Notes on External Trade and International Trade Concepts (Comprehensive Summary)

IMPORTANCE OF EXTERNAL TRADE

  • More than 80 percent of external trade is carried out using ships. extShareofexternaltradebyships≈0.80  (80%)ext{Share of external trade by ships} \approx 0.80\; (80\%)

  • Freedom of navigation is crucial in world trade; navigation routes near the Philippines include:

    • Bashi Channel (between Taiwan and Batanes)

    • Taiwan Straits (China and Taiwan)

    • Sea between Japan and Taiwan

  • The world economy is deeply interrelated; exchange of goods is necessary to complete a product (global value chains)

    • Global Value Chains (GVCs): International production networks where different stages of the production process of a good are carried out in different countries.

  • Example of inter-country sourcing: car components are produced in multiple countries where costs are lower; labor-intensive parts for cars (e.g., wiring harnesses) can be made in the Philippines and exported to major car manufacturers like those in Japan and the USA

  • RO-RO VESSELS play a role in efficient transport of vehicles and goods, contributing to the efficiency of international logistics

  • The science of trade emphasizes how logistics and access to markets influence production choices and overall economic prosperity

RO-RO VESSEL

  • Roll-on/roll-off (RO-RO) vessels facilitate quick loading/unloading of vehicles and heavy equipment, reducing handling costs and time in shipping

  • Their use supports regional trade by improving just-in-time delivery and reducing inventory costs for manufacturers

RATIONALE FOR INTERNATIONAL TRADE

  • The receiving country cannot always produce all goods/services domestically (comparative/absolute limitations)

    • Absolute Advantage: The ability of a country to produce a good or service using fewer resources (e.g., less labor, land, or capital) than another country.

  • Example: The United States lacks certain rare earth elements/minerals needed for high-tech equipment and arms (e.g., stealth fighters); these are imported from other countries

  • International trade allows access to resources and goods not available domestically, enabling production of finished goods (e.g., automobiles rely on inputs from multiple countries)

  • The concept is reinforced by the idea that a deeply interrelated economy requires imports to complement domestic production

  • Economic rationale includes specialization based on factor endowments and technology, enabling higher overall welfare

RATIONALE FOR INTERNATIONAL TRADE (CONTINUED)

  • Real incomes are defined as the value of goods and services paid to members of the community in return for the use of capital and labor owned by the population

  • These incomes comprise various channels:

    • Pensions for retirees

    • Salaries and wages

    • Dividends for shareholders

    • Interest income

    • Remittances for dependents (e.g., OFW dependents)

    • Government subsidies (e.g., Pantawid Pamilya Pilipino Program or 4Ps in the Philippines)

  • In the United States, welfare recipients are another example of income support; the slide contrasts welfare recipients with other income sources

EFFECTS OF TARIFFS AND DIVERSIFICATION (INTRODUCTORY)

  • Tariffs affect world economy by altering prices, production, and trade patterns

  • Tariffs can incentivize diversification of markets among US trade partners as response to tariff regimes

  • (Related video references provided in slides for deeper exploration of tariff impacts and market diversification)

RATIONALE FOR INTERNATIONAL TRADE (RESOURCE ENDOWMENTS)

  • Nations possess endowments of land, labor, capital, and natural resources that influence trade patterns

  • Some countries lack certain resources (e.g., rare earths) but possess others (labor, capital, technology) that enable them to specialize in different products

RATIONALE FOR INTERNATIONAL TRADE (NATURAL RESOURCES EXAMPLE)

  • Slide shows mineral and ore references (e.g., rare earth minerals such as chevkinite-(Ce), Ce-bearing minerals; magnetite) illustrating how mineral endowments influence trade complements

RATIONALE FOR INTERNATIONAL TRADE (US LABOR AND AGRICULTURE SHORTHAND)

  • The US faces shortages in healthcare professionals and agricultural labor due to aging population and low domestic labor supply in certain sectors

