2020

International Trade
and Agreement

Jia R. Zapata
 Cavite State University – Bacoor
.
Department of Management Studies

Module I
 Module One Introduction to International Trade and Agreement

GLOBALIZATION
LEARNING FOCUSED COUNTRY: PHILIPPINES
OBJECTIVES
• Define the meaning of globalization
• Differentiate domestic vs. international trade
• Explain the principles of international trade
• Discuss why we import goods from other countries
• Discuss why we export goods to other countries

Banaue Rice Terraces

Ayala, Makati City

 Philippine’s Globalization

G lobalization has been very effective in the Philippines. There have been major
changes in the economy since 1995 when the Philippines took part in signing
agreements with World Trade Organization. There have been changes in the country
such as more labor and more companies that have emerged to help the economy.
Globalization has been rapidly developing in the Philippines ever since the influence of
the United States during World War II.

The Philippine economy, like that

of most other EMEs, has become
increasingly integrated with the
global economy. This is evident in
the general increase in trade in
goods and labor migration. There
is also greater integration in
finance, albeit at a relatively
moderate pace.

Makati City Night Skyline

Evidence suggests that

globalization has a positive effect
on the country’s economic growth
and employment. In particular,
trade openness and foreign
portfolio flows have contributed
to higher per capita GDP growth
in the Philippines

A scene from Customer Care Hotline Center

 • What is Globalization
LO1: Definition of Globalization • Advantages and Disadvantages of Globalization

What is Globalization?
Globalization is defined as the mobility across borders of goods and services,
Globalization people, capital and knowledge (BIS (2017a)). In the past half century, the world
economy has become much more integrated, interdependent and intertwined
It is the process of as globalization and liberalization appear to have become an inevitable and
interaction and
irreversible trend. Regional trading arrangements, the removal of restrictions
integration among the
on the flow of trade and investment, and rapid technological changes have led
people and government
of different nations, a to the deepening of economic integration and the heightening of globalization
process driven by (Aldaba (2011)). Emerging market economies (EMEs) have also become much
international trade and more tightly integrated in terms of trade, finance, global value chains (GVCs)
investment and aided by and migration (BIS (2017b)).
information technology
Some have attributed an unprecedented period of peace and prosperity to
globalization as it has spurred growth and productivity as well as expanding
opportunities for businesses, investors and workers (Ibrahim (2017)). This is
EME true particularly for EMEs, where many observers consider globalization as a
major cause of strong growth and significant poverty reduction in recent
Emerging Market
decades (BIS (2017b)). However, due to the adverse and lingering impact of the
Economy
Great Financial Crisis (GFC), there has been a growing backlash against
globalization, not only in EMEs but also in advanced economies, particularly in
the United Kingdom and the United States. A pattern of resurgent
protectionism is observed to be emerging across the globe and inward-looking
policies are getting more support.

Exercise:
Enumerate what the Philippines’ Industrial Sectors
1. ___________________________ 6. ___________________________
2. ___________________________ 7. ___________________________
3. ___________________________ 8. __________________________
4. ___________________________ 9. __________________________
5. ___________________________ 10. __________________________
 • What is Globalization
LO1: Definition of Globalization • Advantages and Disadvantages of Globalization

I n the Philippines, globalization is important on how it works in the economy

Industrial Sectors and the development of the technology. Globalization helps each country to
have a cooperation to help each other and be united. Globalization is formed to
Goods/Service-producing
process of goods, services, and people around the worlds. It works to every
segment of an economy
people to move and work in a different country as well as the goods of each
country can also be imported and exported to a different country and
destination. It helps every nation to develop a global economy and increase the
World Trade income of each country.
Organization Also, globalization can be mean to liberalize each country their rule and
is a global international regulation to follow, people can enter to a different country as long they follow
organization dealing with the rules and law of the country they when to or work to. Globalization works
the rules of trade to each country through the World Trade Organization and the United Nation
between nations. because the international law is created and enforce. Globalization help to
developing countries to their industrial, manufacturing, improvements, and
economic expansion of living. It is also the interaction of all economies of the
world in terms of the financial transaction, political, educational, trade and
manufacturing production. However, Globalization can have a disadvantage
and also the advantage to each country.

