Chapter 1 Introduction to International Trade

【Learning Objectives】

Knowledge Objectives：

1. Understand the concept and origin of the international trade.

2. Know the theory of comparative advantage.

3. Know some basic forms of the international trade.

Ability Objectives：

1. Master the definition of the international trade.

2. Apply the theory of comparative advantage to trade practices.

3. Identify the visible goods and invisible goods.

1.1 The Definition of the International Trade

Trade is one of the most basic activities of mankind. It involves the transfer of the ownership of goods or services from one person or entity to another in exchange for other goods or services or for money. Trade exists in every society, every part of the world, and in fact every day due to the specialization and division of labor, in which most people concentrate on a small aspect of production, trading for other products.

Economic activity began with the caveman, who was economically self-sufficient. He did his own hunting, found his own shelter, and provided for his own needs. One person was more able to perform some activity than another, and therefore each person concentrated on what he did best. While one farmed, another herded. The farmer then traded his surplus to the herdsman, and thus each benefited from the variety of diet.

In today's complex economic world, neither individuals nor nations are selfsufficient. Nations have utilized different economic resources; people have developed different skills. This is the foundation of international trade and economic activities.

International trade, also known as world trade, or overseas trade, is the fair and deliberate exchange of goods and services across national boundaries. It concerns trade operations of both import and export and includes the purchase and sale of both visible and invisible goods, the former of which is called trade in goods while the latter of which is called trade in services in the word of WTO. Therefore, it not only includes international trade and foreign manufacturing, but also encompasses the growing services industry in areas such as transportation, tourism, banking, advertising, construction, retailing, wholesaling and mass communications.

1.2 Reasons for the International Trade

In fact, the international trade is more difficult and risky for a firm than domestic trade is. For example, when doing foreign trade, the exporter may not be familiar with the buyer, and thus not know if the importer is creditworthy. In addition, political instability makes it risky to ship merchandise abroad to certain parts of the world. However, there is a long list of reasons why countries may want to en gage in trade with one anther.

The first is the lack of necessary resources because no nation has all of the commodities that it needs. Raw materials are scattered around the world. Large deposits of copper are mined in Peru and Zaire, diamonds are mined in South Africa, and petroleum is recovered in the Middle East. Countries rely on one another for various resources that are not available to them. For example, the United States is a major consumer of coffee, yet it does not have the climate to grow any of its own. Consequently, the United States must import coffee from other countries, such as Brazil, Colombia, and Guatemala, because these countries grow coffee efficiently.

Secondly, international trade also occurs because a country often does not have enough of a particular item to meet its needs. Although the United States is a major producer of sugar, it consumes more than it can produce internally and thus must import sugar.

Thirdly, one nation can sell some items at a lower cost than other countries. In other words, that one country can produce certain items does not mean that it can do so at the best price. A number of factors, such as labor force and taxes, can increase the wholesale and retail prices of those goods and services. In many cases, people prefer to obtain items elsewhere if it will reduce the amounts that they are required to pay for them. Japan has been able to export large quantities of radios and television sets and movie cameras because it can produce them more efficiently than other countries. It is cheaper for the United States to buy these from Japan than to produce them domestically.

Finally, international trade takes place because of innovation or technology. Sometimes, a nation may have access to the raw materials that it needs, but it may lack the ability to convert those materials into the necessary consumer products. While anther nation may have a specialty in producing what is needed. For instance, even though the United States produces more automobiles than any other country, it still imports large quantities of autos from Germany, Japan and Sweden，primarily because there is a market for them in the United States.

Basic Forms of the International Trade

Visible trade involves the import and export of tangible goods and merchandise, whereas invisible trade involves the exchange of services between nations.

Nations such as Greece and Norway have large maritime fleets and thus can provide transportation service. This is a kind of invisible trade.

When an exporter arranges shipment, he rents space in the cargo compartment of a ship. The prudent exporter purchases insurance for his cargo's voyage. While at sea, a cargo is vulnerable to many dangers. Thus, insurance is another service in which some nations specialize. Great Britain, because of the development of Lloyd's, is a leading exporter of this service, earning fees for insuring other nations' foreign trade.

