International Trade in Agricultural Products Professor WEI Longbao SoM· Zhejiang University

Course Outline Lecture 1 Introduction to Agricultural Trade Lecture 2 Review of Classic International Trade Theory Lecture 3 Trade Policies of Importing Countries Lecture 4 Trade Policies of Exporting Countries Lecture 5 Technical Barrier to Trade Lecture 6 Multilateral Trade Negotiations: GATT and WTO Lecture 7 Preferential Trade Agreements Lecture 8 Macroeconomic Policy and Agricultural Trade Lecture 9 Trade and Environment Lecture 10 FDI and Processed Food Trade Lecture 11 Competitiveness in Global Food Economy Lecture 12 International Marketing for Agricultural Products

Lecture 2 Theories of International Trade: A Brief Review

1. The Age of Mercantilism (重商主义) 2. Classical Trade Theory Course Outline 1. The Age of Mercantilism (重商主义) 2. Classical Trade Theory Absolute Advantage Absolute Advantage: Problems Comparative Advantage 3. Factor Proportions Trade Theory 4. “New” Trade Theory Economies of Scale Strategic Trade Theory Porter‘s Diamond

The Age of Mercantilism Between 1600 and 1800 most of western Europe pursued a policy of mercantilism What was mercantilism? Belief that exports should exceed imports Bullionism – the belief that the economic health of a nation was measured by the amount of precious metals (gold and silver) it possessed Colonialism – colonies were viewed as sources of raw materials Heavy government control of trade, with the goals of trade being the goals of governments

Classical Trade Theory

Absolute Advantage Producing a good with fewer inputs (capital, labor, land, raw materials, etc.) per unit of output than other countries If input prices are the same in two countries, the country with an absolute advantage in a good will have a lower unit cost of production for that good Adam Smith, The Wealth of Nations, 1776 A country should produce and export products in which it has an absolute advantage A country should import products in which it has an absolute disadvantage

Absolute Advantage: Problems What if a country has an absolute advantage in everything? How can it possibly produce enough of everything for the entire world? A country’s inputs are limited in supply What if a country has an absolute disadvantage in everything? How can it earn income to buy anything if it’s not producing anything?

Comparative Advantage Producing a good at a lower opportunity cost than another country Inputs used in the production of one good aren’t available for the production of other goods When a country produces a good, what does it give up in foregone production of other goods? David Ricardo, The Principles of Political Economy and Taxation, 1817 A country should produce and export products in which it has a comparative advantage A country should import products in which it has an comparative disadvantage

Numerical Example One input (labor) Two goods (corn, timber) Two countries (A, B) Which country has an absolute advantage in Corn production? Timber production? Which country has a comparative advantage in

Comparative Advantage (continued) Even a country at an absolute disadvantage in everything will have a comparative advantage in at least one good Sub-Saharan Africa: comparative advantage in many agricultural products (coffee, cocoa, cotton, fruits & vegetables, others) Each country specializes in the production and export of what it does relatively well Prices of goods and inputs in a free-market economy will adjust in order to lead to this outcome

More on Comparative Advantage Countries rely on imports to meet consumer demands for goods in which they don’t have a comparative advantage A country can achieve consumption levels beyond what it could achieve on its own Government policy can alter free-market outcomes (import tariffs, import quotas, export subsidies, etc.)

Numerical Example

Factor Proportions Trade Theory

Factor Proportions Trade Theory A country that is relatively abundant in a factor of production should export goods that use a lot of that factor in the production process, and import other goods Example: a country with a lot of labor should export labor-intensive goods Relative = compared to other countries Why? If a factor is relatively abundant, it will be relatively cheap, and a country will be more globally competitive in products that use a lot of that factor

“New” Trade Theory

Economies of Scale Internal economies of scale A company’s average cost of production per unit declines as its production increases External economies of scale A company’s average cost of production per unit declines as production within its industry increases Critical mass of firms exchanging ideas and with workers moving among firms (e.g. Silicon Valley)

Strategic Trade Theory Trade can permit companies to realize economies of scale in production But exploiting economies of scale takes a country’s resources (capital, labor, etc.) away from other companies and industries Abandoned product ranges Companies in other countries expand globally to realize economies of scale and fill abandoned product ranges

Porter’s Diamond Innovation drives and sustains a country’s global competitiveness Comparative advantage is created by technological change, not inherited from a country’s natural endowments Four components of global competitiveness Factor conditions Demand conditions Related and supporting industries Firm strategy, structure and rivalry

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