Advantages and Disadvantages of

Philippine Globalization

P hilippine globalization has brought many job opportunities to all Filipino people. The

government encourages foreign companies to establish business and open many jobs to Filipino
worker even abroad. The impact of globalization helps the Philippines community to be more aware
of what is happening to the Philippines, it also gives the idea to many Filipino people to have more
knowledge and information on the Philippines and international society. With the present
globalization, it has more positive effect in the Philippines, it helps to improve the local and foreign
companies, the culture, the education, and the development of the economy.
 • What is Globalization
LO1: Definition of Globalization • Advantages and Disadvantages of Globalization

Positive Effects of Philippine

Globalization
Globalization can have more opportunities to increase in
employment.
This advantage of globalization can help the Philippines to increase the
employment of Filipino people because of the opportunities from many foreign
countries putting up a business in the country thus creating many job vacancies
for Filipino. Also, globalization has an advantage in opening jobs abroad. There
is a lot of overseas Filipino worker who is work abroad and can be successful in
working in another country. Because of the World Trade Organization, each
person can work in a different country and have the opportunity to live there
and be a citizen in the country they live and work in.

Globalization can also help the Philippines education to improve

more.
Student Trivia In the Philippines, when it comes to education it shows improvement. Thru
offering higher education and developing skilled people. The education in the
Philippines is the 3rd
largest English – speaking Philippines is now recognized outside the country. And many foreigners are
nation in the world after choosing to study here because the quality of education is higher while the cost
US and UK is lower. The Filipino people are smart and can communicate well to other
foreigners. Speaking English in the Philippines is a natural language since it is
our second language

Globalization improves the flow of information technology.

When it comes to information technology of the Philippines, it flows very well
and help the Filipino to have knowledge and updates about the latest
technology that all countries use. The impact of globalization in the Philippine
technology brings more positive effect because it helps to increase the
economy of the Philippines. The use of information technology with the latest
and modern function, improves the flow of all company products and also it
minimizes the work of every Filipino.
 • What is Globalization
LO1: Definition of Globalization • Advantages and Disadvantages of Globalization

Globalization improves the quality of goods and services.

Student Trivia Being connected to other country means goods pouring in to our country. It
makes the competition versus local product more amiable to improvement.
The Philippine largest
Improving our services and produce more quality goods and products to other
Export good (2019) is
countries can boost the Philippines position as economic trading partner.
Electrical machinery
and equipment Through globalization, the service of goods and product is easily served and
amounting to 34.7 US$, done to deliver it to each respective destination.
collecting 49.3% of the
nation’s total exported
goods

The Downside Effect of Philippine

Globalization
The effect of globalization can help a flexible communication and greater understanding in terms of
improvement and development of each country economic and trading condition. It also helps the local and
international market to create flexible labor across the miles. Globalization affects the international market
and enhances economic growth. In some area, if there are the advantage of globalization there is also a
disadvantage of it. Some of it is the distraction of the Philippines environment and the effect on human nature,
culture and values.

Globalization’s impact on Local Farmers

Globalization is not in good terms with exporting rice product from the
Student Trivia agriculture sector. Filipino farmers can produce more rice if the government will
According to a (2019) help them in providing a modern technology that can create or produce as many
report from US rice grains in every quarter of each year. The Philippines has a lot of natural
Department of resources and if the government teach Filipino how to value and preserve our
Agriculture – Foreign natural resources, we don’t need to import some agricultural product from
Agricultural services, other countries.
Phippine is projected to
be the World’s Biggest
Rice Importer.
Projection shows a 58%
increase in Rice
Importation from 1.9
million MT yearly to 3
million MT effectively
surpassing China with
2.5 million MT

Discharging of NFA Rice

 • What is Globalization
LO1: Definition of Globalization • Advantages and Disadvantages of Globalization

Globalization’s affects culture and values

The effect of globalization to the Filipino culture is the lack of Filipino traditions
and values that younger Filipino no longer appreciate and they don’t even
practice it to their daily life. They become more familiar with Western mentality
than being a pure Filipino. The standard of living of a Filipino has a negative
effect because of the globalization. Like some moral values that most Filipino
was forgotten. Some young Filipino is now liberated like other countries in the
way of living. A lot of them especially those couples are living in with marriage.

Globalization effects on health and Filipino well being

Due to the country’s openness to foreigner both tourist and traders, the effect
of these to Filipino people sometimes is not good especially in the health. A
study suggests that the rapid spread of AIDS mostly comes from outside the
country. Filipino who have a sexual intercourse to a foreigner sometimes gets
the disease. Social media has also a big side effect in the Philippines when it
comes to cyber-crimes and the rampant increase of sex videos online.

