ECW3121 International Trade and Finance Lecture 8

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ECW3121International Trade and FinanceLecture 8
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Examination

• The examination for this semester will take
  format as previous years.
• There are four sections A, B, C, and D, and two
  questions in each section.
• Your are supposed to attempt four questions one
  question from each section.

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Section D Research Question

• Australia's current account deficit presents a
  serious problem, which must be addressed
  immediately. Explain and discuss.
• or
• The current account deficit is not a national
  priority and should not be a target for action by
  Australian policy makers. Explain and discuss.
• or
• Apply question 8 or 9 to a country of your choice.

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Heckscher-Ohlin
Stolper-Samuelson
Factor Price Equalisation
Comparative Advantage
Trade Theory Study Guide 1
Rybzcynski
Absolute Advantage
Immiserising Growth
Mercantilism
International Trade and Finance
Balance Of Payments
Non Tariff Barriers
Foreign Exchange Markets
Interest Arbitrage
Tariffs
TradeBlocs
Finance Study Guide 3
Trade Policy Study Guide 2
International Resource Movements
Tools of the Trade Policy Analysis
Exchange rate theorems
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Trade Policy
Tariffs
Import tariff - a tax or duty on Imports
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Trade Policy
Non Tariff Barriers
Import Quotas
Export subsides

• A direct quantitative restriction on import of a
  particular commodity

• The granting of tax relief and/or subsidised
  loans to potential exporters or
• low-interest loans to foreign buyers of the
  nations export.

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Trade Policy
Trade Blocs
8
Reading
Trade Policy
Trade Blocs

• Salvatore - Chapter 9 (Cartels) and 10

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Trade Policy
Trade Blocs
GATT- the General Agreement on Tariff and Trade

• 1947 (Geneva)
• Non-discrimination - equal treatment of all
  countries (no different tariffs on import from
  different countries). Economic integration
  partners are exempted.
• Elimination of non-tariff barriers (such as
  quotas). Agricultural products are exempted.
  Countries experiencing balance-of-payments
  difficulties are exempted (applied to developing
  nations).
• Consultation among countries in solving trade
  disputes.

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Trade Policy
Trade Blocs
International Cartel - an organisation of
suppliers of a commodity form different countries
for export restriction and/or price fixing
Organisation of Petroleum Exporting Countries
(Export restriction) Air Transport Association
(Price fixing)
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Trade Policy
Trade Blocs
International Cartel
Dx - world demand for import Sx -world supply
of export MCx - individual firms/countrys
marginal cost MRx - marginal revenue of
export E - equilibrium of perfect
competition C - equilibrium trade of cartel Pe
- price of perfect competition Pc - price of
cartel Qe - quantity of perfect competition Qc -
quantity of cartel
Small competitive participants

• The cartel fixes quantity at MRxMCx
• and charges a monopolistic price and
• The participants agree on the
• allocation of quotas.

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Trade Policy
Trade Blocs
International Cartel
Dx - world demand for import Sx -world supply of
export MCx - individual firms/countrys
marginal cost MRx - marginal revenue of
export E - equilibrium of perfect
competition C - equilibrium trade of cartel Pe
- price of perfect competition Pc - price of
cartel Qe - quantity of perfect competition Qc -
quantity of cartel
Large participants

• Also prevents an immiserising growth situation
  for lager economies

• The cartel fixes quantity at MRxMCx
• and charges a monopolistic price and
• The participants agree on the
• allocation of quotas.

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Trade Policy
Trade Blocs
Preferential trade agreement - lower barriers
within the block than with other countries (not
participating in agreement)
British Commonwealth since 1932
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Trade Policy
Trade Blocs
Free trade area - No barriers within the block
European Free Trade Association (EFTA,
1960) North America Free Trade Agreement (NAFTA)

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Trade Policy
Trade Blocs
Free trade area - No barriers within the block

• Recent Australias bilateral agreements with
• USA
• Singapore
• Thailand

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Trade Policy
Trade Blocs
Customs union - No barriers within the block
common trade policies
European Union (1957)
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Trade Policy
Trade Blocs
Customs union - No barriers within the block
common trade policies
Why common trade policies are needed?
Country 1 10 tariff
Country 2 20 tariff
Exporting into country 1 at 10 tariff
For re-exporting into country 2 at no tariff
Trade bloc with no trade policy
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Trade Policy
Trade Blocs
Common Market - No barriers within the block
common trade policies free movement of
factors
European Union ( from 1992) AustraliaNew Zealand
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Trade Policy
Trade Blocs
Economic union - No barriers within the block
common trade policies free movement of
factors united monetary system
European Union ( from 2002)
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Research Question

• During recent years Australia has concluded or is
  in the process of concluding free trade
  agreements with USA, Singapore and Thailand.
  Critically examine, explain and comment on one of
  the following statements with regard to one of
  those agreements, using one of the key trading
  sectors in Australia as an example
• Even if the gains associated with the Free Trade
  Agreement are expected to be modest, not
  proceeding with the Agreement would mean a
  significance loss for Australia.
• Not only that the gains form the Free Trade
  Agreement are modest, but also that long term
  effect would be a disaster for Australia because
  the Agreement puts at risk access to Australias
  key markets in South East Asia that are not parts
  of this or other bilateral trade treaties.
• Despite its name, the Free Trade Agreement is
  nothing to do with free trade. For a small
  economy like Australia the most appropriate
  approach for trade liberalization would be the
  multilateral system of negotiations in the WTO.

