INTERNATIONAL

TRADE LAW
WEEK TWO LECTURE

Prof. Samy Wasel

Dr. Marwa Zein
 1
THEORIES OF
INTERNATIONAL
TRADE
ESTABLISHMENT AND
EXPLANATION
 TRADE THEORIES

Mercantilism

Absolut Advantage

Comparative Advantage Theory

Factor Proportions Theory

New Trade Theory

MERCANTILISM

Mercantilism is an economic theory and

practice common in Europe from the 16th
to the 18th century that promoted
governmental regulation of a nation’s
economy for the purpose of augmenting
state power at the expense of rival national
powers.
 UNDERLYING PRINCIPLES OF
MERCANTILISM

The belief that the amount of wealth in

1 the world was relatively static 4 The value of a large population as a key to
self-sufficiency and state power

The belief that a country's wealth could best The belief that the crown or state should
2 be judged by the amount of precious metals 5 exercise a dominant role in assisting and
or bullion it possessed. directing the national and international
economies to these ends.
The need to encourage exports over imports
3 as a means for obtaining a favorable
balance of foreign trade that would yield
such metals.
 ABSOLUTE ADVANTAGE THEORY
Absolute advantage is an economic concept that is used to refer to a party’s superior
production capability. Specifically, it refers to the ability to produce a certain good or
service at lower cost (i.e., more efficiently) than another party. (A “party” may be a
company, a person, a country, or anything else that creates goods or services.).

The concept of absolute advantage was first introduced in 1776 in the context of
international trade by Adam Smith, a Scottish philosopher considered the father of
modern economics. In his monumental work An Inquiry into the Nature and Causes of the
Wealth of Nations, he argued that, in order to become rich, countries should specialize in
producing the goods and services in which they have absolute advantage and engage in
free trade with other countries to sell their goods.
 COMPARATIVE ADVANTAGE THEORY

Comparative advantage is an economic theory created by

British economist David Ricardo in the 19th century. It
argues that countries can benefit from trading with each
other by focusing on making the things they are best at
making, while buying the things they are not as good at
making from other countries. This theory is based on the
idea that every country has different cost structures and
opportunity costs.

By focusing on their strengths, they can produce more

efficiently. Ricardo’s research demonstrated that even if one
country can make everything more efficiently than another
country, international trade is still beneficial.
 FACTOR PROPORTIONS THEORY
In the early 1900s, two Swedish economists,
Eli Heckscher and Bertil Ohlin, focused their
attention on how a country could gain comparative
advantage by producing products that utilized
factors that were in abundance in the country. Their
theory is based on a country's production factors –
land, labor, and capital, which provide the funds for
investment in plants and equipment.
Their theory, also called “the factor
proportions theory”, stated that countries would
produce and export goods that required resources
or factors that were in great supply and, therefore,
cheaper production factors. In contrast, countries
would import goods that required resources that
were in short supply, but higher demand.
NEW TRADE THEORY
(NTT)
New trade theory (NTT) refers to modern
economic theory that explains international trade
based on economies of scale, network effects,
and first-mover advantage. It helps decipher the
main reason behind globalization and intensive
trading between similar economies.
In addition, it paves the way for the
government’s role in the industrialization of a
country.
 2
REASONS FOR
INTERNATIONAL
TRADE
BENEFITS AND RISK
REDUCTION
 1. COMPARATIVE ADVANTAGE

Countries can benefit from trading

with each other by focusing on
making the things they are best at
making, while buying the things they
are not as good at making from other
countries. This theory is based on the
idea that every country has different
cost structures and opportunity costs.
By focusing on their strengths, they
can produce more efficiently.
2. ECONOMIES OF SCALE

The size of the business generally matters when

it comes to economies of scale. The larger the
business, the more the cost savings. Economies
of scale can be both internal and external.
Internal economies of scale are based on
management decisions, while external ones have
to do with outside factors.
3. DIVERSIFICATION AND RISK
REDUCTION

Economic diversification is a key element of

economic development in which a country
moves to a more diverse production and trade
structure. Diversification helps to manage
volatility and provide a more stable path for
equitable growth and development.
Successful diversification is all the more
important now in the wake of uncertain global
growth and the imperative in many developing
countries to increase the number and quality of
jobs.
 3
BENEFITS OF
INTERNATIONAL
TRADE
WELFARE AND
ADVANTAGES
1. WELFARE ENHANCEMENTS
International trade can contribute to welfare
enhancement in the following ways:

● Increased variety of goods and services:

Trade allows consumers to access a wider
range of products from different countries,
leading to greater consumer choice and
satisfaction.

