International trade

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International trade is the exchange of goods and services across international

boundaries or territories.[1] In most countries, it represents a significant share of GDP.
While international trade has been present throughout much of history (see Silk Road,
Amber Road), its economic, social, and political importance has been on the rise in recent
centuries. Industrialization, advanced transportation, globalization, multinational
corporations, and outsourcing are all having a major impact on the international trade
system. Increasing international trade is crucial to the continuance of globalization.
International trade is a major source of economic revenue for any nation that is
considered a world power. Without international trade, nations would be limited to the
goods and services produced within their own borders.

International trade is also a branch of economics, which, together with international

finance, forms the larger branch of international economics.

Contents
[hide]

• 1 Global Trade Theory

o 1.1 Ricardian model
o 1.2 Heckscher-Ohlin model
o 1.3 Specific Factors
o 1.4 New Trade Theory
o 1.5 Gravity model
• 2 Regulation of international trade
• 3 Risks in international trade
o 3.1 Economic risks
o 3.2 Political risks
• 4 See also
• 5 Footnotes
• 6 External links

o 6.1 Data

[edit] Global Trade Theory

Top 20 Exporters and Importers in 2006

Several different models have been proposed to predict patterns of trade and to analyze
the effects of trade policies such as tariffs.

[edit] Ricardian model

Main article: Ricardian model

The Ricardian model focuses on comparative advantage and is perhaps the most
important concept in international trade theory. In a Ricardian model, countries specialize
in producing what they produce best. Unlike other models, the Ricardian framework
predicts that countries will fully specialize instead of producing a broad array of goods.
Also, the Ricardian model does not directly consider factor endowments, such as the
relative amounts of labor and capital within a country.

[edit] Heckscher-Ohlin model

Main article: Heckscher-Ohlin model

The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of

basic comparative advantage. Despite its greater complexity it did not prove much more
accurate in its predictions. However from a theoretical point of view it did provide an
elegant solution by incorporating the neoclassical price mechanism into international
trade theory.

The theory argues that the pattern of international trade is determined by differences in
factor endowments. It predicts that countries will export those goods that make intensive
use of locally abundant factors and will import goods that make intensive use of factors
that are locally scarce. Empirical problems with the H-O model, known as the Leontief
paradox, were exposed in empirical tests by Wassily Leontief who found that the United
States tended to export labor intensive goods despite having a capital abundance.

[edit] Specific Factors

In this model, labour mobility between industries is possible while capital is immobile
between industries in the short-run. Thus, this model can be interpreted as a 'short run'
version of the Hecksche-Ohlin model. The specific factors name refers to the given that
in the short-run specific factors of production, such as physical capital, are not easily
transferable between industries. The theory suggests that if there is an increase in the
price of a good, the owners of the factor of production specific to that good will profit in
real terms. Additionally, owners of opposing specific factors of production (i.e. labour
and capital) are likely to have opposing agendas when lobbying for controls over
immigration of labour. Conversely, both owners of capital and labour profit in real terms
from an increase in the capital endowment. This model is ideal for particular industries.
This model is ideal for understanding income distribution but awkward for discussing the
pattern of trade!

[edit] New Trade Theory

Main article: New Trade Theory

New Trade theory tries to explain several facts about trade, which the two main models
above have difficulty with. These include the fact that most trade is between countries
with similar factor endowment and productivity levels, and the large amount of
multinational production (ie foreign direct investment) which exists. In one example of
this framework, the economy exhibits monopolistic competition, and increasing returns to
scale.

[edit] Gravity model

Main article: Gravity model of trade

The Gravity model of trade presents a more empirical analysis of trading patterns rather
than the more theoretical models discussed above. The gravity model, in its basic form,
predicts trade based on the distance between countries and the interaction of the
countries' economic sizes. The model mimics the Newtonian law of gravity which also
considers distance and physical size between two objects. The model has been proven to
be empirically strong through econometric analysis. Other factors such as income level,
diplomatic relationships between countries, and trade policies are also included in
expanded versions of the model.