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Research Question (Continued)

• Critically examine, explain and comment on one of
  the statements (i), (ii) or (iii) from Question 8
  from the perspective of the opposite party (USA,
  Singapore or Thailand) using one of the key
  trading sectors of the chosen country as an
  example.
• Apply Question 8 to any other bilateral free
  trade agreement from one of the participants
  perspective.

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Trade Policy
Trade Blocs
Customs union
Trade creation - Replacement of some domestic
product with import from a participating
nation. At full employment, before and after the
creation of a union, contributes to the welfare
of a nation by further specialisation.
Trade diversion - Replacement of some lower
cost import from outside of the union with a
higher cost import from a participating
nation. At full employment before and after the
creation of a union, decreases the welfare of a
nation, diverting from comparative advantage
The overall result is uncertain.
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Trade Policy
Trade Blocs
Customs union
Trade creation
P
S
C.S.
Pt
Sf t
G
P.S.
Pw
Sf
D
0
Q
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Trade Policy
Trade Blocs
Customs union
Trade creation
P
S
Pt
Su t
Pu
Su
D
0
Q
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Trade Policy
Trade Blocs
Customs union
Trade creation
Salvatore, Figure 10.1
P
S
C.S.
Pt
Su t
G
CS
Pu
Su
D
0
Q
G - governments lost
Nations gain on efficiency
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Trade Policy
Trade Blocs
Customs union
Trade diversion
No Blocks, tariff t
Nation 2
P
S
E
P1t
S1 t
P3
S3 - Nation 3
P1
S1 - Nation 1
D
0
Q
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Trade Policy
Trade Blocs
Customs union
Trade diversion
Nation 2 imports only from Nation 1 Consumers
buy at P1t Imports Q1- Q1
No Blocks, tariff t
Nation 2
P
S
E
P1t
S1 t
P3
S3 - Nation 3
P1
S1 - Nation 1(W)
D
0
Q
Q1
Q1
Q
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Trade Policy
Trade Blocs
Customs union
Trade diversion
Block with Nation 3 tariff protection from
outsiders t
Nation 2
P
S
E
P1t
S1 t
P3
S3 - Nation 3
P1
S1 - Nation 1(W)
D
0
Q
Q1
Q1
Q
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Trade Policy
Trade Blocs
Customs union
Trade diversion
Block with Nation 3 tariff protection from
outsiders t
Nation 2
P
S
Nation 2 imports only from Nation 3 Consumers
buy at P3 Import Q3- Q3
E
P1t
S1 t
P3
S3 - Nation 3
P1
S1 - Nation 1(W)
D
0
Q
Q1
Q1
Q3
Q3
Q
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Trade Policy
Trade Blocs
Customs union
Trade diversion
Block with Nation 3 tariff protection from
outsiders t
Nation 2
P
S
Nation 2 imports only from Nation 3 Consumers
buy at P3 Import Q3- Q3
E
P1t
S1 t
P3
S3 - Nation 3
P1
S1 - Nation 1(W)
D
0
Q
Q1
Q1
Q3
Q3
Q
Nations lost on efficiency compared to free trade
Nations gain on efficiency compared to trade
with N1. at tariff
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Trade Policy
Trade Blocs
Customs union
Trade diversion

• Salvatore, Figure 10.2
• Prepare for discussion in the tutorial next week.

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APEC
Trade Policy
Trade Blocs

• 18 member nations
• Bogor agreement free trade and investment in
  APECs industrialised economies by 2010 and by
  developing economies in 2020.
• Meeting in November, 1994 at Osaka - Australia
  pushing for faster reforms
• AFTA was scheduled to become a regional free
  trade area by 2003. (Restrictions still exist.)
• Danger that free trade areas could jeopardise
  APECs efforts

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APEC different subgroups/different interests
Trade Policy
Trade Blocs

• NAFTA - US, Canada, Mexico - 49.8
• Chile-Mexico FTA - 5.3
• ASEAN FTA - Indonesia, Malaysia, Singapore,
  Thailand, Phillipines, Brunei, Vietnam - 8.8
• Australia, New Zealand 2.4
• Not in trade sub-group - Japan, South Korea,
  China, Taiwan, Hong Kong - 38.2

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Reading
Trade Policy
International Resource Movements

