Evolution of International Trade - Notes

Evolution of International Trade

Objectives

  • Explain the development of the standard theory of international trade.
  • Discuss the meaning of trade surplus and elaborate on industrial capitalism.
  • Differentiate between free trade and mercantilism.
  • Differentiate absolute advantage from comparative advantage.
  • Differentiate marginal cost from opportunity cost.
  • Discuss the benefits of international business and trade.
  • Explain the meaning of barter, provide examples, and discuss its advantages and disadvantages.
  • Discuss the history of international trade from the barter system to the current time.
  • Trace the origin of money, give examples of items used as money, and explain the meaning of mint and minting.
  • Elaborate on the development of the Philippine currency and trace its history.
  • Explain the meaning of mobile payments, discuss what Point of Sale (POS) is, elaborate on the different methods of mobile/internet payments, elucidate on the meaning of mobile wallets, and discuss "Auto Pay" and "Direct Carrier Billing."
  • Elucidate on the meaning of digital/virtual currency and discuss the different types of cryptocurrencies.

Introduction

  • This subject is organized around the 5 W’s (what, who, when, where, why) and the how of international business and trade.
    • What: foundation - theories of international business and trade.
    • Who: international business and trade participants.
    • When: the start and development of international business and trade.
    • Where: the existence of international business and trade.
    • Why: the importance of international business and trade for the development of nations.
    • How: how international business and trade is done.
  • The course will explore the evolution of international business and trade from past to present and sift through the different theories that form its foundation.
  • Students will learn the nature and scope of international marketing and distinguish the difference between global entrepreneurship and intrapreneurship.

Evolution of International Trade Theory: A Glimpse

  • The evolution of international trade theory has shifted from country-level explanations to firm-level analyses.

Early Theories (Country-Level Focus)

  • Mercantilism (16th-18th Centuries):
    • National wealth depends on accumulating gold and silver.
    • Emphasized exports over imports, leading to protectionist policies.
  • Absolute Advantage (Adam Smith, 1776):
    • Countries should specialize in producing goods where they have an absolute cost advantage.
    • Advocated for free trade.
  • Comparative Advantage (David Ricardo, 1817):
    • Countries should specialize in producing goods where they have a comparative cost advantage, even if they are less efficient in absolute terms.
  • Heckscher-Ohlin Theory (1930s):
    • Trade is based on a country's factor endowments (land, labor, capital).
    • Countries would export goods that intensively use their abundant factors.

Modern Theories (Firm-Level Focus)

  • New Trade Theory (1970s-present):
    • Emphasized economies of scale (refer to the cost advantage experienced by a firm when it increases its level of output).
    • Imperfect competition (a market in which elements of monopoly allow individual producers or consumers to exercise some control over market prices.).
    • Product differentiation (characteristics that make your product or service stand out to your target audience).
    • Acknowledged that intra-industry trade (trade within the same industry) is significant.
  • Porter's Diamond (1990):
    • Examined how a nation's competitive advantage in specific industries is created and sustained.
    • Focused on factors like factor conditions, demand conditions, related and supporting industries, and firm strategy, structure, and rivalry.

Barter

Definition and Nature of Barter

  • Direct exchange of goods or services between two parties without the use of money.
  • A form of countertrade, a broader term that encompasses various non-monetary international trade transactions.

Historical Significance of Barter

  • Primary form of trade in early civilizations before the development of money.
  • Remains relevant in certain contexts, particularly in developing economies and in situations where currency is unstable or unavailable.

Advantages of Barter in International Trade

  1. Overcoming currency restrictions: Helpful when dealing with countries with weak currencies or limited access to foreign exchange.
  2. Improving cash flow: Can be beneficial for businesses facing liquidity challenges.
  3. Expanding market access: Allows entry into new markets where traditional monetary transactions are difficult.

Disadvantages of Barter in International Trade

  1. Difficulty in valuation: Determining the value of goods and services exchanged can be complex and subjective.
  2. Lack of standardization: Barter transactions often lack the legal and regulatory frameworks of traditional trade.
  3. Potential for disputes: Disagreements over the quality or quantity of goods exchanged can arise.

Modern Forms of Barter

  • Counter purchase: Requires the seller to purchase a specific amount of goods from the buyer's country.
  • Buy-back agreements: The seller agrees to supply technology or equipment, and in return, receives a portion of the goods produced using that technology.
  • Offset agreements: The seller agrees to offset a portion of the purchase price by buying goods from the buyer's country.

Role of Barter in the Contemporary Global Economy

  • While less common than traditional monetary trade, barter remains a viable option in certain situations.
  • It's important for businesses to carefully assess the risks and benefits before engaging in barter transactions.

Origin of Money

Evolution from Barter:

  • Early trade primarily relied on barter.
  • The limitations of barter (double coincidence of wants, difficulty in valuation, indivisibility of goods) led to the need for a more efficient medium of exchange.

Emergence of Commodity Money:

  • Certain goods with intrinsic value (e.g., livestock, precious metals) began to be used as a medium of exchange.
  • These commodities served as a store of value, a unit of account, and a medium of exchange.

Development of Metallic Currency:

  • The use of precious metals like gold and silver became widespread due to their durability, divisibility, and portability.
  • This marked a significant step towards standardized currencies.

