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Theory of Absolute Advantage Theory of Comparative Advantage Revealed Comparative Advantage Trade Policy Analysis: Tariffs, NTMs Trade Creation and Trade Diversion (FTA) Viners Model Case Study (Pakistan and India)
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Text books
An Introduction to International Economics: Kenneth A. Reinert New Perspectives on the World Economy Cambridge University Press Revised: June 23, 2011 2012 (Chapters # 1, 2, 3, 4, 5, and 6) Methodology for impact assessment of Free Trade Agreements, Michael G. Plummer, David Cheong, and Shintaro Hamanaka, 2010 Asian Development Bank
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Autarky Price
This situation is depicted in Figure 2.3. The intersections of the supply and demand curves determine the equilibrium prices of rice in the two markets. Since no trade is involved, these two prices are known in international economics as autarky prices.
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Limitations
It suggests the possibility that a country could not have an absolute advantage in anything, and therefore would have nothing to export at all. This, it turns out, is unlikely. The notion of the gains from trade also has its limits. It suggests that countries as a whole mutually gain from trade. It does not suggest, however, that everyone within a country will gain from trade.
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Assume that the two goods are consumed in the same fixed proportion as shown in the next diagram Allow supply conditions to differ Vietnam and Japan Let me draw two Production Possibility Frontiers (Figure 3.3)
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COMPARATIVE ADVANTAGE
Under perfect competition, opportunity costs are fully reflected in relative prices. The slope of a PPFs where the demand diagonal crosses it is the relative price of rice, Tangency line giving relative prices is flatter in Vietnam than in Japan. That is, the opportunity cost of rice is lower in Vietnam than in Japan.
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COMPARATIVE ADVANTAGE
This situation is depicted in Figure 3.4. The world price ratio here is depicted with dashed lines . The tangencies of these world price lines with the PPFs determine the new production points in Vietnam and Japan. In Vietnam, the movement involves an increase in the production of rice, while in Japan, this movement involves an increase in the production of motorcycles. This is known as specialization in production.
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COMPARATIVE ADVANTAGE
Look at Figure 3.5 (next slide), which removes the autarky points and autarky price lines. In Vietnam, production of rice exceeds consumption of rice, and the difference is exported Production of motorcycles, however, falls short of consumption of motorcycles, and this shortfall is imported
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Beginning with Belassa (1965), the standard practice is to examine actual trade flows of a country to understand what is known as revealed comparative advantage.
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The standard calculation of revealed comparative advantage measures how much a country is exporting a given good relative to its total trade, in comparison to the share of that good in world trade. Country i is said to have a "revealed comparative advantage" in a good when the share of that good in its exports is bigger than the share of that good in world exports
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Trade Policy Analyst should be able to assess, both qualitatively and quantitatively, the numerous impacts of government interventions in international trade. it is important for you to understand how these assessments are made
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Trade protection can be broadly classified as either tariffs or nontariff measures. A tariff is a tax on imports. It is a very common trade policy used by almost all countries.
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From the point of view of many trade policy analysts and the World Trade Organization (WTO), the ideal trading system would consist of only tariffs. Tariffs are seen as the most transparent kind of trade policy Least susceptible to political manipulation and corruption. The range of NTMs is limited only by the imaginations of policy makers
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Tax-like measure:
Anti-dumping duties (AD)
Tariff-like charges imposed on imports that are deemed by the imposing government to have been dumped or sold at less than fair value by the exporter.
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NTM
Tax-like measure
Temporary import surcharges
Extra import tariffs imposed in emergency circumstances of various kinds.
Variable levies
Import tariffs whose size depends on the price of the imported good. This is usually to help maintain a certain level of domestic price, particularly in agricultural sectors.
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NTM
Cost-increasing measures
Standards and technical regulations (STRs) or technical barriers to trade (TBTs)
A large set of measures including certification guidelines, performance mandates, testing procedures and labeling requirements designed to contribute to consumer safety, environmental protection, national security, product interoperability and other goals.
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NTM
Cost-increasing measures
Sanitary and Pphytosanitary (SPS) requirement
Technical barriers to trade in the agricultural arena designed to protect plant, animal and human health
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NTM
Cost-increasing measures
Customs procedures
Inspection and customs clearance procedures that can increase costs of imports and impose delays
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NTM
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NTM
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NTM
NTM
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EXAMPLE OF SPS
Requiring specific product or process criteria Requiring product to come from disease-free area Quarantine regulations Certification or inspection procedures Sampling and testing requirements Food safety packaging and labelling requirements Limitation on food additives, pesticide residue
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Trade creation is the displacement of less efficient national production in favor of more efficient partner-country production While trade diversion is the displacement of more efficient non-partner imports in favor of less efficient partner-country sourced imports.
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Viners Model
Viners model shows that the net welfare effect of an FTA on an importing country is ambiguous. If the partner country is the cheapest import source, then it would be easy to show that the FTA would only have a trade creation effect FTA would be unambiguously beneficial to the home country. Multiple sources of imports and changes in terms of trade are possible if the importing countrys demand is large enough to influence the prices at which foreign exporters supply their goods
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TRADE INDICATORS
Intraregional trade ratio Intraregional Trade Intensity Regional Trade Introversion Index Revealed Comparative Advantage Regional Orientation Complementarity Export Similarity
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RCA IND
Pharmaceutical = 14.9 Textile & Clothing = 15.1 Electronics = 4.8 Leather = 1.7 Automobile = 0.5
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Switching of Trade Arrangements for India from existing positive list to negative list (Case Study)
Problems with Existing Positive List Arrangement: Restricted Trade limits the potential of economic growth Adhoc arrangement --- Various lobbies played a role Inter-Industry Economic Frictions Contrary to International Commitments
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Data Source
UN Comtrade 6-Digit HS Code data. 8 Digit HS Code data was provided by TDAP. Software used for Calculating RCAs & BRCAs is Trade Sift
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Step-wise Procedure
1. 2. All products which India has not exported in year 2010 are deleted from the negative list.(No threat from India) We have then calculated Normalized RCAs and excluded those from negative list which are having negative NRCAs for Indian products. Products in which both countries are competitive and having a positive NRCA are further analyzed by BRCA and those products are excluded which have a BRCA of greater than 1. Pakistani Products having a negative NRCA or BRCA less than 1 are included in the negative list. Finally, We have used BRCA arrive at the 8 Digit HS code negative list.
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India Exporting ?
No (476)
Yes (2136)
Only those sector are analyzed that face potential threat. (2612)
India Exports
No (1442)
Safe List
Yes (694)
Pak Competitive? (NRCA>1)
No (397)
Negative List
477 TOTAL
No (80)
Safe List
Negative List
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