Some nations possess little in the way of exportable commodities or manufactured goods, but they have mild sunny climate. During the winter, the Bahamas attracts large numbers of tourists, particularly from the northeastern United States, who spend money on hotel accommodations, meals, taxis, and so on. Tourism, therefore, is another form of invisible trade.

Invisible trade can be as important to some nations as the export of raw materials or commodities is to others. In both cases, the nations earn money to buy necessities.

Import is the process of purchasing goods and services from other nations while export, opposite to import, is the process of selling goods and services into other nations. There are two types of import, namely, direct import and indirect import. Direct import is the direct purchase of goods and services from overseas market, while indirect import is the purchase of foreign goods and services through middlemen.

Like import, export can be either direct or indirect. Direct export involves es tablishing an export department or even an overseas sales branch, which provides a continuous presence and easier control for the exporter in the buyer's country but obviously means more expenses. Indirect export sells goods and services to overseas markets through middlemen, often known as the export agents.

Export agents seldom produce goods and merchandise on their own. Their major task is to bring buyers（importers）and sellers（exporters）together and help them handle international transactions. Export agents make their money from commissions of the sale of price. An export agent, a company or a firm does not deal with foreign currencies or the red-tape of international marketing, which is a main advantage for a firm or a company to do export business. However, there is also a major disadvantage for an export company. Due to the fact that the export agent must make a profit, the price of the product must be increased or the domestic company must provide a larger discount than it would in domestic transaction. Indirect export involves less investment and is therefore less risky, which enables small firms with limited capital and product diversification to export very easily.

The Theory of Comparative Advantage

With the development of manufacturing and technology, there arose another incentive for nations to exchange their products. It was found that it made economic sense for a nation to specialize in certain activities and produce those goods for which it had the most advantage, and to exchange those goods for the products of other nations, which had advantages in different fields. This trade is based on the principle of comparative advantage.

The theory of comparative advantage, also called the comparative cost theory, was developed by David Ricardo and other economists in the nineteenth century. It points out that trade between countries can be profitable for all, even if one of the countries can produce every commodity more cheaply. As long as there are minor, relative differences in the efficiency of producing a commodity, even the poor coun try can have a comparative advantage in producing it. The paradox is best illustrated by this traditional example: the best lawyer in town is also the best typist in town. Since this lawyer cannot afford to give up precious time from legal affairs, a typist is hired who may be less efficient than the lawyer in both legal and typing matters. But the typist's comparative disadvantage is least in typing. Therefore, the typist has a relative comparative advantage in typing.

This principle is the basis of specialization into trades and occupations. At the same time, complete specialization may never occur even when it is economically advantageous. For strategic or domestic reasons, a country may continue to produce goods for which it does not have an advantage. The benefits of specialization may also be affected by transport costs: goods and raw materials have to be transported around the world and the cost of the transport narrows the limits between which it will prove profitable to trade. Another impediment to the free flow of goods between nations is the possible introduction of artificial barriers to trade, such as tariffs and quotas.

1.3 Trade Protectionism

Reasons for Trade Protectionism

In contrast with free trade where government barriers to trade are kept to a minimum degree, trade protectionism is the economic policy of restraining trade between countries through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow imports to complete fairly against goods and services produced domestically. Two major purposes are involved in trade protectionism. One is to protect the goods or services produced domestically from the fierce competition by foreign participation. The other is to en hance the competitiveness of the domestic products in the international market by beneficial policies.

The specific reasons for implementing trade protectionism can be summarized as follows：

◆ To keep economic diversity

Many countries are implementing protectionism to keep economic diversity so as to avoid over dependence on other countries both economically and politically.

◆ To protect infant industries

Infant industries refer to emerging domestic industries that should be protected until they become stable and mature. Usually, the infant industry is protected in its early stage of development by the preferential policies issued by the country's government. The normal method is to limit or ban the foreign participation in the same area. Nowadays, as service trade such as banking and insurance in most developing countries is still in its infancy, the governments are taking measures to prohibit the engagement of foreign enterprises in this area.

