International Trade.pptx

International trade, regional integration and trade reforms in
Ethiopia
Chapter Three
1

What is international trade?
2

What is international trade?
 International trade refers to the trade between two or more countries.
 International trade allows countries to exchange good and services with the
use of money as a medium of exchange.
 Several benefit or advantages can be identified with reference to international
trade. However international trade does have its limitations as well.
 While many nations are nominally committed to free trade, they tend to
intervene in international trade to protect the interests of politically important
groups
3

What are the Benefit of international trade?
4

Benefit of international trade
There are direct and indirect benefits of
international trade.
5

1. Direct benefits of international trade
• Country specializes in the production of a few goods due to international trade and division of labor,
• it exports these commodities, which it produces cheaper in exchange for what others can produce at a lower cost.
• It gains increase in national income which, in turn, raises the level of output and the growth rate of economy.
• Thus the higher level of output through trade tends to break the vicious circle of poverty and promotes economic
development.
• International trade widens the market and increases the inducement to invest income and saving through more
efficient resource allocation. Moreover, when efforts are made to export products that LDCs are specialized, they tend
to widen the market.
• International trade provide employment opportunity.
• International trade also helps to transform the subsistence sector into the monetized sector by providing markets for
farm produce and raises the income and the standards of living of the peasantry.
6

1. Indirect benefits of international trade
• First, international trade helps to exchange domestic goods having low growth potential for foreign
goods with high growth potential. The staple commodities of LDCs are exchanged for machinery, capital
goods, raw materials, and semi-finished products required for economic development.
• Second, international trade possesses an "educative effect". LDCs lack in critical skills, which are a
greater hindrances to development than is the scarcity of capital goods.
• Third, international trade provides the basis for the importation of foreign capital in LDCs. This
smoothens the balance of payments and inflationary pressures
• Lastly, international trade benefits LDCs indirectly by fostering healthy competition and checking
inefficient monopolies. Healthy competition is essential for the development of the export sector of
such economies and for checking inefficient exploitative monopolies that are usually established on the
grounds of infant industry protection.
7

What are the limitation of international trade?
8

Limitation of international trade
• Three arguments are usually advanced in support of the view that "international trade has impeded
the development LDCs".
1. International trade has strong backwash effects on the LDCs. Trade operates (as a rule) with a fundamental bias in
favor of the richer and progressive regions and in disfavor of the LDCs. This is because, the rich countries are having a
large base of manufacturing industries and by exporting their industrial products at cheap rates to LDCs, they have priced
out the small-scale industries of LDCs.
2. It has been argued that the operation of the international demonstration effect through international trade has adversely
affected capital formation in LDCs. This effect may made people of LDCs to buy unproductive and leisure products.
3. There has been a secular deterioration in the terms of trade of the LDCs. It implies that there has been an international
transfer of income from the poor to the rich countries and that the gains from international trade have gone more to
developed countries at the expense of LDCs.
9

Trade agreement and economic development
10

How Trade agreement and economic development related?
11

Trade agreement and economic development
• Trade agreement refers to the trade agreement between two or more countries.
• There are a number of institution who work on promoting trade agreement between countries. One
of this institution is WTO.
“… In brief, the World Trade Organization (WTO) is the only international organization dealing with the
global rules of trade between nations. Its main function is to ensure that trade flows as smoothly,
predictably and freely as possible.
• It is the process of integrating economic decision-making such as consumption, investment and
saving all across the world
• The impact of trade agreement is to enhance trade liberalization and globalization.
– Liberalization: In general, liberalization refers to a relaxation of previous government restrictions, usually in
areas of social or economic policy.
– Globalization is the term used to describe the growing world wide integration of the people and countries.
12

What are the major features that characterize globalization?
13

Features that characterize globalization
• Among the features that characterize globalization include :
interconnection of sovereign countries through trade and capital flow;
 harmonization of the economic rules that govern the interaction or
relationship between these sovereign nations;
creating structures to support and facilitate
dependence and inter connection; and
creation of a global market place
14

Positive and negative effects of globalization
• The process of globalization has both positive and negative effects to different category of
economies of the world.
• Competition among firms to get a good a share of the large world market leads to;
 specialization and efficiency;
 better quality products at reduced prices; economies of scale in production;
 technological and managerial improvements.
 World output of goods and services will increase both in quality and quantity which is expected
to translate into higher living standards of the world population.
15