Rise of Fiat Money:

  • Governments began issuing paper money (fiat money) backed by their promise to convert it into precious metals.
  • This evolved into modern-day fiat currencies, which are not backed by any physical commodity.

Role of International Trade in Money Evolution:

  • International trade facilitated the spread of different forms of money across borders.
  • The demand for a stable and widely accepted medium of exchange for international transactions drove the development of more sophisticated monetary systems.

Modern Monetary System:

  • Today, the international monetary system is complex, involving various currencies, exchange rates, and international institutions (e.g., International Monetary Fund).

Mint vs. Minting

  • A mint is an industrial facility that manufactures coins for currency.
    • Early mints used hammered or cast coinage, producing hundreds or thousands of coins.
    • Modern mints manufacture coin dies in large numbers and produce billions of milled coins.
  • Minting, coining, or coinage is the process of manufacturing coins using a kind of stamping, the process used in both hammered coinage and milled coinage. This "stamping" process is different from the method used in cast coinage.

History of Philippine Currency

Pre-Colonial Period:

  • Barter System: Early Filipinos primarily used barter to exchange goods and services.
  • Use of Commodities: Certain goods like gold, silver, and cowrie shells were used as mediums of exchange.

Spanish Colonial Period (1521-1897):

  • Introduction of Spanish Currency: Spanish silver coins (pesos) became the dominant currency.
  • Trade with Spain: Philippine trade with Spain was conducted primarily using Spanish silver coins.

Revolutionary Period (1898-1899):

  • Various revolutionary notes and coins were issued.
  • BPI and PNB notes were also in circulation.

American Period (1900-1941):

  • Introduction of US Dollar: The US dollar became the official currency of the Philippines.
  • Trade with the US: Trade with the United States was facilitated by the use of the US dollar.

Japanese Occupation Period (1942-1945):

  • Japanese war notes were issued.
  • Guerilla notes were also in circulation.

Post-Independence:

  • Establishment of the Central Bank of the Philippines: The Central Bank was established in 1949 to regulate the country's monetary system.
  • Introduction of the Philippine Peso: The Philippine peso was reintroduced as the national currency.

Impact on International Trade:

  • Currency Fluctuations: Fluctuations in the exchange rate of the Philippine peso against other currencies can significantly impact the country's international trade competitiveness.
  • Foreign Exchange Reserves: The Central Bank maintains foreign exchange reserves to stabilize the peso and facilitate international trade.

Mobile Payments and Internet Payments

  • Mobile Payments: Transactions conducted using mobile devices (smartphones, tablets) like mobile money transfers, near-field communication (NFC) payments, and mobile wallets.
  • Internet Payments: Online transactions facilitated through the internet, including e-commerce, online banking, and digital wallets.

Evolution of Payment Systems:

  • From Barter to Cash to Digital: Tracing the historical evolution of payment systems.
  • Impact of Technology on Payment Systems: How technological advancements have revolutionized the way we pay.

Benefits of Mobile Payments in International Trade:

  1. Increased Financial Inclusion: Expanding access to financial services in developing economies.
  2. Reduced Transaction Costs: Lowering costs associated with traditional international money transfers.
  3. Improved Efficiency and Speed: Faster and more convenient transactions compared to traditional methods.
  4. Enhanced Security: Improved security features and fraud prevention mechanisms.
  5. Facilitating Cross-border Trade: Enabling seamless cross-border payments for businesses and individuals.

Challenges of Mobile Payments in International Trade

  • Interoperability Issues: Challenges in ensuring seamless cross-border transactions across different mobile payment platforms.
  • Regulatory Hurdles: Varying regulations and compliance requirements across different countries.
  • Security Concerns: Addressing security risks such as data breaches and cyberattacks.
  • Digital Divide: Ensuring equitable access to mobile payment services for all.

Types of Internet Payments:

  • Online Credit/Debit Card Payments: Utilizing credit and debit cards for online purchases.
  • Online Bank Transfers: Transferring funds directly from bank accounts to online merchants.
  • E-Wallets: Using digital wallets like PayPal, Alipay, and Google Pay for online transactions.
  • Blockchain and Cryptocurrency: Utilizing blockchain technology and cryptocurrencies for secure and transparent online payments.

Challenges of Internet Payments in International Trade

  • Cross-border Payment Processing: Challenges in processing payments across different currencies and jurisdictions.
  • Currency Exchange Rate Fluctuations: Impact of currency exchange rate fluctuations on international transactions.
  • Fraud and Security Risks: Addressing issues like online fraud, data breaches, and cyber attacks.
  • Regulatory Compliance: Navigating complex regulatory environments in different countries.

Virtual Currency

Defining Virtual Currencies:

  • Digital representations of value that can be used for payment or investment.
  • Virtual currency, or virtual money, is a digital currency that is largely unregulated, issued and usually controlled by its developers.

Key types:

  • Cryptocurrencies (like Bitcoin, Ethereum).
  • Stablecoins
  • Central Bank Digital Currencies (CBDCs).

Underlying Technologies:

  • Blockchain technology:
    • Decentralized ledger system ensuring security and transparency.
    • An advanced database mechanism that allows transparent information sharing within a business network.
  • Cryptography: Secure encryption methods for transactions.

Evolution of Virtual Currencies:

  • From Bitcoin to DeFi: Tracing the historical development and key milestones.