political Economy 2. Immigration and Freedom of Movement 3. Economic Contribution and Perceived Imbalance
Consequences 1. Economic Impact 2. Impact of Job Germany’s Subsidy War: Unequal Gain The "Germany subsidy war" refers to disputes within the European Union (EU) regarding Germany's use of state subsidies to support domestic industries, which raised concerns about fair competition across the single market.
State Aid and Competition Rules
COVID-19 Pandemic Energy Subsidies EU response Political Tensions
