Foreign

Trade
Economic Development:
Lecture 13
Foreign Trade
Foreign trade is the exchange
of goods and services between
countries. However, the
dynamics of trade are highly
complicated as there are a lot
of risks involved, but the
reward to reap when it is a
success.
Foreign Trade
This economic activity started for centuries, even
before history was written. Early people exchange
goods for a different variety of products, we know it
as barter, which some of us are still doing nowadays,
especially during the time of pandemic, 2020 and
2021.
Foreign Trade
The Greek civilization and Roman Empires used to
trade with their nearby empires and so as the Chinese
(Middle Kingdom) to the world.
History of Foreign Trade
Mercantilism, which started
toward the end of seventeenth
century, valued balance of trade,
exports given to a foreign
country must, at any time,
exceed the imports, if not equal.
History of Foreign Trade
In the eighteenth century,
Adam Smith wrote a book,
The Wealth of Nations, the
time of liberalism emphasized
the role of specialized
production to supply the highly
increasing demand of
consumption.
History of Foreign Trade
This led to David Ricardo’s
theory of comparative
advantage, wherein each country
specializes in a particular product
or set of products and import
everything else for consumption.
History of Foreign Trade
The main factor that pushes international trade is a
comparative advantage, a concept by David
Ricardo. A country has a comparative advantage in
the production of goods and services if that
particular country can produce the same at a
lower opportunity cost than other countries.
History of Foreign Trade
In the year 1913, gold and other precious metals
were considered a medium of exchange; a lot of
countries considered it valuable and made it possible
to trade much easier despite the borders.
History of Foreign Trade
The League of Nations organized the World
Economic Conference in 1927, masterminded the
multilateral trade agreement between nations, and set
the regulations to keep up with the ever-evolving
international trade.
History of Foreign Trade
Today, profitability is maximized through efficient
production and distribution, as well as exchange,
using comparative advantage and regulations that are
in placer to ensure seamless business transactions
beyond borders.
History of Foreign Trade
Governments always sought to manipulate foreign
exchange activities to favor their own economy,
which is just reasonable.
Concept of Foreign Trade
Household and firms around
the world constantly change
their demand for goods and
services that may be
available in their country;
there is a need to acquire
these products in exchange
for its own capital, goods,
and services.
Concept of Foreign Trade
In fact, in the computation of the GDP, we include a
component of international trade that is net exports,
the difference between exportation and importation,
and the balance of payments.
Concept of Foreign Trade
When a country exports more
than its imports, there is a
trade surplus, while when
there are more imports than
exports, there is a trade deficit.
Concept of Foreign Trade
The balance between all
payments out of a country within
a given period and all payments
into the country is an outgrowth
of the mercantilist theory of
balance of trade.
Concept of Foreign Trade
Balance of payments includes all
payments between a country and its
trading partners and is made up of
the balance of trade, private foreign
loans and their interests, loans and
grants by government or
international organizations, and
movements of gold.
Concept of Foreign Trade
For example, the Philippines is one
of the leading suppliers of business
process outsourcing services in the
world. We may have more skillful
individuals who can do the job in
terms of language or technical
knowledge, specifically in voice-
based services, for example, call
centers.
Concept of Foreign Trade
Another concept in international trade is where the
foreign currency is being traded and that is what we
call the foreign exchange market.
Concept of Foreign Trade
There is a currency appreciation when a currency
increases in value compared to another currency,
while there is a currency devaluation when a
currency decreases compared to another currency.
Concept of Foreign Trade
The term “dual exchange rate” refers to a situation
in which more than one exchange rate applies
between one currency and another.
Concept of Foreign Trade
The term arises most often when
a country’s authorities
establish one currency rate for
certain transactions involving
foreign exchange/currency and
a second rate governing other
transactions.
Concept of Foreign Trade
Many countries in Europe and the developing world
use a fixed exchange rate for commercial (current
account) transactions and another rate, either
fixed or floating for other (e.g., financial account)
transactions.
Concept of Foreign Trade
A prevailing price of a good in the
international market is called the
world price. This can be the basis
of the decision to import and export
when the domestic price of a good
is higher or lower than the world
price, hence, maximizing the cost to
acquire the specific good.
Gains from Trade

Production Product
Competition
Costs Variation

Surplus Market
Market Efficiency
Production Costs
Raw materials in certain countries are cheaper than
the others making the production costs lower.
Production Costs
For example, China can
maximize the economies of
scale of the mining and light
industries thereby lowering the
production costs making the
price that is passed on to the
consumers comparatively low.
Production Costs
It is true however, that not all
industries in China are able to
optimize economies of scale, and
it is currently going down
according to the same study.
Competition
The liberalization of trade and investment stimulates
healthy competition.
Competition
There are two main reasons for an examination of the
relationship between trade and competition.

