Unit 3
INTERNATIONAL TRADE POLICY
The balance of payments
• In economics, the balance of payments (BOP)
measures the payments that flow between any
individual country and all other countries.
• It is used to summarize all international economic
transactions for that country during a specific
time period, usually a year.
• The balance of payments comprises the current
account, the capital account, and the
financial account. "Together, these accounts
balance in the sense that the sum of the entries
is conceptually zero.”
1. Current account
Current account is a national account that records
transactions involving the import and export of goods
and services, income receipts on assets abroad, and
income payments on foreign assets inside the country
Current account surplus (a trade surplus): When a
country exports more goods, services, and income than it
imports.
Current account deficit (a trade deficit): When a country
imports more goods, services and income than it exports.
2. Capital account
• Capital account: A national account that records
transactions involving the purchase or sale of assets
3. Financial account
• The financial account records transactions that involve
financial assets and liabilities and that take place between
residents and nonresidents.
• A balance of payments equilibrium is defined as a
condition where the sum of debits and credits from the
current account and the capital and financial accounts
equal to zero; in other words, equilibrium is where
Current account + (Capital + Financial account) = 0
• This is a condition where there are no changes in
Official Reserves. When there is no change in
Official Reserves, the balance of payments may also
be stated as follows:
Current account = - (Capital + Financial account)
Or
Current account deficit (or surplus) = Capital and
Financial account) surplus (or deficit)
Balance of payments identity
• Current Account = Capital Account +
Financial Account + Net Errors and
Omissions
Balance of trade
• the balance between exports and imports in an economy
• Value of import > value of export: Trade deficit
• Value of import < value of export: Trade surplus
• Balance of trade - NX
Code of conduct
• a non-binding intergovernmental instrument that seeks to
regulate certain types behaviour of governments or
private corporations
• Codes of conduct are as difficult to negotiate as binding
agreements since signatories
Commercial policy
• It covers governmental acts, policies and practices which
influence trade in goods and services
• the subjects covered in Part II of the GATT which includes,
among others, national treatment, anti-dumping and
countervailing duties, customs valuation, import and
export fees and formalities, marks of origin, quantitative
restrictions, subsidies, state trading enterprises,
safeguards, and consultation and dispute settlement
Competition policy
• It may be concerned also with the welfare-enhancing
effects of opening non-tradeable sectors to competition,
the so-called wider competition policy. This includes gas,
water and electricity utilities which once were considered
natural monopolies. Competition policy is often seen as
promoting especially the interests of the consumer, and
comparisons are made with trade policy which, especially
in the case of trade remedies, tends to favour the
producer.
Competition policy and anti-
dumping measures
• trade policy may confer benefits to domestic producers
through anti-dumping measures that allow them to
secure additional returns by enabling them to raise
prices. Exporters who make price undertakings to
evade the imposition of anti-dumping duties may in
this way also be able to obtain economic rents. The
contention is that such actions are legal under trade
policy, but illegal under competition policy. Another
conflict is seen as resulting from an underlying
principle that anti-dumping laws are designed to
protect domestic producers and sellers of goods,
whereas competition laws are meant to protect
Competitive advantage
• It states that the success of a firm or an industry is based
on cost advantages in the production of a relatively
standardized product or product-based advantages related
to the development of differentiated products. Firms with
a competitive advantage are often concentrated
geographically, which in turn assists the development of a
workforce with the relevant skills.
Contingent multilateralism
• An American term to mean that multilateral action should
be taken whenever possible to improve market access, but
sometimes preferential liberalization in the form of free-
trade agreements and unilateral action would be better.
Contingent protection
• Protective mechanisms, also called commercial defence
mechanisms, that are legal under the WTO agreements.
They may be triggered to counter the effects of dumping,
subsidies and unexpected import surges causing injury to
domestic industry. Such mechanisms include anti-dumping
measures, countervailing duties and safeguards.
Internationalization
• The extension of economic activity across national borders
to harness the benefits of lower costs in other economies,
with countries specializing in a particular stage of
production. It is one of the results of decreasing costs of
transport and communications which promotes the
integration of markets for goods, services, technology,
ideas, capital and human resources
Globalization
• , a decline in costs of doing business across space. The
term describes the increasing integration of national
economic systems through growth in international trade,
investment and capital flows. Definitions of globalization,
both benevolent and malevolent, are too numerous to list
here. Many analysts distinguish globalization from
internationalization which they tend to see as much more
benign
Protectionism
• A climate of economic policy formulation which sees merit
in preventing the exposure of domestic producers to the
rigours of the international market. The basic means for
achieving this are tariffs, subsidies, voluntary restraint
arrangements and other non-tariff measures
Subsidy
• A subsidy is a benefit given to an individual, business, or
institution, usually by the government. It can be direct
(such as cash payments) or indirect (such as tax breaks).
The subsidy is typically given to remove some type of
burden, and it is often considered to be in the overall
interest of the public, given to promote a social good or an
economic policy.
Free trade
• the free movement across borders of goods, services,
capital and people. In practice, national policy and
regulatory objectives put greater or lesser constraints on
the movement of each.
Trade liberalization
• A general term for the gradual or complete removal of
existing impediments to trade in goods and services. Free
trade may be its ultimate aim, but more likely it is freer
trade. Investment restrictions may also be covered by this
term if investment in the target market is necessary for
effective market access.
Trade policy
• The complete framework of laws, regulations, international
agreements and negotiating stances adopted by government to
achieve legally binding market access for domestic firms.
Trade policy also seeks to develop rules providing
predictability and security for firms. Fundamental components
of trade policy are most-favoured-nation treatment, national
treatment, transparency and exchange of concessions.
• To be effective, trade policy needs to be supported by domestic
policies to foster innovation and international competitiveness,
and it needs to be conducted with flexibility and pragmatism.
Bilateral trade agreement
• An agreement between two countries setting out the conditions
under which trade between them will be conducted. If both parties
are already WTO members enjoying the attendant non-
discrimination, market access and other benefits, the main additional
reason for a bilateral agreement may be a program of bilateral trade
facilitation and trade promotion activities
• If one party is not a member of the WTO, the agreement will normally
provide for most-favoured nation treatment and national treatment,
protection of intellectual property rights, consultation and dispute
settlement, and other principles and mechanisms necessary for
ensuring smooth trade flows and the speedy resolution of problems.
Multilateral trade agreements
• Intergovernmental agreements aimed at expanding and
liberalizing international trade under non-discriminatory,
predictable and transparent conditions set out in an array
of rights and obligations. The motivation for taking on
these obligations is that all members will increase their
welfare by adhering to a common standard of conduct in
the management of their trade relations
Multilateralism
• An approach to the conduct of international trade based
on cooperation, equal rights and obligations, non-
discrimination and the participation as equals of many
countries regardless of their size or share of international
trade. This is the basis of the rules and principles
embodied in treaties such as the Marrakesh Agreement
Establishing the World Trade Organization and its
components.