◆ To protect the vital and strategic business sectors

The vital and strategic business sectors are closely related to a country's stability and economic development. For many countries, the important business sectors such as transportation, telecommunications, and steel are all under strict control and protection of the government.

◆ To reduce the high pressure of unemployment

Employment is crucial to a country's stability. Without protection, the flooding in of foreign labor and goods at a low cost will put the workers in certain industries, especially the labor-intensive industry under big pressure of job losses. That's why most governments are making efforts to protect the domestic labor market and create more job opportunities.

Forms of Trade Protectionism

Varieties of methods are used by different countries to restrain foreign trade，mainly including tariff barriers and non-tariff barriers.

◆ Tariff barriers

Tariff barriers are the main and typical form of protectionism. Typically, tariffs （or taxes）are imposed on imported goods. Tariff rates usually vary according to the type of goods imported. Import tariffs will increase the cost to importers, and increase the price of imported goods in the local markets, thus lowering the quantity of goods imported. Tariffs may also be imposed on exports, and in an economy with floating exchange rates, export tariffs have similar effects as import tariffs. However, since export tariffs are often viewed as a negative impact on local industries, while import tariffs are taken as a positive impact on local industries, export tariffs are seldom implemented. Tariff duty levied for income purpose is known as revenue tariff, while that levied for protection is known as protective tariff. As a penalty measure, countervailing duty is levied against bounty or grant during production, transport and export. Anti-dumping duty is also punitive. It is collected when the importing country holds that there is a dumping.

The import tariff duties are mainly levied in three ways: specific, ad valorem and compound.

◇Specific duty is levied per physical unit-according to weight, volume, measurement and quantity, etc.

◇ Ad valorem duty is levied according to the value or price of products.

◇ Compound duty is a combination of specific duty and ad valorem. It is collected according to either of the two first, then the other.

◆ Non-tariff barriers

◇ Import quotas

Import quotas are used to reduce the quantity and therefore increase the market price of imported goods. The economic effect of an import quota is similar to that of a tariff, except that the tax revenue gained from a tariff will instead be distributed to those who receive import licenses. There are two types of import quotas: absolute quota and tariff quota. Absolute quota sets a limit on the quantity of imports to a specified level during a period of time specified. Tariff quota sets a limit within which low and no duties are levied, otherwise high duties or penalty will be imposed.

◇ Import license

An import license is a permit for import granted by the government. It can be independent or combined with quotas.

◇ Exchange rate manipulation

A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports.

◇ Technical standard barriers

As a new hidden method of import control, technical standard barrier is widely used by governments of countries（usually developed ones）to control import through setting technical standards that foreign countries（usually developing ones）are not familiar with or hard to meet.

◇ Green barriers

Green barriers are also a newly used method for import control. With the excuse of protecting environment and the safety of human beings, a series of strict ecological, health and sanitary standards much higher than those in the developing countries are set as the condition for market access by developed countries to protect their domestic market and industries. Green barriers normally take on two forms: green label and green packing.

◇ Direct subsidies

Government subsidies（in the form of lump-sum payments or cheap loans）are sometimes given to local firms that cannot compete well against imports. These sub sidies are purported to protect local jobs, and to help local firms adjust to the world markets.

◇ Export subsidies

Export subsidies are often used by governments to increase exports. Export subsidies are the opposite of export tariffs by which exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade, and in a country with floating exchange rates, have effects similar to import subsidies.

