TRADE
What is TRADE?
• The voluntary exchange of
goods and services among
people and countries.
• Trade and voluntary exchange
occur when buyers & sellers
freely and willingly engage in
market transactions.
• When trade is voluntary and
non-fraudulent, both parties
benefit and are better off after
the trade than they were before
the trade.
Meaning and Nature
• Trade refers to buying and selling of
goods and services for money or
money's worth. It involves transfer
or exchange of goods and services
for money or money's worth. The
manufacturers or producer produces
the goods, then moves on to the
wholesaler, then to retailer and
finally to the ultimate consumer.
• Trade is essential for satisfaction of
human wants, Trade is conducted
not only for the sake of earning
profit; it also provides service to the
consumers.
Meaning and Nature
• Trade is an important social activity
because the society needs uninterrupted
supply of goods forever increasing and
ever changing but never ending human
wants.
• Trade has taken birth with the beginning
of human life and shall continue as long
as human life exists on the earth. It
enhances the standard of living of
consumers.
• Thus we can say that trade is a very
important social activity
Different Types of Trade
Trade
Home/
Domestic
Trade
Wholesale
Trade
Foreign
Trade
Retail
Trade
Import
Trade
Trade can be divided into following two types:
1. Internal or Home or Domestic trade
2. External or Foreign or International trade
Export
Trade
Entrepot
Trade
Why do countries trade?
• Countries trade with each other when, on
their own, they do not have the resources, or
capacity to satisfy their own needs and
wants. By developing and exploiting their
domestic scarce resources, countries can
produce a surplus, and trade this for the
resources they need.
•
Clear evidence of trading over long distances
dates back at least 9,000 years, though long
distance trade probably goes back much
further to the domestication of pack animals
and the invention of ships.
•
Today, international trade is at the heart of
the global economy and is responsible for
much of the development and prosperity of
the modern industrialised world.
Why do countries trade?
•
Goods and services are likely to be
imported from abroad for several
reasons:
1. Imports may be cheaper, or of better
quality.
2. They may also be more easily available
or simply more appealing than locally
produced goods
3. No local alternatives exist, and
importing is essential. This is highlighted
today in the case of Japan, which has no
oil reserves of its own, yet it is the
world’s fourth largest consumer of oil,
and must import all it requires.
Two Fundamental Principles in the Production of
Goods and Services.
•
The production of goods and services in countries that
need to trade is based on two fundamental principles,
first analysed by Adam Smith in the late 18thCentury
(in The Wealth of Nations, 1776), these being
the division of labour and specialisation.
Division of labour
•
In its strictest sense, a division of labour means
breaking down production into small, interconnected
tasks, and then allocating these tasks to different
workers based on their suitability to undertake the task
efficiently. When applied internationally, a division of
labour means that countries produce just a small range
of goods or services, and may contribute only a small
part to finished products sold in global markets. For
example, a bar of chocolate is likely to contain many
ingredients from numerous countries, with each
country contributing, perhaps, just one ingredient to
the final product.
Specialization
• Specialisation is the second fundamental principle associated with trade, and
results from the division of labour. Given that each worker, or each producer, is
given a specialist role, they are likely to become efficient contributors to the
overall process of production, and to the finished product. Hence, specialisation
can generate further benefits in terms of efficiency and productivity.
• Specialisation can be applied to individuals, firms, machinery and technology,
and to whole countries. International specialisation is increased when countries
use their scarce resources to produce just a small range of products in high
volume. Mass production allows a surplus of good to be produced, which can
then be exported. This means that goods and resources must be imported from
other countries that have also specialised, and produced surpluses of their
own.
Specialization
• When countries specialise they are likely to become
more efficient over time. This is partly because a country's
producers will become larger and exploit economies of scale.
Faced by large global markets, firms may be encouraged to
adopt mass production, and apply new technology. This can
provide a country with a price and non-price advantage over
less specialised countries, making it
increasingly competitive and improving its chances of exporting
in the future.