[edit] Regulation of international trade

Traditionally trade was regulated through bilateral treaties between two nations. For
centuries under the belief in Mercantilism most nations had high tariffs and many
restrictions on international trade. In the 19th century, especially in Britain, a belief in
free trade became paramount. This belief became the dominant thinking among western
nations since then despite the acknowledgement that adoption of the policy coincided
with the general decline of Great Britain. In the years since the Second World War,
controversial multilateral treaties like the GATT and World Trade Organization have
attempted to create a globally regulated trade structure. These trade agreements have
often resulted in protest and discontent with claims of unfair trade that is not mutually
beneficial.
Free trade is usually most strongly supported by the most economically powerful nations,
though they often engage in selective protectionism for those industries which are
strategically important such as the protective tariffs applied to agriculture by the United
States and Europe. The Netherlands and the United Kingdom were both strong advocates
of free trade when they were economically dominant, today the United States, the United
Kingdom, Australia and Japan are its greatest proponents. However, many other countries
(such as India, China and Russia) are increasingly becoming advocates of free trade as
they become more economically powerful themselves. As tariff levels fall there is also an
increasing willingness to negotiate non tariff measures, including foreign direct
investment, procurement and trade facilitation. The latter looks at the transaction cost
associated with meeting trade and customs procedures.

Traditionally agricultural interests are usually in favour of free trade while manufacturing
sectors often support protectionism. This has changed somewhat in recent years,
however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan,
are chiefly responsible for particular rules in the major international trade treaties which
allow for more protectionist measures in agriculture than for most other goods and
services.

During recessions there is often strong domestic pressure to increase tariffs to protect
domestic industries. This occurred around the world during the Great Depression. Many
economists have attempted to portray tariffs as the underlining reason behind the collapse
in world trade that many believe seriously deepened the depression.

The regulation of international trade is done through the World Trade Organization at the
global level, and through several other regional arrangements such as MERCOSUR in
South America, NAFTA between the United States, Canada and Mexico, and the
European Union between 27 independent states. The 2005 Buenos Aires talks on the
planned establishment of the Free Trade Area of the Americas (FTAA) failed largely due
to opposition from the populations of Latin American nations. Similar agreements such as
the MAI (Multilateral Agreement on Investment) have also failed in recent years.

[edit] Risks in international trade

The risks that exist in international trade can be divided into two major groups:

[edit] Economic risks

• Risk of insolvency of the buyer,

• Risk of protracted default - the failure of the buyer to pay the amount due within
six months after the due date
• Risk of non-acceptance
• Surrendering economic sovereignty
• Risk of Exchange rate

[edit] Political risks

 • Risk of cancellation or non-renewal of export or import licences
• War risks
• Risk of expropriation or confiscation of the importer's company
• Risk of the imposition of an import ban after the shipment of the goods
• Transfer risk - imposition of exchange controls by the importer's country or
foreign currency shortages
• Surrendering political sovereignty

Home
Decide whether you want to sell
directly to foreign buyers or indirectly Contact Us
through an export agent."
Site Contents
Summary of Various Indirect Exporting Secrets of International Trading

1. Export Merchant - Handle a wide variety of APEC The EEC InCoTerms 2000
products.
Mostly buys and sells on their own. Exporting Starts Here

2. Export Agent/Broker - Negotiates export sales for a Export Marketing Strategies

commission.
How to manage Export Promotion?
3. Foreign Resident Buyer - Buys for his principal
abroad. Documentation for Exporting

4. Manufacturer - Exports own products as well as How to Draft and Agency Agreement?
related but non-competitive products.
Export Trade Barriers & Trade Blocks
5. Export Consortium - Undertakes large projects
abroad.
Getting Paid for Exporting

Export Insurance

How to Develop an Export Market?

1/9 2/9 3/9 4/9 5/9 6/9 7/9
Procedures for INDIRECT Exporting 8/9 9/9

Prepare a short list of trading house that might be How to Conduct Export Research?
interested in handling your product.
How to calculate Costing for Export?
1. Get references and recommendations about them.
Hazards of Export Packing & Shipping
2. Ask for information for each trading house,
explaining your Export Shipment and Transportation
purpose.
4 P's of Business Correspondence
3. Visit the most promising to find out what they may
be
About Pallet a transportable platform
able to do for your product.
4. Keep in mind which foreign markets you wish to
penetrate
first.

5. Reserve those foreign markets that you wish to export to

directly.

6. Supply trading house selected by you with information

about your company products.

7. Negotiate an agreement whereby the trading house buys

directly from you or acts as your export agent covering
prices, commissions, export support, orders, etc.

8. Maintain close contact with the trading house, and

monitoring its performance.