Self-Reflection:
List down other advantages and disadvantages of globalization. Does Globalization help the
Philippine Economy or lead it into a trap?
 • Domestic Trade
LO2: Differentiate Domestic vs. • International Trade
International Trade • Difference between Domestic and International Trade

Exercises: Go Lokal!
List Down at least top 5 domestic/local product from:
Cavite Davao Cebu Benguet Province
1._____________ 1. _____________ 1. _____________ 1. _____________
2._____________ 2. _____________ 2. _____________ 2. _____________
3._____________ 3. _____________ 3. _____________ 3. _____________
4. _____________ 4. _____________ 4. _____________ 4. _____________
5. _____________ 5. _____________ 5. _____________ 5. _____________

Domestic Trade
Domestic Trade is the sector of the national economy that carries on the selling
of commodity products from various sectors of production in a country’s
Domestic Trade domestic market. It encompasses wholesale and retail trade. The nature and
Deals with the forms of domestic trade, the nature of the relationships it expresses, and the
exchange and economic laws that control its development are determined by the
distribution of goods corresponding mode of production, and as such they change with the transition
and services made for from one socio-economic system to another. This includes, marketing of
local consumption different goods and service to various part of the country

Pasalubong treats from Baguio City Local Market

 • Domestic Trade
LO2: Differentiate Domestic vs. • International Trade
International Trade • Difference between Domestic and International Trade

Exercises: Logo Quiz

Name the logo for each International brand below

A.
 • Domestic Trade
LO2: Differentiate Domestic vs.
• International Trade
International Trade • Difference between Domestic and International Trade

The International Trade

If you can walk into a supermarket and find South American bananas, Brazilian
International coffee, and a bottle of South African wine, you're experiencing the impacts of
Trade international trade.
International trade is International trade allows countries to expand their markets and access goods
the exchange of goods and services that otherwise may not have been available domestically. As a
and services between
result of international trade, the market is more competitive. This ultimately
countries.
results in more competitive pricing and brings a cheaper product home to the
consumer. Trading globally gives consumers and countries the opportunity to
be exposed to goods and services not available in their own countries, or which
would be more expensive domestically.

Asian Products from an International Section of a Local Supermarket

Australian Treats from an International Section if a Local Supermarket

International trade was key to the rise of the global economy. In the global
economy, supply and demand—and therefore prices—both impact and are
impacted by global events.
Still, some argue that international trade actually can be bad for smaller nations,
putting them at a greater disadvantage on the world stage.
 • Domestic Trade
LO2: Differentiate Domestic vs. • International Trade
International Trade • Difference between Domestic and International Trade

Domestic vs. International Trade

The exchange of goods and services between countries and across borders is
referred to as international trade. Domestic trade happens when this business
Import is conducted inside of a country’s borders. There are many differences in
international and domestic trade, but the basic principles are the same.
To bring goods or
services into a country One of the main differences is cost. The cost of trading internationally is
from abroad for sale. considerably higher than trading domestically. This is true for many reasons.
One reason is time. The time that it takes to transport goods across oceans can
cost businesses money. There can be time wasted at borders, tariffs must be
paid, and customs inspections can be cumbersome. However, with today’s
Export
ocean shipping logistics and advances in ocean freight transport, many of these
To send (goods or problems are disappearing.
services) to another
country for sale. It may seem that importing and exporting goods could have a negative effect
on a country producing and transporting their own goods inside of their own
borders, but that is not necessarily true. Many countries benefit from importing
the materials needed to drive their own production industry. Even technologies
and services shared across borders can benefit a country’s production.
Additionally, international trade motivates countries to work together,
empowering each country to benefit from the other.

Port of Manila, one of the country’s main and busiest Port

 Point of Difference Domestic Trade International
Trade

1.
Trade with the Trade beyond
Meaning geographical limit of geographical limit of
the Country the Country
2.
Minimum two
Counties Involved Only one Country
Countries

3.
Risk Less degree of risk High degree of risk

4.
Foreign Currency,
Currency Used Home Currency
normally USD

5.
No long procedure or Long procedure and
Procedure Involved
formalities many formalities

6.
Bill of Exchange, Letter
Mode of Payment Cash or cheques of Credit or by the
bank
7.
Legal Rules and
National Laws International Law
Regulation

8.
Normally Road or
Mode of Transportation Sea or Air Transport
Railway

9.
High Operating Cost
Cost Involved Low Operating Cost
due to long Distance

10.
Effect on Foreign
No Effect Direct Impact
Reserve
LO3: Explain the Principles of • Principles of International Trade
International Trade

International Trade Theories

W ith the emergence of International Trade, the markets are born

and mutual dependence on forms and sources of International produce. In

order to compete in the new global context, the countries they specialize in
activities where they have a comparative advantage. This principle of
comparative advantage supports all the theories of trading internationally and
the dynamics of the world current as is the basis through which the trade
policies of the countries. The different theories of International Trade try to
respond a series of questions related to the dynamics and causes of the
International Trade, as well as the volume of the different flows, the direction
of these, what factors affect international prices of goods traded, how trade
affects Inter-countries to the National economies and how economic policy
affects the International trade.