● Lower prices: Trade promotes competition,

which can drive down prices of goods and
services. Consumers can benefit from
accessing more affordable products,
allowing them to enjoy a higher standard of
living.
● Improved resource allocation: Trade allows
countries to specialize in producing goods
and services in which they have a
comparative advantage. This specialization
leads to more efficient resource allocation,
as countries can focus on producing what
they are most efficient at resulting in higher
overall productivity and welfare.
 2. CONSUMER BENEFITS

• Access to a wider variety of goods:

International trade enables consumers to
enjoy products and services that may not be
available domestically. This variety
enhances consumer choice and allows
individuals to enjoy goods from different
cultures and regions.

• Lower prices: Trade can lead to lower prices

for imported goods due to factors such as
lower production costs or economies of
scale in other countries. This can improve
consumers' purchasing power and allow
them to afford a higher quantity and quality
of goods.
 3. PRODUCER BENEFITS

• Market expansion: International trade opens up new markets for

producers, allowing them to reach a larger customer base. This
expanded market can lead to increased sales and profits for
domestic producers.

• Economies of scale: Trade can facilitate increased production

levels, leading to economies of scale. Producers can benefit from
lower average production costs, which can result in increased
competitiveness and profitability.

• Access to inputs and resources: International trade provides

producers with access to inputs, such as raw materials and
intermediate goods, that may not be available domestically or may
be more cost-effective to import. This access to inputs can enhance
production efficiency and competitiveness.
 4. ECONOMIC GROWTH

• Increased output and productivity: International trade

encourages specialization, which can lead to increased
production and productivity. Countries can focus on
producing goods and services in which they have a
comparative advantage, leading to more efficient
resource allocation and higher output levels.

• Technological transfer and innovation: Trade allows for

the exchange of ideas, knowledge, and technology
between countries. Exposure to new technologies and
innovations from trading partners can stimulate
domestic innovation and technological progress,
contributing to long-term economic growth.
• Foreign direct investment (FDI): Trade can
attract foreign direct investment, which
brings in capital, technology, and expertise
from abroad. FDI can contribute to economic
growth by creating jobs, improving
infrastructure, and fostering technological
advancements.
 4
RISKS AND
CHALLENGES OF
INTERNATIONAL
TRADE
OBSTACLES IN TRADE
 RISKS AND CHALLENGES

• Disruption of Domestic Industries:

Job displacement, Structural adjustment costs,
Vulnerability to global market fluctuations.

• Income Inequality:
Unequal distribution of gains, Regional disparities.

• Environmental Impact:
Carbon emissions and climate change,
Deforestation and resource depletion.
 RISKS AND CHALLENGES

• Trade Imbalances:
Current account deficits and surpluses:,
Currency manipulation and trade disputes.
 5
WINNERS AND LOSERS
FROM TRADE
LIBERALIZATION

PARTIES PRIVILEGES
 WINNERS FROM TRADE LIBRALIZATION

• Export-oriented industries
and workers

• Consumers benefiting from

lower prices
 LOSERS FROM TRADE LIBRALIZATION

• Import-competing industries
and workers

• Those who face job

displacement due to trade
 6
OPTIMAL
INTERVENTION IN
INTERNATIONAL TRADE

DIFFERENT PRESPECTIVES
 ECONOMIC PERSPECTIVE

• Protecting infant industries.