The advantages of trade
1. The exploitation of a
country's comparative advantage, which
means that trade encourages a country to
specialise in producing only those goods
and services which it can produce more
effectively and efficiently, and at the
lowest opportunity cost.
2. Producing a narrow range of goods and
services for the domestic and export
market means that a country can produce
in at higher volumes, which provides
further cost benefits in terms
of economies of scale.
3. Trade increases competition and lowers
world prices, which provides benefits to
consumers by raising the purchasing
power of their own income, and leads a
rise in consumer surplus.
The advantages of trade
4. Trade also breaks down
domestic monopolies,
which face competition from more
efficient foreign firms.
5. The quality of goods and services is likely
to increase as competition encourages
innovation, design and the application of
new technologies. Trade will also
encourage the transfer of
technology between countries.
6. Trade is also likely to
increase employment, given
that employment is closely related to
production. Trade means that more will
be employed in the export sector and,
through the multiplier process,
more jobs will be created across the
whole economy.
The disadvantages of trade
1.
2.
3.
Trade can lead to over-specialisation, with workers
at risk of losing their jobs should world demand fall
or when goods for domestic consumption can be
produced more cheaply abroad. Jobs lost through
such changes cause severe structural
unemployment. The recent credit crunch has
exposed the inherent dangers in over-specialisation
for the UK, with its reliance on its financial
services sector.
Certain industries do not get a chance to grow
because they face competition from more
established foreign firms, such as new infant
industries which may find it difficult to establish
themselves.
Local producers, who may supply a unique product
tailored to meet the needs of the domestic market,
may suffer because cheaper imports may destroy
their market. Over time, the diversity of output in an
economy may diminish as local producers leave the
market.
Brief Overview Of Neoliberalism’s History: How Did It Develop?
Free Markets Were Not Natural. They Were Enforced
• The modern system of free trade, free
enterprise and market-based economies,
actually emerged around 200 years ago, as
one of the main engines of development for
the Industrial Revolution.
• In 1776, British economist Adam Smith
published his book, The Wealth of Nations.
Adam Smith, who some regard as the father
of modern free market capitalism and this
very influential book, suggested that for
maximum efficiency, all forms of
government interventions in economic
issues should be removed and that there
should be no restrictions or tariffs on
manufacturing and commerce within a
nation for it to develop.
What is NEOLIBERALISM?
• Neoliberalism, in theory, is essentially about
making trade between nations easier. It is
about freer movement of goods, resources
and enterprises in a bid to always find
cheaper resources, to maximize profits and
efficiency.
• To help accomplish this, neoliberalism
requires the removal of various controls
deemed as barriers to free trade, such as:
– Tariffs
– Regulations
– Certain standards, laws, legislation and
regulatory measures
– Restrictions on capital flows and
investment
• The goal is to be able to to allow the free market to naturally balance itself
via the pressures of market demands; a key to successful market-based
economies.
• As summarized from What is “Neo-Liberalism”? A brief definition for
activists by Elizabeth Martinez and Arnoldo Garcia from Corporate Watch,
the main points of neoliberalism includes:
– The rule of the market — freedom for capital, goods and services,
where the market is self-regulating allowing the “trickle down” notion
of wealth distribution. It also includes the deunionizing of labor forces
and removals of any impediments to capital mobility, such as
regulations. The freedom is from the state, or government.
– Reducing public expenditure for social services, such as health and
education, by the government
– Deregulation, to allow market forces to act as a self-regulating
mechanism
– Privatization of public enterprise (things from water to even the
internet)
– Changing perceptions of public and community good to individualism
and individual responsibility.
•
•
Overlapping the above is also what Richard Robbins, in his
book, Global Problems and the Culture of Capitalism (Allyn
and Bacon, 1999), summarizes (p.100) about some of the
guiding principles behind this ideology of neoliberalism:
– Sustained economic growth is the way to human
progress
– Free markets without government “interference”
would be the most efficient and socially optimal
allocation of resources
– Economic globalization would be beneficial to everyone
– Privatization removes inefficiencies of public sector
– Governments should mainly function to provide the
infrastructure to advance the rule of law with respect
to property rights and contracts.