There is an increasing recognition that the benefits of

international trade liberalization may be negated by domestic
measures inimical to an open, competitive market
environment.

There are cases where the use of either trade policy or

competition policy could lead to differing results, depending
on which policy was given priority.
Competition
In a highly competitive open
market, prices are low because
these business entities tend to
compete with each other’s
prices and quality of products.
Competition
In a monopolistic market,
prices are at the discretion of the
producer as the sole seller of the
product, which makes it more
expensive for the buyers.
Competition
Moreover, the production processes become more
efficient, always innovating on new ways to produce
the same products at a much cheaper cost, thereby
improving the existing processes and achieving the
optimized result.
Competition
It may also be true that in pursuit of looking for more
efficient ways to produce the product, they may
produce with eco-friendly technique, such as
lowering consumption of non-renewable energy.
Product Variation
Some people in less developed countries enjoy the
benefits of electronic devices and machines like
computers, mobile phones, home appliances, etc.,
even if they are not producing them because of
foreign trading. This somehow makes life for them
easier and increases their standard of living.
Product Variation
In addition, products that are
available depending on the
season may be accessed any
time of the year as they can
be supplied by a country that is
not affected by seasonal
changes.
Surplus Market
This benefit is particularly for
those producer countries of
agricultural products or
other perishable goods that
may have surpluses and
would be willing to exchange
these for other products that
are useful to them.
Surplus Market
For example, a surplus of tomatoes in Indonesia may
supply the deficiency of the same good in Mongolia,
where tomatoes are not grown year-round because of
the weather. There is almost always a country that
needs the surplus products of another country.
Market Efficiency
Seasonal fluctuations of products affect some
companies that may lose the opportunity to do
business when their product is in low demand.
Market Efficiency
For example, the demand for
winter clothes. There must be
at least one country that needs
this good, even if it is not
winter in the home country, like
the weather seasons of the
United Kingdom and
Australia or South Africa.
Market Efficiency
It may be summer in the UK but winter for those
countries and be demanding for warm clothing. This
manages the risks of losses of seasonal fluctuations
and enjoys profits because of international trade.
Risks of Foreign Trade

Buyer Supplier
Risks Risks

Third-
Party Risks
Buyer Risks
It may be challenging to start international trade with
the first client, trust will always be an issue as the
possibility to be scammed is great.
Supplier Risks
Reputation may be compromised as two factors must
always be met, the volume and the distance of
delivery. Hence, the quality as well as the quantity of
the products must always be met, agreement to
always be adhered upon.
Third-Party Risks
Failure to honor buyer-seller
agreements is one of the risks of
foreign trade. In cases of losses of
products in transit, the believed
insurance may not cover the
expenses.
Effects of Foreign Trade
World price is the price of the product set to other
countries except for the price in own country.
Effects of Foreign Trade
We tend to export goods and services with domestic
prices lower than the world price and import goods
and services where the local price is higher than the
world price.
Effects of Foreign Trade
In the imposition of tax on
import, known as tariff, the
world price increases by the
amount of tariff. It changes the
equilibrium demand and supply.
Effects of Foreign Trade
For the consumer side, as the price
increases, the quantity demanded
after the tariff decreases, whereas
for the domestic supplier side, as
the price increases because of the
tariff, the quantity supply also
increases.
Effects of Foreign Trade
The importation is the
difference between the quantity
demanded and quantity
supplied after the imposition of
tax. This imposed tax may be
used by the government to
finance public goods and
services.
Effects of Foreign Trade
A tariff has implications that surely affect the welfare,
although it may not be true always that it benefits
both domestic consumers and suppliers.
Effects of Foreign Trade
Tax basically increase the prices to the
consumers, hence demand decreases,
and this makes a deadweight loss, an
economic inefficiency as tariff creates
a new equilibrium point.
Effects of Foreign Trade
It also diverts production from foreign producers who
may be using low-cost production to domestic
producers that may be using high-cost production and
this wastes resources.
Any Questions?