What are the debates around Globalization?
16

Globalization debates
• Globalization debates include:
Is globalization a process or a project?
Is it a new era or nothing new?
Is it beneficial or dangerous
17

Difference between globalization and regionalization
• We should distinguish between globalization and regionalization.
– Globalization means the establishment of standards on a world-wide basis.
– Regionalization, on the other hand, means a situation in which various groupings of
states – more specifically, neighboring states – establish closer relations, when these states
employ policies of discrimination (or preferences) against all other states.
18

Why International trade policy?
Or
What International trade policy plays?
20

International trade policy plays
• International trade policy plays an important part in the economic development of an LDC. Trade
policy may be defined as one that helps in accelerating the rate of economic development:
 by enabling the underdeveloped country to have a larger, share of the gains from trade,
 by augmenting the rate of capital formation
 by promoting industrialization; and
 by maintaining equilibrium in the balance of payments.
21

Argument for trade policy
• The following are the major arguments for government intervention include
protecting jobs
protecting industries deemed important for national security
retaliating to unfair foreign competition
protecting consumers from “dangerous” products
furthering the goals of foreign policy
protecting the human rights of individuals in exporting countries
23

Instruments of international trade policy
24

What are Instruments of international trade policy?
25

Instruments of international trade policy
• Note that trade barriers are usually intended to protect a domestic industry.
• The following are the common methods of trade protection
1. Tariffs: A tariff is a charge on imports. Specific tariffs are a fixed charge for each unit of good
imported
2. Quotas: A quota is a restriction on the quantity of imports.
3. Administrative Barriers:- Many countries use customs and inspection processes to interfere
with imports.
4. Subsidies: In order to assist exporting industries, some governments have adopted policies
of subsidizing exports.
26

Regional Economic Integration
27

What is Regional Economic Integration?
Or
What is its importance?
28

Regional Economic Integration
• Regional Economic integration an Agreements among countries in a geographic region to reduce,
and ultimately remove, tariff and nontariff barriers to the free flow of goods, services and factors
of production among each other.
• Three levels of economic integration
– Global: trade liberalization by GATT (General Agreement on Tariffs and Trades) or WTO
– Regional: preferential treatment of member countries in the group
– Bilateral: preferential treatment between two countries
29

Stages (types) of economic integration
30

Stages (types) of economic integration
There are four stages (types) of economic integration
1. FTA (free trade area):
– no internal tariffs among members, but each country imposes its own external tariffs to the third country.
– NAFTA (North America Free Trade Agreement
– AFTA (ASEAN Free Trade Area)
– EFTA (European Free Trade Area)
2. Customs union:
– no internal tariffs and common external tariffs
– Mercosur (Southern Common Market),
– CACM (Central American Common Market)
– CARICOM (Caribbean Community and Common Market)
3. Common market:
– free movement of products and factors (resources), which is customs union plus factor mobility
– EU (European Union – previously EEC)
4. Economic union:
– common market plus common currency
– coordination of fiscal and monetary policy
– EMU (Economic and Monetary Union)
31

Levels of Regional Integration
Political Union Coordinate aspects of members’ economic and political systems
Economic Union
Remove barriers to trade, labor, and capital; set a common trade policy against
nonmembers; and coordinate members’ economic policies
Common Market Remove all barriers to trade, labor, and capital among members; and set a
common trade policy against nonmembers
Customs Union Remove all barriers to trade among members, and set a common trade policy
against nonmembers
Free-Trade Area Remove all barriers to trade among members, but each country has own
policies for nonmembers
32

Free- trade area
Customs union
Common market
Economic Union
Political Union
33
Greater integration

What are the major Effects of integration?
35

Effects of integration
Effects of integration
Potential benefits Potential drawbacks
Trade creation
Greater consensus
Political cooperation
Creates jobs
Trade diversion
Shifts in employment
Loss of sovereignty
36

Reading material
Structure of foreign trade in Ethiopia
37

Structure of foreign trade in Ethiopia
• The structure of Ethiopian foreign trade or any other country’s foreign trade can be seen by
asking questions the following:
 What goods and services have the country been selling to the rest of the world?
 What goods and services have the country been purchasing from the rest of the world?
 Who are the basic trading partners? The answer for this question will enable you to
understand the export and import structure and direction of Ethiopia foreign trade
• Answering the above question enable us to understand the structure of foreign trade in the
country.
38