At the international level then we see that this additionally
translates to:
– Freedom of trade in goods and services
– Freer circulation of capital
– Freer ability to invest
Rooted In Mercantilism
•
•
•
Adam Smith’s work did, however, expose the previous fraud that was the mercantilist
system, which enriched the imperial powers at the expense of others. This mercantilism
had its roots in the Middle and Dark Ages of Europe, many hundreds of years earlier and
also parallels various methods used by empires throughout history (including today) to
control their peripheries and appropriate wealth accordingly. Furthermore, as J.W. Smith
argues, even though it is claimed to be Adam Smith free trade, neoliberalism was and is
mercantilism dressed up with more friendly rhetoric, while the reality remains the same
as the mercantilist processes over the last several hundred years:
The powerful throughout the past centuries not only claimed an excessive share of the
wealth of nature which was properly shared by all within the community, through the
unequal trades of mercantilism they claimed an excessive share of the wealth on the
periphery of their trading empires. Adam Smith describes mercantilism for us:
[Mercantilism’s] ultimate object… is always the same, to enrich the country [city or
state] by an advantageous balance of trade. It discourages the exportation of the
materials of manufacture [tools and raw material], and the instruments of trade, in
order to give our own workmen an advantage, and to enable them to undersell those of
other nations [cities] in all foreign markets: and by restraining, in this manner, the
exportation of a few commodities of no great price, it proposes to occasion a much
greater and more valuable exportation of others. It encourages the importation of the
materials of manufacture, in order that our own people may be enabled to work them
up more cheaply, and thereby prevent a greater and more valuable importation of the
manufactured commodities.
•
•
•
William Appleman Williams describes mercantilism at its zenith: “The world was defined as
known and finite, a principle agreed upon by science and theology. Hence the chief way for a
nation to promote or achieve its own wealth and happiness was to take them away from
some other country.”
When the injustice of mercantilism was understood, it became too embarrassing and was
replaced by the supposedly just Adam Smith free trade. But free trade as practiced by Adam
Smith neo-mercantilists was far from fair trade. Adam Smith unequal free trade is little more
than a philosophy for the continued subtle monopolization of the wealth-producing-process,
largely through continued privatization of the commons of both an internal economy and the
economies of weak nations on the periphery of trading empires. So long as weak nations
could be forced to accept the unequal trades of Adam Smith free trade, they would be
handing their wealth to the imperial-centers-of-capital of their own free will. In short, Adam
Smith free trade, as established by neo-mercantilists, was only mercantilism hiding under the
cover of free trade.
— J.W. Smith, Cooperative Capitalism; A Blueprint for Global Peace and Prosperity, (Quality
Books, Inc, 2003), pp.4-5
Colonialism And Imperialism Needed To Succeed
•
•
Free trade formed the basis of free enterprise for
capitalists and up until the Great Depression of the
1930s was the primary economic theory followed in
the United States and Britain. But from a global
perspective, this free trade was accompanied by
geopolitics making it look more like mercantilism.
For both these nations (as well as others) to
succeeded and remain competitive in the
international arena, they had a strong foundation of
imperialism, colonialism and subjugation of others
in order to have access to the resources required to
produce such vast wealth. As J.W. Smith notes
above, this was hardly the free trade that Adam
Smith suggested and it seemed like a continuation
of mercantilist policies.
However, even during its prevalent times before the
Second World War, neoliberalism had already
started to show signs of increasing disparities
between rich and poor.
Colonialism And Imperialism Needed To Succeed
•
•
Because of the Great Depression in the 1930s, an economist, John Maynard
Keynes, suggested that regulation and government intervention was actually
needed in order to provide more equity in development. This led to the
“Keynesian” model of development and after World War II formed the foundation
for the rebuilding of the U.S-European-centered international economic system.