Summary of Various Direct Exporting

1. Direct to Final Buyer Abroad - Manufacturer sells directly to buyer

abroad. No middlemen. Needs high degree of marketing skills.

2. Foreign Distributor - Buys and sells on own account.

He makes all the marketing decisions.

3. Foreign Agent - Sell your product on commission.

4. Foreign Broker - Handles primarily commodities and

deals in large volume, buying and selling for a fee.

5. Foreign Trade Organization - Specialized import agencies

of socialist and some non-socialist countries.

6. Licensing Agreement - Exporter may seek royalty in exchanging for licensing

a foreign firm to manufacture his product abroad, use his brand name,
technology, etc.

7. Joint Venture - Exporter may enter into a partnership arrangement with a

foreign firm to produce and market jointly in the foreign country

Procedures for DIRECT Exporting

Decide whether you want to sell directly to final foreign buyers yourself or
 through an import agent or to a foreign distributor located in the target market

1. Prepare literature about your company and products that

would be suitable for your exporting activities.

2. If selling direct to final foreign buyers yourself, arrange for promotion

campaign (direct mail, trade shows, advertising foreign visits, The Internet
etc.) and develop a list of sales leads.

3. Begin sending letters, etc. to prospective customers and

following up sales lead.

4. If selling through agent or distributor, begin search for

suitable agent or distributor in each foreign market.

5. Select agent or distributor

6. Negotiate and sign agency or distributorship agreement.

7. Fill orders, as and when received.

8. Monitor performance of agent or distributor

Economic And Monetary Union

Development of a unitary economy across the member states of European Union (EU) with a single
currency, single market, and harmonized interest and taxation rates. In June 1989, the European Council
decided to initiate moves towards EMU from 1 July 1990, on the basis of a report by Jacques Delors, the
then president of the European Commission. The Maastricht Treaty then set out a timetable and criteria for
the achievement of EMU and agreed to the future establishment of a single European currency, the euro.

The first stage of EMU lasted until 31 December 1993, concentrating on the liberalization of capital
movements, the closer coordination of economic policies by member states, and closer cooperation
between central banks. The second stage, from 1 January 1994, included the establishment of a European
Monetary Institute (since superseded by the European Central Bank) to further strengthen national bank and
monetary policy coordination. In December 1995, the European Council confirmed that the third stage of
EMU, the introduction of the euro, would begin on 1 January 1999. Participating member states had to
satisfy certain convergence criteria on inflation rates, government deficit levels, currency fluctuation margins,
and interest rates. In May 1998, 11 of the then 15 member states agreed take part in the single currency
from its launch date. The UK, Denmark, and Sweden opted out, and Greece initially failed to meet the
economic convergence criteria, but joined on 1 January 2001.

Economic and Monetary Union of the

European Union
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In economics, a monetary union is a situation where several countries have agreed to
share a single currency among them. The European Economic and Monetary Union
(EMU) consists of three stages coordinating economic policy and culminating with the
adoption of the euro, the EU's single currency. All member states of the European Union
participate in the EMU. Fifteen member states of the European Union have entered the
third stage and have adopted the euro as their currency. The United Kingdom, Denmark
and Sweden have not accepted the third stage and the three EU members still use their
own currency today.

Under the Copenhagen criteria, it is a condition of entry for states acceding to the EU that
they be able to fulfil the requirements for monetary union within a given period of time.
The 10 new countries that acceded to the European Union in 2004 all intend to join third
stage of the EMU in the next ten years, though the precise timing depends on various
economic factors. Similarly, those countries who are currently negotiating for entry will
also take the euro as their currency in the years following their accession. (See
Enlargement of the European Union.) On the 1st of January 2008 Cyprus and Malta
joined the EMU.

Prior to adopting the euro, a member state has to have its currency in the European
Exchange Rate Mechanism (ERM II) for two years. Denmark, Estonia, Latvia, Lithuania,
and Slovakia are the current participants in the exchange rate mechanism.

EMU is sometimes misinterpreted to mean European Monetary Union.