The Export structure of Ethiopian foreign trade
39

The Export structure of Ethiopian foreign trade
• Export of Ethiopia foreign trade refers to the amount of goods and services that
the country sells to different countries.
• The export of the country can be seen usually based on two ways-by commodity
types and /or industrial origin.
• Ethiopia’s export sector is highly dominated by primary (agricultural) products
such as coffee, vegetables, fruits, pulses, chat, oilseeds, sugar and livestock
products such as live animals, hides and skins, honey and wax etc.
40

Import structure of Ethiopians foreign trade
41

Import structure of Ethiopians foreign trade
• Import of foreign trade refers to the commodity that is imported from different
countries to home country.
• Like exports, import is also classified into two ways;
 by broad commodity types and
 by economic category.
• Like any other developing countries import structure for Ethiopia is dominated by
Consumer Goods.
• These Consumer goods are interchangeably followed by Semi- finished goods and
Fuel in similar fashion.
42

Direction of trade
• With whom has Ethiopia been trading? The answer to this question also provides the answer for
the question; what is the direction of external trade of Ethiopia.
• As far as Ethiopia's foreign trade is concerned, the destination of its exports and the origin of its
imports have almost remained the same over a long period. Why??????
• Europe has retained its predominance as the destination of our export and the origin of our
imports followed by Asia, America and Africa.
44

Foreign Trade Reform in Ethiopia
45

Why Foreign Trade Reform in Ethiopia?
46

Foreign Trade Reform in Ethiopia
• In order to improve the foreign trade government undertaken liberalization and structural reform the country.
• The trade liberalization of the external sector so as to redress the prevailing huge external imbalances and thereby improve
the continually depleted foreign exchange reserve position of the county.
• Furthermore, within the framework of promoting exports, measures of reducing license fees for import and export and
simplifying the procedure of getting licenses were undertaken.
• In order to encourage to import trade liberalization the government reduced import tariff to the 35 percent.
• Further the country undertaken various efforts to join regional and multilateral trade agreement.
• As far as accessing other members’ market is concerned, Ethiopia has had preferential access to developed country markets
under such schemes as;
 World Trade Organization accession
 the Generalized System of Preferences (GSP),
 EU’s Everything but Arms (EBA) Initiative,
 Caribbean and Pacific (ACP) countries and
 the African Growth and Opportunity ACT (AGOA).
47

Ethiopia WTO Accession
• Ethiopia has formally applied for membership of the WTO in 2003 and in 2007 has submitted its
Memorandum of Trade Regime, which is the initial requirement for accession.
• The following are the major objective of World Trade Organization (WTO):
– the increase of the standards of life,
– the attainment of full employment,
– the growth of real income and effective demand, and the expansion of trade in goods and services.
– The need for the preservation of the environment and integration of developing countries into the
world trading system
• The World Trade Organization operates three major sectoral agreements which are binding on all its
members:
1. the Multilateral Agreement on Trade in Goods
2. the General Agreement on Trade in Services, and
3. the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPs).
49

What are the major Benefits of WTO accession?
51

Benefits of WTO accession
• The following are usually considered as potential benefits of joining the WTO:
– Allow much greater access to foreign markets and larger export opportunities
– Encourage more flows of foreign direct investment
– Make local producers and manufacturers to be more competitive and international
market oriented
– Gives opportunity to get access to the effective dispute settlement mechanism of the
WTO
– Increases transparency and predictability
– For landlocked countries like Ethiopia, guarantees rights through maritime neighbor's swift
access to the most convenient international route.
52

Challenges of WTO accession
53

What are the challenges of WTO accession?
54

Challenges of WTO accession
• The major challenge facing Ethiopia comes from within.
 Its industrial and agricultural sectors lack competitive advantage, economies of scale, cutting
edge technology, marketing caliber and efficient production and distribution system.
 The comparative advantage of abundant labor and land has not been fully utilized.
 The land is largely degrades and fragmented.
 The agricultural labor is unskilled.
 Although there is an institution mandated to set standards and quality of products, the country
has not yet established or implemented a universally applicable standard and quality for
consumer products, except those imported.
55

