International Trade and Economic Systems
Measuring International Trade
Balance of Payments
International trade is measured by the balance of payments, which records all economic transactions between a country and the rest of the world within a given period. The balance shows the changes in a country’s international currency reserves. It consists of two accounts:
- Current Account: Records payments for goods, services, and resource use.
- Capital Account: Records the movement of funds from Foreign Direct Investment (FDI), loans, and repayments.
The current account includes the balance of trade (movement of goods and services) and payments for the use of resources across countries (e.g., external debt interest). The trade balance records exports and imports of goods and services.
Surplus and Deficit
A surplus in the balance of payments occurs when it is positive, meaning there’s an increase in international reserves (by selling domestic products or increasing obligations). The reverse is called a deficit.
Tools for International Trade Regulation
- Tariffs: Import taxes that increase the costs of imported goods. They can be applied to final products or intermediate goods.
- Quotas: Open the international market but only for a certain quantity or period.
- Non-Tariff Barriers: Restrictions on imports such as strict quality standards, health regulations, labor protections, and environmental requirements in exporting countries.
- Export Subsidies: Incentives provided to exporters.
- Dumping: Public or private subsidies that allow a product to be exported at a lower price than its domestic selling price. Dumping is sanctioned by the WTO.
- Exchange Rates: Foreign trade is conducted using national currencies, and their relative values are determined by exchange rates.
Devaluation and Revaluation
- Devaluation: Occurs when a currency’s value decreases relative to other currencies. This means you receive more units of domestic currency for a unit of foreign currency. Devaluation favors exports and makes imports more expensive.
- Revaluation: Occurs when a currency’s value increases relative to other currencies. This means you receive fewer units of domestic currency for a unit of foreign currency. Revaluation favors imports and reduces exports.
Global Regulatory Framework
World Trade Organization (WTO)
International trade is governed by the WTO.
Functions of the WTO:
- Administering trade agreements
- Providing a forum for trade negotiations
- Resolving trade disputes
- Monitoring national trade policies
- Providing technical assistance and training courses for developing countries
Free Trade Agreements (FTAs)
Objectives of FTAs:
- Progressive reduction of tariffs
- Encouraging foreign direct investment
Economic Systems
An economic system refers to the institutions, organizational methods, and driving forces that determine the development of economic activity.
The dominant economic systems today emerged from the Industrial Revolution. They are primarily categorized based on the roles of the market and the state in decision-making:
- Market Economy: Linked to the development of capitalism.
- Centrally Planned Economy: Associated with socialism.
- Mixed Economy: Combines aspects of both market and centrally planned economies.
Market Economy
Also known as a free market economy, this system is based on economic liberalism and is prevalent in most capitalist countries. Its core principle is the freedom of production and exchange of goods and services without government intervention.
While this system led to significant wealth creation, it also faced two major types of crises:
- Overproduction: Failure to coordinate supply and demand.
- Social Inequality: Workers were vulnerable to harsh working conditions imposed by employers during the early stages of the Industrial Revolution.
These crises challenged the fundamental principles of liberal capitalism. By the end of the 20th century, this system evolved into a form characterized by monopoly concentration of capital and large multinational corporations.
The main proponent of economic liberalism was Adam Smith, author of “The Wealth of Nations.” He believed that the market was the most effective regulator of the economy and that government intervention should be minimal.
Socialist Economy
This system is characterized by state control over economic decision-making. It advocates for collective ownership of the means of production and the principle of equal opportunity. While it persists in countries like China and Cuba, it has increasingly incorporated elements of the market economy.
The main ideologue of the socialist economy was Karl Marx, author of “The Communist Manifesto” and “Das Kapital.” He envisioned an economic system that would eliminate the flaws of liberal capitalism. From a socialist perspective, inequality is addressed through collective ownership of the means of production, benefiting all members of society. Consequently, the state controls most of the productive apparatus.
Mixed Economy
This system reflects a global trend where nations share responsibilities between the state and the market. The state plays a custodial role, ensuring essential services like health, education, and welfare, while also regulating the economy to safeguard the common good and promote a fairer distribution of wealth.
The State’s Role in the Economy and the Common Good
The state performs several key regulatory functions in the economy:
- Budget and Fiscal Policy: Establishing the budget and public spending, financed primarily through taxes. Fiscal policy in Chile is managed by the Ministry of Finance.
- Redistribution: To achieve a more equitable distribution of wealth and ensure a minimum level of resources for the poorest sectors, the state intervenes through measures like setting a minimum wage and providing subsidies.
- Regulation: In Chile’s open and competitive economy, the state establishes laws and regulatory bodies to govern economic activity. Examples include:
- Antitrust Law
- Consumer Law
- Banking Law
- Law of Corporations
- Law of Isapres and AFP
- Law of Basic Services
- Stabilization: The state aims to maintain economic balance during crises through actions such as:
- Adjusting taxes
- Creating employment programs
- Initiating public works projects
- Providing severance insurance
- Provision of Goods and Services: Through public enterprises, the state provides goods and services such as:
- Education
- Health
- Defense and security
Free Trade Agreements (FTAs)
Treaties
In international law, a treaty is a written agreement between two sovereign nations or between a nation and an international organization (e.g., the European Union).
Validity
For a treaty to be valid, both parties must have the capacity to enter into treaties. A treaty is not valid if it was concluded under threat or force, violating the principles of international law enshrined in the Charter of the United Nations.
Types of Treaties
- Political Treaties: Address issues like mutual defense against external attacks.
- Trade Agreements: Regulate economic matters, such as reducing tariffs on imported products.
- Treaties of Submission or Arbitration: Nations agree to submit to international courts to resolve territorial disputes.
Termination
Treaties can lose their validity for various reasons:
- Expiration of the treaty’s term
- Unilateral withdrawal by a party
- Rebus sic stantibus: The treaty was concluded based on circumstances that have changed significantly.
Trade Agreements
A trade agreement is an agreement between countries to grant each other certain benefits. There are three main types:
- Free Trade Zone
- Customs Union
- Economic Union
Free Trade Zone
In a Free Trade Area, signatory countries agree to eliminate tariffs on goods traded between them. This ensures that the prices of goods are the same for all members, preventing one country from artificially increasing prices through tariffs.
Examples include:
- European Free Trade Association (EFTA)
- North American Free Trade Agreement (NAFTA)
Customs Union
A customs union establishes a common external tariff (CET) for all member countries. This means that any member importing goods from a non-member country applies the same tariff.
Customs unions often allow for:
- Free movement of people
- Free movement of capital
throughout the member countries’ territories. The European Union (EU) is an example of a customs union.
Economic Union
In addition to the benefits of a customs union, an economic union involves full economic integration, including the elimination of different currencies among member countries. The EU is also an example of an economic union.