The Marshall Plan for Europe helped reconstruct it and the European nations saw
the benefits of social provisions such as health, education and so on, as did the U.S.
under President Roosevelt’s New Deal.
In fact, the Bretton Woods Institutions (the International Monetary Fund (IMF) and
World Bank) were actually designed with Keynesian policies in mind; to help
provide international regulation and control of capital. As Susan George notes,
“when these institutions were created at Bretton Woods in 1944, their mandate
was to help prevent future conflicts by lending for reconstruction and development
and by smoothing out temporary balance of payments problems. They had no
control over individual government’s economic decisions nor did their mandate
include a license to intervene in national policy.” This is very different from what
they are doing today.
•
•
•
•
As European and American economies grew, they needed to continue expansion to maintain
the high standards of living that some elites were attaining in those days. This required
holding on to, and expanding colonial territories in order to gain further access to the raw
materials and resources, as well exploiting cheap labor. Those who resisted were often met
with brutal repression or military interventions. This is not a controversial perception. Even
U.S. President Woodrow Wilson recognized this in the early part of the 20th century:
Since trade ignores national boundaries and the manufacturer insists on having the world as a
market, the flag of his nation must follow him, and the doors of the nations which are closed
against him must be battered down. Concessions obtained by financiers must be safeguarded
by ministers of state, even if the sovereignty of unwilling nations be outraged in the process.
Colonies must be obtained or planted, in order that no useful corner of the world may be
overlooked or left unused.
— Woodrow Wilson, President of the United States, 1919, Quoted by Noam Chomsky, On
Power and Ideology, (South End Press, 1990), p.14.
Richard Robbins, Professor of Anthropology and author of Global Problems and the Culture of
Capitalism is also worth quoting at length:
•
•
•
•
The obvious answer was to expand European and American power overseas, particularly into
areas that remained relatively untouched by capitalist expansion — Africa, Asia, and the
Pacific. Colonialism had become, in fact, a recognized solution to the need to expand markets,
increase opportunities for investors, and ensure the supply of raw material. Cecil Rhodes, one
of the great figures of England’s colonization of Africa, recognized the importance of overseas
expansion for maintaining peace at home. In 1895 Rhodes said:
World War I was, in effect, a resource war as Imperial centers battled over themselves for
control of the rest of the world. World War II was another such battle, perhaps the ultimate
one. However, the former imperial nations realized that to fight like this is not the way, and
became more cooperative instead.
Unfortunately, that cooperation was not for all the world’s interests primarily, but their own.
The Soviet attempt of an independent path to development (flawed that it was, because of its
centralized, paranoid and totalitarian perspectives), was a threat to these centers of capital
because their own colonies might “get the wrong idea” and also try for an independent path
to their development.
Because World War II left the empires weak, the colonized countries started to break free. In
some places, where countries had the potential to bring more democratic processes into place
and maybe even provide an example for their neighbors to follow it threatened multinational
corporations and their imperial (or former imperial) states (for example, by reducing access to
cheap resources). As a result, their influence, power and control was also threatened. Often
then, military actions were sanctioned. To the home populations, the fear of communism was
touted, even if it was not the case, in order to gain support.
What is NEOLIBERALISM?
• Neoliberalism (or “new liberalism”) was first put
forward in 1938 during the Great Depression
supposedly for “price mechanisms” and “free
competition”. After World War II, monetarist
policies (espoused by Milton Friedman) were
adopted. Beginning in the 1980’s, Reagan in the
US and Thatcher in the UK blamed workers and
social spending for stagflation (stagnation and
inflation) while denying its real cause in the
huge military expenditures.
• The neoliberal economic policy has come to be
known since 1989 as the Washington Consensus
(coined by economist John Williamson). It has
been designed and enforced by the International
Monetary Fund, World Bank and the US
Treasury Department, joined by the World Trade
Organization since the 1990s.