  • Immigration and migrant labor paths fill these gaps, though policy changes (e.g., deportations) can affect agricultural output

  • This illustrates a practical consequence of trade in services and labor mobility on a major economy

RATIONALE FOR INTERNATIONAL TRADE (CLIMATE/ZONES AND PRODUCTION CAPABILITIES)

  • Much of the US territory lies in temperate zones; tropical fruits and crops cannot be grown in large quantities domestically

  • Hence, the US imports tropical fruits from tropical countries (e.g., the Philippines, Mexico)

RATIONALE FOR INTERNATIONAL TRADE (IMPORTING DESPITE CAPACITY)

  • A country may have the capability to produce certain goods but still imports due to:

    • Comparative advantages in other sectors

    • Prestige or signaling value of imported goods (e.g., fashion or technology prestige)

  • Philippines example: temperate crops (e.g., strawberries) and clothes are produced domestically but still imported for various strategic, economic, or prestige reasons

OTHER REASONS FOR IMPORTING

  • Imported goods may be cheaper than domestically produced ones

  • Imports provide a greater variety of goods

  • Imported goods may offer advantages beyond price, such as quality or access to advanced technology

RATIONALE FOR INTERNATIONAL TRADE (EXAMPLES IN PHILIPPINES)

  • Corn imports for feed can be cheaper than domestic corn due to transportation costs and infrastructure constraints (roads/seaports)

RATIONALE FOR INTERNATIONAL TRADE (VARIETY AND QUALITY)

  • Imported clothes broaden consumer choices

  • Imported goods may be of higher quality due to more advanced technology in exporting countries

COLONIALMENTALITY

  • Colonial mentality: belief that abroad-made goods or products from more industrialized countries (e.g., US) are superior to locally produced goods

  • Perception that going abroad equals success; staying in the Philippines may be viewed as less ambitious by some

  • This mindset affects consumer choices toward imported goods and influence national development attitudes

COMPARATIVE ADVANTAGE (ORIGIN AND IMPORTANCE)

  • David Ricardo (18th-19th century) formulated the theory of comparative advantage: a nation benefits by specializing in goods for which it has a relative advantage and trading for others

  • This specialization and trade increases overall welfare and allows countries to consume beyond their domestic production possibilities

COMPARATIVE ADVANTAGE (EXAMPLE)

  • The United States can grow bananas and coffee in greenhouses (expensive) but imports coffee from countries that produce it more cheaply

  • The US has almost no domestic coffee production due to climate and cost factors

DAVID RICARDO: BIOGRAPHY (SUMMARY)

  • David Ricardo's family background and early life are summarized to provide historical context for the theory

  • Details include family origins and Ricardo’s entry into stockbroking and economic thought sources

CHANGING COMPARATIVE ADVANTAGE (DYNAMIC WORLD)

  • Comparative advantage may change if new resources are discovered or existing resources are utilized more efficiently

  • Example: tin cans become cheaper if a country develops local steel and tin plate production, reducing reliance on imported tin plates

  • Loss of local steel plants can shift comparative advantage and cost structures (e.g., Iligan steel mill closure and tin-plate production changes)

GREENHOUSE EXAMPLE (TEMPERATE ZONES)

  • Greenhouses in temperate zones can grow tropical crops, but heating costs make it expensive; this affects comparative advantage calculations for certain crops

MAIN REASONS FOR PROTECTIONISM (SUMMARY)

  • Strategic defence and economic reasons: ensure production of goods in times of war or strategic need

  • Transport costs: some goods are not viable to produce domestically due to distance/costs

  • Artificial barriers to trade: quotas, tariffs, and other restrictions to protect local industries

EVOLUTION OF WORLD TRADE (LONG-TERM TRENDS)

  • 1870-1913: merchandise trade grew on average by 3.4% per year3.4\%\text{ per year} before World War I