Contents
[hide]

• 1 History of the EMU

o 1.1 Stage One: 1 July 1990 to 31 December 1993
o 1.2 Stage Two: 1 January 1994 to 31 December 1998
o 1.3 Stage Three: 1 January 1999 and continuing
• 2 Criticism
• 3 See also
• 4 References

• 5 External links

[edit] History of the EMU

First ideas of an economic and monetary union in Europe were raised well before
establishing the European Communities. For example, already in the League of Nations,
Gustav Stresemann asked in 1929 for a European currency (Link) against the background
of an increased economic division due to a number of new nation states in Europe after
WWI.
A first attempt to create an economic and monetary union between the members of the
European Communities goes back to an initiative by the European Commission in 1969,
which set out the need for "greater co-ordination of economic policies and monetary
cooperation" (Barre Report), which was followed by the decision of the Heads of State or
Government at their summit meeting in The Hague in 1969 to draw up a plan by stages
with a view to creating an economic and monetary union by the end of the 1970s.

On the basis of various previous proposals, an expert group chaired by Luxembourg’s

Prime Minister and Finance Minister, Pierre Werner, presented in October 1970 the first
commonly agreed blueprint to create an economic and monetary union in three stages (
Werner plan). The project experienced serious setbacks from the crises arising from the
non-convertibility of the US dollar into gold in August 1971 (i.e. the Bretton Woods
System) and from rising oil prices in 1972. An attempt to limit the fluctations of
European currencies, using a snake in the tunnel, failed.

The debate on EMU was fully re-launched at the Hanover Summit in June 1988, when an
ad hoc committee (Delors Committee) of the central bank governors of the twelve
member states, chaired by the President of the European Commission, Jacques Delors,
was asked to propose a new timetable with clear, practical and realistic steps for creating
an economic and monetary union[1]. This way of working was derived from the Spaak
method.

The Delors report of 1989 set out a plan to introduce the EMU in three stages and it
included the creation of institutions like the European System of Central Banks (ESCB),
which would become responsible for formulating and implementing monetary policy.

The three stages for the implementation of the EMU were the following:

[edit] Stage One: 1 July 1990 to 31 December 1993

• On 1 July 1990, exchange controls were abolished, thus capital movements were
completely liberalised in the European Economic Community.
• The Treaty of Maastricht in 1992 establishes the completion of the EMU as a
formal objective and sets a number of economic convergence criteria, concerning
the inflation rate, public finances, interest rates and exchange rate stability.
• The treaty enters into force on the 1 November 1993.

[edit] Stage Two: 1 January 1994 to 31 December 1998

• The European Monetary Institute is established as the forerunner of the European

Central Bank, with the task of strengthening monetary cooperation between the
member states and their national banks, as well as supervising ECU banknotes.
• On 16 December 1995, details such as the name of the new currency (the euro) as
well as the duration of the transition periods are decided.
• On 16-17 June 1997, the European Council decides at Amsterdam to adopt the
Stability and Growth Pact, designed to ensure budgetary discipline after creation
 of the euro, and a new exchange rate mechanism (ERM II) is set up to provide
stability between the euro and the national currencies of countries that haven't yet
entered the eurozone.
• On 3 May 1998, at the European Council in Brussels, the 11 initial countries that
will participate in the third stage from 1 January 1999 are selected.
• On 1 June 1998, the European Central Bank (ECB) is created, and in 31
December 1998, the conversion rates between the 11 participating national
currencies and the euro are established.

[edit] Stage Three: 1 January 1999 and continuing

• From the start of 1999, the euro is now a real currency, and a single monetary
policy is introduced under the authority of the ECB. A three-year transition period
begins before the introduction of actual euro notes and coins, but legally the
national currencies have already ceased to exist.
• On 1 January 2001, Greece joins the third stage of the EMU.
• The euro notes and coins are introduced in January 2002.
• On 1 January 2007, Slovenia joins the third stage of the EMU.
• On 1 January 2008, Cyprus and Malta join the third stage of the EMU.

[edit] Criticism
There have been debates as to whether the Eurozone countries constitute an optimum
currency area. By contrast with other single currency areas such as the United States, the
Eurozone seems to be lacking the same degree of homogenity with regard to a common
language, history or culture.

Additionally, there is a significant amount of economic diversity within the economies of

the Eurozone. As a result, Eurozone interest rates have to be set for both low-growth and
high-growth Euro members. Monetary policy (setting of interest rates to influence
economic activity) is a major economic tool used by governments. Economies operating
according to the Juglar Business Cycle perform best under different monetary policies if
they are not in sync, so it has been argued that a "one-size fits all" monetary policy could
not work.

To enable true free movement of goods and capital, significant harmonisation and
opening-up of economies would be necessary, but these aims are proving difficult to
implement in the real world.

[edit] See also