The Washington Consensus imposes on the
underdeveloped countries the following prescriptions
supposedly for “development”:
• fiscal policy discipline -- meant to
control the price of money or
currency value, exchange rates and
money supply, assure the payment of
debt obligations, stabilize the balance
of payments (dollars in and dollars
out) increase government revenues
and adopt austerity measures.
• redirection of public spending away
from industrial development and selfreliance- instead of nationalizing
industries, privatization or selling
state assets to private interests is
encouraged.
• tax reform to benefit foreign investors at the
expense of the people- trade tariffs are liberalized ,
tax breaks and incentives for foreign investors, and
more taxes on the people (such as the value-added
tax)
• market-determined interest rates -- Central Banks no
longer control olong-term interest rates but are
subject to “market forces” highly correlated to
dollar-denominated rates tied to the US Federal
Reserve Board Open Market Committee
• competitive exchange rates – “competitive” in the
trading of currencies in exchanges (whether in spot
trading, forward rates, bilateral rates, effective rates
and real rates) where the all-mighty US dollar reigns
supreme
• import liberalization – in connection with trade
liberalization, the removal of trade tariffs and
relaxation of non-tariff barriers (any policy that
interferes with imports like quotas and voluntary
export restraints)
• investment liberalization – assuring the
liberal flow of foreign investments
(direct and portfolio) into the country
and the guarantee (including sovereign
guarantee) on returns;
• privatization of state enterprises – state
assets are either leased or sold to
private entities under various programs
such as build-operate-own or buildoperate-transfer
• deregulation and legal security for
property rights – domestic laws (even
Constitution) are aligned to ensure the
ownership and control of foreign
capitalists with the least interference
from government
Under neoliberalism, also known as market fundamentalism, the
monopoly banks and firms accelerated superprofit-taking and
accumulation of capital in the centers of global capitalism. As a
result, the crisis of overproduction and overaccumulation by a few
has recurred at a rapid and worsening rate.
In a futile attempt to override the recurrent
crisis of overproduction and the tendency of
the profit rate to fall, the monopoly
capitalists resorted to the tricks of finance
capitalism and, in the process, has spawned a
financial oligarchy with fictitious financial
assets.
The repeated expansion of the money supply
and credit, the creation of derivatives in
astronomical amounts and the generation of
one financial bubble after another to raise
the profits and overvalue assets have
resulted in recurrent and ever worsening
crisis of overproduction.
Neoliberal policies carried out:
• flexibilization of labour – adopting new
technologies, business structures and
processes, so-called “flexible” policies allowed
the use of core and periphery workers with
depressed wage scales, employment, working
conditions, labor-management relations, and
trade union rights;
• liberalization of investment, trade and finance
– capitalists, especially foreign investors, are
given priority over workers’ interests;
• privatization of public assets – instead of
accumulating capital for public interest and
national development balanced by central
planning, private profit and anarchic economic
production becomes vulnerable to “market
forces” and speculation;
• deregulation at the expense of the people and the environment – the
government surrenders control over resources and production to favor
monopoly capitalists;
• overpriced contracts in war production – war materiel are sourced and sold
above their real value;
• guarantees and subsidies for overseas investments – assuring repatriation of
investors’ superprofits with government guarantees, tax incentives, relaxed
tariffs, non-tariff measures; and denationalization of the economies of the
underdeveloped countries – while hailing “newly-industrialized countries”
(NIC’s) in the past, Asian “tiger economies,” and the recent BRICS model (Brazil,
Russia, India, China and South Africa), the great majority of underdeveloped
countries and BRICS countries themselves are undergoing severe crisis
What is the impact of neoliberal policies on workers?
For workers, these policies have
resulted in:
• cuts in wages and benefits
• informalization of labour
• loss of job security
• deteriorating living and working
conditions
• increased tax burden
• rising prices in basic goods and
services
• repressive attacks on their
labour and democratic rights
Philippine Foreign Trade
Philippine Foreign Trade