Basically, it is intended to solve a series of questions. Among these:

• Why do countries trade with each other?

• Who wins and who loses with trade?

• How is the welfare of a country affected by trade with another or others?

• What are the effects of tariff and non-tariff barriers on the Trade and
wellbeing of a country?

• Are there arguments to defend trade restrictions?

Answering the question of why countries trade, the different

International Trade theories expose that there are three factors explanatory.
The first is related to the diversity of production factors that allow a country to
specialize in certain resources and get profit on them.
 LO3: Explain the Principles of • Principles of International Trade
International Trade

A second factor has to do with diversity in the tastes of consumers.

These differences them allow companies to market a wide variety of products
according to your needs and preferences and countries to exchange truly
demanded products.

Economy of Scale
Lastly International Trade is explained by the possibility to get economies of
When more units of a
scale. Through the offering of goods to Different countries, companies can
good or service can be
produced on a larger access economies of scale That allow you to save costs and produce a lot of
scale, yet with (on
products in short periods of time. This savings is driven by the emergence of
average) fewer input
costs, economies of scale equipment, machinery and philosophies such as the JIT (Just In Time).
are said to be achieved.

Exercise:
Name 5 Countries, name give at least 5 products they produce and trade.
ex. Holland – Tulips, Japan – Robots, China – Silk, Porcelain, Philippines – Banana, Mangoes,
USA – War Weapons, Apples, Wheat
 LO3: Explain the Principles of • Principles of International Trade

International Trade

Mercantilism
Mercantilists sought to determine what the advantages of trade for the
economy of the countries and to determine how they could be favored with

Great Britain these exchanges. For them, the only way to generate an advantage for country
was to promote to the utmost exports and trying to discourage imports of
was a stellar example of
mercantilism in its earlier products from the outside, in order to maintain a positive trade balance.
history. The British
government had a very Their vision was static because they considered that for a country to win
tight grip on its trade
in Foreign Trade, the other had to lose. The main source of funding and wealth
industry during this era. It
would protect its would be made through the accumulation of gold and silver and maintaining
merchants – while
keeping other empires'
many colonies, which would allow the country to maintain and guarantee the
merchants out – via trade supply of precious metals. The basic doctrine was the doctrine of the trade
barriers, regulations, and
subsidies offered to balance surplus.
domestic industries
To achieve the surplus, the State should intervene in the economy
through export promotion mechanisms and tariff barriers to prevent foreign
products from entering. Through the intervention in the economy and the
market, one could guarantee the restriction on imports and wealth
accumulation.

Former Modern British Empire

 LO3: Explain the Principles of • Principles of International Trade
International Trade

The Absolute Advantage

The absolute advantage was proclaimed by Adam Smith in the 17th century
Absolute Advantage in his book "The Wealth of Nations" where the foundations are laid for the benefit of
Occurs when country can
trade between countries. The "absolute benefit theory" argues that a country has
produce a product using
fewer resources than an advantage on another at the time of producing a good, if this is more efficient, in
other nation. other words, if you need fewer resources per unit for your production than the other

If a country using the country. In this sense, a country will export (import) those goods Where there is an
same factor of production absolute advantage (disadvantage) of costs to another country.
can produce more
product in comparison
with other countries For Smith, the absolute advantage leads to the specialization in the production of
goods and the Division of labor, as specializing in the production of those goods in
which each country has Advantage, both countries will benefit through trade in Such
goods.

Reference Video:
https://www.youtube.com/watch?v=5CrygjvyUPU
 LO3: Explain the Principles of • Principles of International Trade
International Trade

The Comparative Advantage

The comparative advantage theory was promulgated by David Ricardo in the

Opportunity Cost nineteenth century in his book "Principles of Economic policy" extending the scope and
the loss of potential
explanation of the theory of the absolute advantage disclosed by Adam Smith.
gain from other
alternatives when one
alternative is chosen. Comparative advantage is an economic term that refers to an economy's ability
to produce goods and services at a lower opportunity cost than that of trade
partners.