  • 1914-1950: two World Wars and the Great Depression reduced growth to less than 1% per year1\%\text{ per year}

  • 1945-1973: postwar institutions led to buoyant growth averaging 7.9%7.9\% per year

  • 1973-1998: growth slowed to 5.1%5.1\% per year

  • 2001: merchandise exports fell by −4%-4\% after a prior rise of +13%+13\% in 2000

  • Early 21st century: ongoing adjustments with varying trends; analysis covered in Chapter 9.3 of the source

PROTECTIONISM (DEFINITIONS)

  • Protectionism refers to government policies that restrict international trade to protect domestic industries

  • Goals often include improving domestic economic activity, safety, or quality concerns

METHODS OF PROTECTION (TARIFFS)

  • Tariff: tax or import duty on goods/services; can be fixed or percentage-based; generates revenue and raises domestic prices for imported goods

  • Tariffs can protect local industries but may harm consumers and raise costs for intermediate goods

  • Historical example (US policy under President Trump): tariffs on imports, including some inputs needed by domestic producers, led to higher consumer prices and inflation

  • Tariff retaliation can trigger reciprocal high tariffs by trading partners, diversifying markets away from the tariff-imposing country

METHODS OF PROTECTION (NON-TARIFF BARRIERS)

  • Quotas: numerical limits on imports (volume or value)

  • Domestic subsidies: financial aid or tax benefits to domestic producers (e.g., agriculture) to give them edge over foreign suppliers

  • Export restraints (Voluntary export restraints): agreements not to export above a specified amount

  • Import deposits: require a deposit with government to discourage imports

  • Safety/health standards and technical specifications: to impose additional hurdles for imports (lengthy or strict compliance) – examples include standards/regulatory bans

PROTECTIONISM IN PHILIPPINES (EXAMPLE)

  • Domestic subsidies in export-oriented industries: tax holidays for export processing zones; some allowances for returning overseas workers bringing belongings tax-free

EVOLUTION OF WORLD TRADE ORGANIZATION (WTO) AND GATT

  • For a long period, U.S. trade policy linked open markets with democracy and peace; trade policy served as a foreign-policy tool post-World War II

  • GATT emerged from the desire to avoid a repeat of prewar protectionism; MFN (Most Favoured Nation) principle became central in 1947 negotiations

  • The General Agreement on Tariffs and Trade (GATT) was signed on 30 October 1947 by 23 countries; it established tariff concessions and trade rules

  • The ITO (International Trade Organization) was envisioned but never ratified; GATT remained the governing instrument for world trade

UNITED NATIONS AND GATT/GATS (TIMELINE AND STRUCTURE)

  • 1947: GATT signed by 23 nations; 56 countries later engaged in Havana negotiations for ITO; 53 signed the Havana Final Act in 1948, but ITO was not ratified; GATT persisted

  • 1995: Creation of the WTO, transforming and expanding beyond GATT to cover trade in services and intellectual property; dispute settlement procedures established

DOHA ROUND (TRADE NEGOTIATIONS)

  • Doha Round: latest round of WTO negotiations aimed at reforming the international trading system by lowering trade barriers and revising rules; focused on 20 areas of trade; development emphasis (Doha Development Agenda)

  • Officially launched at WTO's Fourth Ministerial Conference in Doha, Qatar, in November 2001; included agriculture, services, and intellectual property discussions

REGIONS IN WORLD TRADE (MULTILATERALISM WITH REGIONALISM)

  • Despite GATT/WTO, regional trade agreements (RTAs) proliferated; more than 60% of world trade is regional

  • Major regions with intra-regional trade highlights (examples):

    • EU: 61% of EU trade is intra-EU (as of the cited period)

    • NAFTA: about 55% of trade among NAFTA members is intra-regional

REGIONS IN WORLD TRADE: DEFINITIONS

  • Free trade area: members reduce or abolish barriers among themselves but retain own barriers to non-members

  • Customs union: members abolish internal barriers and adopt a common external tariff against outsiders

  • Common market: customs union plus free movement of factors of production (people, capital, etc.)