NOTES

1. economic resources經濟資源

經濟資源具備有用性和稀缺性。有用性是資源之所以為資源的依據，稀缺性是經濟資源之所以為經濟資源的前提。經濟資源的類別因研究視角不同而有所區別，具體有物質資源（material resources）、能量資源（energy resources）、人力資源（human resources）等。

2. services industry服務業

服務業被視為第三產業。第三產業包括批發和零售業，交通運輸、倉儲和郵政業，住宿和餐飲業，教育、衛生和社會工作，文化、體育和娛樂業，公共管理、社會保障和社會組織，國際組織，以及農、林、牧、漁業中的農、林、牧、漁服務業，采礦業中的開采輔助活動，制造業中的金屬制品、機械和設備修理業等。

3. wholesale price批發價格

批發價格是指開展批發業務的企業向購買一定數量商品的單位或個人出售商品的價格。

4. retail price零售價格

5. indirect export間接出口

間接出口是指將產品賣給國內出口商或委托出口代理商代理出口。間接出口的形式有專業外貿公司、國際貿易公司、出口管理公司、合作出口以及外國企業駐本國采購處。

6. quota配額

配額是一種數量限制。

進口配額是指一國政府在一定時期對一些商品的進口數量或金額加以直接限制。

自動出口配額制又稱自動限制出口，是一種限制出口的措施，是出口國家或地區在進口國或地區的要求或壓力下，“自動”規定某一時期內某些商品對該國或地區的出口限制，在現行的配額內自行控制出口，超過配額即禁止出口。

7. red tape繁文縟節

8. international marketing國際市場營銷

國際市場營銷是世界經濟發展的必然產物，它是一種跨國界的管理過程，是企業通過計劃、定價促銷和引導，創造產品和價值，并在國際市場上進行交換，以滿足多國消費者的需要和獲取利潤的活動。

9. artificial barriers人為障礙

10. the theory of comparative advantage（comparative cost theory）比較優勢理論

該理論是大衛·李嘉圖在亞當·斯密絕對成本差異理論基礎上發展起來的。李嘉圖認為每個國家不一定必須自己生產各種商品，而應集中力量生產那些利益較大或不利較小的商品，即具有比較優勢的產品，然后通過對外貿易進行交換。這樣，在資本和勞動不變的條件下，生產總量會得到增加，如此形成的國際分工對貿易各國都有利。

11. David Ricardo大衛·李嘉圖（1772—1823）

李嘉圖是19世紀中葉英國資產階級古典政治經濟學的杰出代表和完成者，他提出了比較優勢理論。李嘉圖早先曾從事證券交易，后來從事議會活動。其最主要的著作是《政治經濟學及賦稅原理》（1817）。

12. While at sea, a cargo is vulnerable to many dangers.

在海上，貨物會遇到各種危險。

13. Lloyd's勞合社

勞合社始創于17世紀末。其最初是倫敦的一個簡陋的咖啡館，后逐漸發展為世界上最重要的海上保險組織和重要的通信機構。勞合社和倫敦其他的海上保險公司形成了世界上最大的海上保險市場，即“倫敦市場”。勞合社本身并不經營具體保險業務，只是為其會員提供辦理保險業務的場所。

14. Some nations possess little in the way of exportable commodities or manufactured goods.

有些國家沒有什么可供出口的產品或制成品。

15. The Bahamas巴哈馬（群島）

巴哈馬（群島）位于西印度群島，在古巴的北面，面積有7 086平方千米，人口有185 000人。

16. tariffs關稅

關稅是指進出口商品在經過一國關境時，由政府設置的海關根據該國法律規定向進出口商所征收的稅收。對于國際貿易發達的國家而言，關稅往往是國家稅收乃至國家財政的主要來源。

EXERCISES

I. Translate the following Chinese terms into English.

絕對利益

經濟資源

規模經濟

合理成本

海外市場

比較優勢理論

關稅壁壘

農產品補貼

配額

II. Translate the following English terms into Chinese.

export subsidy

natural resources

trade protectionism

drawback

infant industries

Lloyd's

specific duty

ad valorem duty

compound duty

exchange rate

III. Questions.

1. What are the differences between absolute advantage and comparative ad-vantage？

2. Who developed the theory of comparative advantage? What do you think of it？

3. Is there any difference between international trade and foreign trade？

4. What are the differences between visible trade and invisible trade？

5. What is tariff? Explain briefly different kinds of tariffs.