The benefits of trading are tangiblized when the country that owns an

absolute advantage in the two goods specializes in producing that well. Where
you have a greater relative advantage, ie in the good, the most efficient to
produce and the one that represents a lower cost of opportunity. In Conclusion,
he developed his theory of International Trade, explicitly establishing that a
country is in a good way to concentrate on developing those goods where they
have Comparative Advantage.

Reference Video:
https://www.youtube.com/watch?v=jNESLIbM8Ns
LO3: Explain the Principles of • Principles of International Trade
International Trade

Absolute vs. Comparative

Advantage

Reference Video:

https://www.youtube.com/watch?v=ZTMgtr8s8Yo

https://www.youtube.com/watch?v=Pd_qs8ueIWw&t=144s

Exercise:
Identify which country has the absolute advantage, comparative advantage and the opportunity
cost, for each product (Set for this week recitation). Show your computation

Rice Coconut
Thailand 10 5
Philippine 30 120

Water Oil
USA 40 20
UK 6 30

Gun Roses
China 20 120
Russia 100 50
LO4: Why do we need to Import • Benefits of Importation
Goods from other Countries

Why is Importing and Exporting

Important?

A s soon as a business starts operating internationally, there are many

additional factors which can have a huge impact on its success. Exporting and
importing goods is not just the core of any large, successful business; it also
helps national economies grow and expand.

Each country is endowed with some specific resources. At the same

time, a country may lack other resources in order to develop and improve its
overall economy. For example, while some countries are rich in minerals and
precious metals or fossil fuels, others are experiencing a shortage of these
resources. Some countries have highly developed educational systems or
infrastructures, while others do not.

Once countries start exporting whatever they are rich in, as well as
importing goods they lack, their economies begin developing. Importing and
exporting goods is not only important for businesses; it is important for
individual consumers, too. Consumers can benefit from certain products or
components that are not produced locally, but are available to purchase online
from a business abroad.
LO4: Why do we need to Import • Benefits of Importation
Goods from other Countries

Why do Nations Import?

T he motivation for a country to import goods and services from other

countries is perhaps less obvious than its motivation for selling exports (making
a profit on goods not consumed by the domestic market). As with exports, the
purposes served by imports vary from country to country. Let’s explore these
various purposes by starting with asking why a country like the United States,
with its massive and extraordinarily diverse economy, would need to import
anything from other countries.

In fact, there are only a handful of goods or services that the United States
absolutely must import from other countries. With a land area spanning several
climatic zones, immense natural resources, and a dynamic workforce, the
United States is able to produce, mine, or grow almost every item its citizens
need to lead reasonably prosperous lives.

Yet no country today, including the United States, can be totally self-sufficient
without suffering a high cost. All countries need to—or choose to—import at
least some goods and services for the following reasons:

1. Goods or services that are either a. essential to economic well-being or

b. highly attractive to consumers but are not available in the domestic
market
2. Goods or services that satisfy domestic needs or wants can be produced
more inexpensively or efficiently by other countries, and therefore sold
at lower prices.
3. Cost of importing is lower than the cost of manufacturing
It is helpful to illustrate these points by looking at the case of the United
States, precisely because it comes closer to being self-sufficient than any other
country for the reasons mentioned above (several climactic zones, resources,
able workforce). Coal, copper, iron, silver, and nickel are just a few of the
natural resources the United States possesses in large quantities that other
countries do not possess.
LO4: Why do we need to Export • Benefits of Exportation
Goods to other Countries

Why do Nations Export?

F or many developing countries, exports also serve the purpose of

earning foreign currency with which they can buy essential imports—foreign
products that they are not able to manufacture, mine, or grow at home.
Developing countries, in other words, sell exports, in part, so that they can
import. Exporting goods and services can also further advance developing
nations’ domestic economies.
Interconnectivity through global trade can be problematic, though. For
example, up until 2008, Japan had a booming export business with the United
States. When American consumers became unable to buy Japanese products,
Japanese companies lost a large portion of their consumer base (Ryuhei, 2009).
Industrial Countries
Exports are also more than just an outlet for “excess” production for industrial
countries. Because their economies are more diverse, industrial countries tend
to:
1. Export a much wider variety of products than do developing countrie
2. Export a larger proportion of their total production of goods and
services.
3. Export sales help maintain high employment levels for the work
force of the United States and many other industrial countries.