  • Economic union: common market plus coordinated economic policies (taxation, interest rates) and often a common currency

EUROPEAN UNION (EU) – OVERVIEW

  • The EU is a supranational political and economic union of 27 member states located primarily in Europe

  • Area: 4,233,255 km24{,}233{,}255\text{ km}^2; Population: 450 million450\text{ million} (as of 2025)

EVOLUTION OF THE EUROPEAN UNION (SELECT TIMELINE)

  • 1945-1959: postwar peace and beginnings of cooperation; ECSC, Treaties of Rome, birth of the European Parliament

  • 1960-1969: economic growth; deeper European integration; early cooperation milestones

  • 1970-1979: Denmark, Ireland, UK join; regional policy launches

  • 1980-1989: single market beginnings; Erasmus program; broader integration

  • 1990-1999: Europe without frontiers; expansion and single market launch

  • 2000-2009: euro becomes legal tender; Lisbon Treaty; further expansion

  • 2010-2019: responses to financial crisis; Croatia joins; UK votes to leave

  • 2020-today: a united and resilient EU; responses to COVID-19 and geopolitical challenges

STIMULUS PACKAGE (EU Post-COVID-19 REBUILD)

  • NextGenerationEU (NGEU) combined with the long-term EU budget constitutes a large stimulus package

  • Total funds: €2.018 trillion€2.018\text{ trillion} (in current prices)

  • Aims: green and digital recovery, resilience, climate neutrality by 2050

  • Context: emergency assistance for Ukraine and humanitarian support across the EU

UNITED KINGDOM LEAVES THE EU

  • 31 January 2020: UK leaves the EU after 47 years of membership

ASEAN – ASSOCIATION OF SOUTHEAST ASIAN NATIONS

  • Established on 8 August 1967 in Bangkok, Thailand (Bangkok Declaration)

  • Founding members: Indonesia, Malaysia, Philippines, Singapore, Thailand

  • Later members: Brunei Darussalam (joined 1984), Viet Nam (1995), Lao PDR and Myanmar (1997), Cambodia (1999)

  • As of the slides, ASEAN comprises 10 member states

  • Economic context: ASEAN has a combined GDP around $2.3 trillion (as cited) with about 600 million people (roughly 9% of the world’s population)

  • Intra-regional trade and investment: around 25% of ASEAN trade is intra-regional; efforts to boost deeper integration

  • China is the leading trading partner for ASEAN; ASEAN has signed ASEAN+1 FTAs with China, Japan, Korea, India, and Australia/New Zealand

  • ASEAN is a dynamic, diverse bloc with a mix of advanced and developing economies

ASEAN ECONOMIC COMMUNITY (AEC) – KEY FEATURES

  • ASEAN is a 10-nation trade bloc with an aggregate GDP around 2.3 trillion2.3\text{ trillion}

  • Aim: establish a fully integrated economic community (AEC)

  • Intra-regional trade and investment are central to integration

ECONOMIC BACKGROUND OF ASEAN (SELECT FACTS)

  • Wide income disparities among members: Singapore and Brunei have high GDP per capita (PPP) ≈ $49{,}000$ and $39{,}000$ respectively; Myanmar and Cambodia have low GDP per capita just below $900$ (PPP)

  • Population: over 600 million

  • The region’s combined 2014 GDP around 2.6 trillion2.6\text{ trillion}

  • China is the No. 1 trading partner for ASEAN; intra-regional trade and foreign direct investment (FDI) flows have grown, with ASEAN attracting substantial FDI

CONNECTIONS AND IMPLICATIONS

  • External trade and international institutions (GATT, WTO) shape how nations access resources, technology, and markets; regional blocs complement and sometimes challenge multilateral rules

  • Comparative