Impacts of trade reform
• In order to see the impact of trade reform it is better to see the structure of foreign trade in
Ethiopia.
• The structure of Ethiopian foreign trade or any other country’s foreign trade can be seen by asking
questions like the following:
 What goods and services have the country been selling to others and purchasing from the rest
of the world?
 Who are the basic trading partners?
• Answering these question will enable to understand the export and import structure and direction
of Ethiopia foreign trade
57

Problems of Ethiopian’s foreign trade
58

What are the problems of Ethiopian’s foreign trade?
59

Problems of Ethiopian’s foreign trade
• The Ethiopia foreign trade is highly characterized by in exporting agricultural production which is even more
dominated by single commodity. On the other side, the country imports industrial a goods.
• In addition to this the country trade relation is established with those countries which are well developed as
compared to the level of our country development. These and other problems hampered the performance of
foreign trade in the country.
• Some of them are known as the Poor Performance of the real sectors of the economy specially agriculture, the
terms of trade, overvaluation of the currency, pricing and marketing policy of the government, smuggling of
exports
60

Pattern of international trade
61

Pattern of international trade
 Imports are the goods and services that country buy from people in other countries.
 Exports are the goods and services we sell to people in other countries.
 Pattern of international trade show us the change observed in the world due to the international
trade. It focus more on;
 The amount and types of international trade and
 The direction international trade.
 The pattern of trade indicate the amount and magnitude of trading countries in the world. It
would answer what the amount of trade and who are more trade partner in the world during the
last few decades.
62

Trends of international trade
63

Trends of international trade
 Trends of international trade indicate the change in the amount of export and import in the international trade.
 The world export increased from around USD 2 trillion to around 23 trillion in 2013.
 The World export show continuous growth during the last three decades.
 The export show miner change around 2009 due to the world financial crisis and other factors.
 In 2010 again the world export increased from the low growth.
 In 2010 the world export again increased to 18 trillion from the lower 15 trillion in 2008.
 The world export varies based on the level of economic development.
 The world export dominated by western Europe and followed by Asia and North America.
 In 2007, the West Europe took around 42 percent of the world export. The Asian took 27 percent and North
America took 13 of world export. Africa take only 3 percent of world export.
 By 2010, China became the second largest trading partner after the United States, overtaking Germany and Japan.
China’s emergence reflects its rapid industrialization process and growing trade openness
64

Direction of trade
 Direction of trade indicate the sources and destination of world trade.
 Most of the time the trade conducted more between developed countries rather than developing
and developed countries.
 The trade between north America is around USD 905 million which is he highest as compare to
North America with the rest of the world.
 In the same way the trade between European countries is around USD 3 trillion a compared to the
rest of the world.
 Africa showed different direction of trade. It trade more across the content rather than within the
content. Africa trade within was around USD 33 million as compared to USD 80 Million of North
America and USD 148 Million with Europe.
66

Who gains and who loses from globalization?
67

Who gains and who loses from globalization?
 Many countries have gained from export led growth and more open markets,
particularly in the Asia-Pacific.
 There have also been losers, for example in sub-Saharan Africa.
 Careful assessment of the evidence on the effects of globalization both within and
between countries suggests that inequality has not increased between countries
and that inequality within countries is often wrongly attributed to globalization.
68

Economic globalization and developing countries
69

Economic globalization and developing countries
• In recent years, globalization has been regarded as the key challenge for nations and states all over the world.
• From a developing-country perspective, the discussion over the nature and dynamics of economic globalization displays some paradoxical
features.
• It is generally acknowledged that today economic globalization constitutes a main challenge for developing countries.
 One obvious reason for this is that while deliberate policies by developed states have played an important role in promoting economic
globalization, the states of developing countries have not been among the globalization drivers.
 States and companies based in developing countries have been globalization-takers’, not ‘globalization-makers’
• The general challenges of economic globalization for developing countries are the twin dangers of,
 on the one hand, being economically marginalized – even excluded – from the world economy and,
 On the other hand, having their national capacity for independent developmental activities severely eroded.
• Sub-Saharan Africa has over time experienced the strongest engagement with world markets; however, its export/GDP ratio has stagnated
while all other regions have experienced a steady increase in their ratios.
• East Asia marks itself as the region with the fastest growth and it has today the highest level of global trade integration.
70

1. Does globalization lead to convergence or divergence?
2. Can globalization be reversed?
71

END OF CHAPTER FOUR
THANK YOU!
72

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