• Salvatore - Chapter 12

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Trade Policy
International Resource Movements
Multi-national corporations
Diversification
A firm X producing a good A
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Trade Policy
International Resource Movements
Multi-national corporations
Vertical coordination
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Trade Policy
International Resource Movements
Multi-national corporations
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The Australian Bureau of Statistics
Classification
Non-official investment
Official investment

• Investment in the official sector
• Government
• Reserve Bank

• Investment in the private sector
• Trading Banks
• Other financial enterprises
• Other trading enterprises

Government Infrastructure Defence Security Officia
l bonds purchased by foreigners
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The Australian Bureau of Statistics
Classification
Non-official investment

• Investment in the private sector
• Trading Banks
• Other financial enterprises
• Other trading enterprises

Non-official direct investment
Non-official portfolio and other investment
Some degree of influence by the investor over the
firm in which the funds are being invested
No influence by the investor over the firm in
which the funds are being invested

• reinvestment (of earnings, profits, etc)
• changes in the net assets of unincorporated
• enterprises owned by non-residents
• borrowing by direct investment enterprises
• other net accounts payable by direct
• investment enterprises to direct foreign
• investors

• purchasing securities by small foreign
• investors

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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The costs and benefits of foreign investment
Benefits (arguments for F.I.)
Costs (arguments against F.I.)
Financial impact
Economic impact
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The costs and benefits of foreign investment
Benefits (arguments for F.I.)
Costs (arguments against F.I.)

• increase in available resources
• more rapid growth
• new foreign technology
• foreign managerial and business skills

• push domestic capital out of more productive
  sectors
• add to balance of payment problem (dividends,
  interest, repatriation)
• new technologies are already obsolete
• the interests of foreign investors and managerial
  staff can contradict the interests of the host
  nation

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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The costs and benefits of foreign investment
Financial impact
Direct investment
Short run
Long run

• The inflow of investment - less the import of
  equipment and raw materials
• The outflow of the repatriation of assets
• The outflow of the repatriation of profit

• Adds to the productive capacity of the host
  country

The overall impact on the balance of payments is
positive
The overall impact on the balance of payments is
uncertain
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The costs and benefits of foreign investment
Financial impact
Portfolio and other investment
Short run
Long run

• Is based on speculative motivation, the
  interest rate disparities and/or fluctuations in
  exchange rates
• Increases Australian foreign reserves

• Improves Australian foreign reserves if directed
  in export targeting industries
• Otherwise, increases foreign debt without
  improvement of local industries

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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
The costs and benefits of foreign investment
Economic impact
Positive impact
Negative impact

• Emission of new technologies
• Competitive advantage of foreign firms
• Training of domestic labour force
• Overcoming of barriers to entry in international
  business areas (technology, patents, licenses,
  etc)

• Reduction in the host country research and
  development spending (Australian academia and
  research facilities are far from self
  sufficiency)
• Decrease in competitiveness of the host
  country professional education and training
• Brain drain, mobility of the staff of foreign
  companies

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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
Regulation of Foreign Investment in Australia
The Foreign Investment Review Board
Sectoral rules and regulations
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
Regulation of Foreign Investment in Australia
The Foreign Investment Review Board
The purpose of FIRB to examine proposals by
foreign interests to invest in Australia
Foreign interests A person not ordinary
resident of Australia A foreign controlled
corporation or business Any corporation or
business in which there is substantial foreign
interest, regardless whether the corporation or
business is foreign-controlled and where
foreign interest is 15 or more of its issued
shares or voting power by a single or associated
voting interest, or 40 or more in aggregate
by two ore more foreign investors.
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
Sectoral rules and regulations
Manufacturing, certain primary and service
industries
Everything is permitted if does not contradict
national interests and for what there is no a
special sectoral regulation
Real estate
Acquisition of residential land is permitted to
start construction within 12 months Less than
half of the development then normally to be
acquired buy foreign interest Less than 50 of
foreign participation on non-residential
properties is approved. More than 50 - if it is
proved that Australian equity is not available
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
Sectoral rules and regulations
Mining
Investment of more than 10 mln and less than 50
of foreign participation is approved. More
than 50 - if it is proved that Australian equity
is not available Acquisition of existing
business other than oil and gas need to
demonstrate net benefits
Banking
Subject to licensing A number of licenses were
issued in 1984. Then licensing was terminated
Recently this policy has been reconsidered
(Details in Economics of Money and Banking)
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
Sectoral rules and regulations
Civil aviation
To buy less than 25 of Australian airlines is
permitted More than 40 - special
consideration Only for companies flying to
Australia It is possible to invest up to 100 by
foreign investment. only 35 in Qantas
Radio and television
Not more than 15-20
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Trade Policy
International Resource Movements
Foreign investment and foreign ownership in
Australia
Sectoral rules and regulations
Newspapers
Only case-by-case evaluation
Uranium
No restrictions on foreign investment Until
recently policy was not to develop new
mines Recently, the policy has been reconsidered