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

2. 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

3. Lecture 2 Theories of International Trade: A Brief Review

4. 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

5. 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

6. Classical Trade Theory

7. 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

8. 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?

9. 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

10. 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

11. 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

12. 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.)

13. Numerical Example

14. Factor Proportions Trade Theory

15. 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

16. “New” Trade Theory

17. 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)

18. 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

19. 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

20. Thank you !