1. Life Impact | The University of Adelaide University of Papua New Guinea Economic Development Lecture 15: International Trade

2. University of Papua New Guinea Slide 1 Lecture 15: International Trade Michael Cornish Overview Introduction Exports and imports International trade theory Import substitution v Export promotion Exchange rates Economic integration International trade reform

3. University of Papua New Guinea Slide 2 Lecture 15: International Trade Michael Cornish Introduction Globalisation GATT WTO Different views on globalisation: –Free trade = good –Protectionists –Save the poor! –Environmentalists

4. University of Papua New Guinea Slide 3 Lecture 15: International Trade Michael Cornish The WTO is a bloodsucker…?

5. University of Papua New Guinea Slide 4 Lecture 15: International Trade Michael Cornish Exports and imports Export dependence –Oil producing states –Primary products – up to 25% of export earnings! –Long-term prices of primary products are going down…

6. University of Papua New Guinea Slide 5 Lecture 15: International Trade Michael Cornish Primary product prices going down

7. University of Papua New Guinea Slide 6 Lecture 15: International Trade Michael Cornish Primary product prices going down

8. University of Papua New Guinea Slide 7 Lecture 15: International Trade Michael Cornish Exports and imports Low income elasticity of demand for primary products Price elasticity of demand for primary products is usually inelastic –Price volatility Combination of two effects = export earnings instability What about manufactured goods?

9. University of Papua New Guinea Slide 8 Lecture 15: International Trade Michael Cornish Exports and imports Import dependence –K, components, raw materials –Balance of payment problems –Cultural imperialism v ideas (Commodity) terms of trade –P X / P M : Prices of average imports relative to average exports

10. University of Papua New Guinea Slide 9 Lecture 15: International Trade Michael Cornish Exports and imports Prebisch-Singer Thesis –Import substitution industrialisation –Diversification into manufacturing –Basic v advanced manufactured goods

11. University of Papua New Guinea Slide 10 Lecture 15: International Trade Michael Cornish International trade theory Traditional theory: comparative advantage –Specialisation –Gains from trade –Gains even with absolute advantage

12. University of Papua New Guinea Slide 11 Lecture 15: International Trade Michael Cornish International trade theory Relative factor endowments (Neoclassical trade model) –Relative endowments in land, L, K –Specialisation in abundant factor –Assumes: Relative factor-intensity Different factor endowments

13. University of Papua New Guinea Slide 12 Lecture 15: International Trade Michael Cornish International trade theory Theoretical conclusions: –All countries gain, output increases –Incomplete specialisation: increasing opportunity costs –Factor equalisation? –More abundant factor increases in price –Moving outside our PPCs: stimulation of economic growth

14. University of Papua New Guinea Slide 13 Lecture 15: International Trade Michael Cornish International trade theory Criticisms: –Immobility of factors of production –Resource underutilisation -> easy export growth? –Technology substitution –Consumer sovereignty –Slow intrastate factor mobility –International market power

15. University of Papua New Guinea Slide 14 Lecture 15: International Trade Michael Cornish International trade theory Criticisms: –Uncertainty –Government intervention Protection Industrial policy –Foreign ownership

16. University of Papua New Guinea Slide 15 Lecture 15: International Trade Michael Cornish International trade theory Some preliminary conclusions: –Central role for international trade –Income inequality issues –Gains from trade sometimes limited –Source of capital –Collective self-reliance

17. University of Papua New Guinea Slide 16 Lecture 15: International Trade Michael Cornish Import substitution v Export promotion Import substitution –Pre-90s –Requires strong protection –Growth from domestic market –Diversification –Government intervention

18. University of Papua New Guinea Slide 17 Lecture 15: International Trade Michael Cornish Tariffs (in case you forgot…?)

19. University of Papua New Guinea Slide 18 Lecture 15: International Trade Michael Cornish Import substitution v Export promotion Import substitution - Problems: –Infant industry ‘never grows up’ –Inefficient allocation of resources –Income inequality –Overvalued exchange rates

20. University of Papua New Guinea Slide 19 Lecture 15: International Trade Michael Cornish Import substitution v Export promotion Export promotion –Internationally competitive – if successful! –Used by the four tigers? –Primary export expansion? –Manufacturing export expansion?

21. University of Papua New Guinea Slide 20 Lecture 15: International Trade Michael Cornish Import substitution v Export promotion Industrialisation strategy approach –A role for industrial policy –Import substitution then Export promotion? –Technology transfer –FDI, joint ventures –Non-preferential but active support for exporters –Industry-specific infrastructure, human capital

22. University of Papua New Guinea Slide 21 Lecture 15: International Trade Michael Cornish Exchange rates Overvaluation –Options: Run down reserves / borrow foreign exchange Reduce D (protection) Exchange controls Devalue currency! China…

23. University of Papua New Guinea Slide 22 Lecture 15: International Trade Michael Cornish Exchange rates Dual/parallel exchange rates –Declared rate (critical imports) –Undeclared rate (luxury imports) –Corruption! Free-floating exchange rates –Prone to price volatility, speculation Managed floating exchange rate

24. University of Papua New Guinea Slide 23 Lecture 15: International Trade Michael Cornish Economic integration Free trade area Customs union Common market Monetary union Why? –Division of labour, economies of scale –Economic benefits v political sovereignty –Convergence / divergence

25. University of Papua New Guinea Slide 24 Lecture 15: International Trade Michael Cornish International trade reform Prospects for developing countries heavily dependent on developed countries Regional integration an obstacle? Lowering of tariffs and non-tariff barriers –Extensive margin v intensive margin Compensation/assistance for displaced workers? Floating exchange rates (esp. China?)