• National defense
• Employment rates
• Environmental concerns
• Aggressive trade
• Emotional argument
• Consumer safety
• Medical drugs
 LEGAL PERSPECTIVE

• Trade agreements and organizations role

I. Market Access
II. Rules and Standards
III. Dispute Settlement
IV. Trade Facilitation
V. Market Cooperation
VI. Development and Assistance
 POLITICAL PERSPECTIVE

• Considerations of public opinion

• Political ideology
• Lobbying in trade policy decisions
 7
INTERNATIONAL BODIES
RELATED TO
INTERNATIONAL TRADE

ORGANIZATIONS AND ENTITIES

 WORLD TRADE ORGANIZATION
(WTO)

The World Trade Organization

(WTO) is the only global
international organization dealing
with the rules of trade between
nations. At its heart are the WTO
agreements, negotiated and
signed by the bulk of the world’s
trading nations and ratified in their
parliaments. The goal is to ensure
that trade flows as smoothly,
predictably and freely as possible.
 INTERNATIONAL MONETARY FUND (IMF)

The IMF is a global organization that works to

achieve sustainable growth and prosperity for all
of its 190 member countries. It does so by
supporting economic policies that promote
financial stability and monetary cooperation, which
are essential to increase productivity, job creation,
and economic well-being. The IMF is governed by
and accountable to its member countries..
 WORLD BANK GROUP

Its focus on reducing poverty and

promoting sustainable economic
development through financial and
technical assistance.
 REGIONAL TRADE AGREEMENTS

1. North American Free Trade Agreement

(NAFTA)
2. European Union (EU)
3. Association of Southeast Asian Nations
(ASEAN)
4. Mercosur
5. Gulf Cooperation Council (GCC)
6. Central American Free Trade Agreement
(CAFTA)
7. Comprehensive and Progressive
Agreement for Trans-Pacific Partnership
(CPTPP)
UN RELATED
BODIES
 UNITED NATIONS CONFERENCE ON TRADE AND
DEVELOPMENT (UNCTAD)

• UNCTAD is a principal organ of the

UN that deals with trade, investment, and
development issues.
• It provides research, analysis, and
policy recommendations on trade and
development matters.
• UNCTAD's primary goal is to promote
sustainable development and integration of
developing countries into the global economy.
 UNITED NATIONS INDUSTRIAL DEVELOPMENT
ORGANIZATION (UNIDO)

• UNIDO focuses on promoting

industrial development in developing countries.

• It assists nations in building their

productive capacities, enhancing
competitiveness, and integrating into global
value chains.
 INTERNATIONAL TRADE CENTRE (ITC)

• ITC is a joint agency of the UN and

the World Trade Organization (WTO).

• It helps small and medium-sized

enterprises (SMEs) in developing countries to
become more competitive in international
markets.

• ITC offers trade-related technical

assistance and capacity-building programs.

.
 UNITED NATIONS ECONOMIC COMMISSION FOR
EUROPE (UNECE)

• UNECE plays a role in

facilitating economic cooperation
and integration in the European
region, including trade facilitation
and regulatory harmonization.
UNITED NATIONS ECONOMIC AND SOCIAL COUNCIL
(ECOSOC)

• While not a specialized trade body,

ECOSOC coordinates UN economic and social
work, including trade-related matters.

• ECOSOC often discusses and makes

recommendations on global economic policies,
trade, and development issues.
 UNITED NATIONS DEVELOPMENT PROGRAMME
(UNDP)

• UNDP works on reducing poverty,

promoting sustainable development, and
enhancing human development.

• Its programs often involve initiatives

related to trade capacity-building and economic
development.
 UNITED NATIONS INTERNATIONAL STRATEGY FOR
DISASTER REDUCTION (UNDRR)

• UNISDR focuses on reducing the

risk of disasters.

• While not directly related to trade, it

addresses issues that can impact trade, such
as the resilience of infrastructure and supply
chains.
 UNITED NATIONS ENVIRONMENT PROGRAMME
(UNEP)

• UNEP addresses environmental

sustainability issues that can have trade
implications.

• It promotes environmentally
responsible trade practices and sustainable
resource management.
 UNITED NATIONS ECONOMIC COMMISSION FOR
EUROPE (UNECE)

• UNITAR provides training

and capacity-building programs,
including those related to
international trade and trade
negotiations
 ANY
QUESTIONS!
 THANK
YOU!

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