Development of the Czech International Trade © Libor Žídek, 2006 The structure of the lecture • A. Theory – economic theory and international trade – factors with impact on the trade • B. Development of Czech (oslovak) trade • C. Comparison of changes in trade A. Economic theory • trade ð ñ division of labour ð specialization ð better use of our sources ð ñ productivity • + trade deals are voluntary = both sides are better off (otherwise they don’t do it) balance of payment • current account (CA) – trade balance – balance of services – transfers • capital account • financial account – foreign direct investment • +/- reserves of foreign currency • generally speaking there is nothing wrong with DEF of the CA • measure opening of the economy - EX/GDP*100 or IM/GDP*100 or EX+IM/GDP*100 • absolute advantage country A produces a commodity more effectively than country B • comparative advantage – trade is positive even for countries without absolute advantage Factors with impact on trade • trade policy – liberalism X protectionisms – tariffs and quotas – antidumping (social or ecological antidumping) • economic development inside and outside the country – economic ñ ð ñ IM – economic ñ in main trade partners ð ñ EX – economic policy expansive X restrictive • economic integration (CEFTA) • international organization (WTO) or agreements (CR and EU) • exchange rate – convertibility of currency – ability to exchange it to other currencies – system ð fix/ float • development of inflation (P) – impact of changes on international trade • devaluation ð • terms of trade – R[c ]= I[e]/I[i] * 100 – I[e]-index of export prices – I[i] - index of import prices B. Development of Czech trade • 1. Situation before 1989 • 2. Liberalization of trade • 3. Following development 1. Situation before 1989 • during the socialist period: – commodity: traditional light industry ð heavy – from western markets ð members of the Council for Mutual Economic Assistance - COMECOM (especially the Soviet Union) – export and import were under state plan • home prices were disconnected from the world prices Before 1989 • about 60% of EX and IM to the countries without convertible currency – CPE, developing ones • EX to the East - goods with relatively higher added value – X to the West with relatively low processing • IM from the East raw materials – X from the West machinery and vehicles • strict control of the trade – 50 organizations controlling international trade • ratio turnover/GDP relatively high, but the economy in fact closed 2. Liberalization of international trade • 1990 – steps to relax business environment including international trade – end of trade monopoly – Czechoslovak crown 3 times devaluated • crown undervalued ð ”exchange rate pillow” • fixed exchange rate (!) 1991 • quarrels about trade liberalization at the beginning of the transition – „+“ X monopolistic structure of the economy – worries of inflation pressures – „-“ ò in demand because households would buy foreign production ð ò in domestic production • liberalization at the beginning of 1991 – since 1^st of January 1991 every firm could acquire foreign (hard) currency – ò of most tariffs – (average tariff 5%) • but simultaneously IM tariff (20%) on most of the IM of consumption goods (soon ò) – worries of outflow of reserves – + IM and EX licences on some commodities (drugs, weapons, …) 3. Following development • reorientation of the trade ð ò IM from the East strong ññ IM from the West ð def CA • ñ EX to the West • ñ IM of machinery, vehicles, industrial products and finished goods • ò EX machinery, vehicles and ñ raw materials • end of 1991 European treaties – with EC – asymmetric – EC liberalized 70% (5-6 year the rest) of cs IM and CSR 20-25% of European IM (9 year) • since 1992 permanent ò in protection – GATT, WTO, EU Decline of trade with ex-CPE • break up of the Council of Mutual Economic assistance (1991) • change of the paying conditions to hard currencies ($, DM, …) – universal shortage • economic decline in ex CPE ð ò IM • substitution of IM goods from CPE to developed countries • 1993 splitting of Czechoslovakia – nominal ñ of trade because inner trade became international ð ñEX 25% and IM 21% – but another trade barrier even if there was custom union (common duty policy against third parties and no tariffs between the CR and the SR) • 1995 strong increase in GDP – ð trade imbalance = DEF of trade balance 7% of GDP ð DEF CA 2,6% GDP • 1996 – ñ imbalance – ñ EX only 3,5% X ñ IM 12,2% ð DEF CA = 7,4% GDP ð ð DEF whole BP financial crisis 1997 • ñ imbalance – ò dynamic of EX ð ñ DEF CA ðð attack on crown ð floating currency + monetary and fiscal tightening ð  ò of economic growth + ò of foreign imbalance – since 2^nd quarter ññ of EX > ñ IM ð ò DEF CA = 6,1% GDP but still DEF BP • 1998 - consolidation – ñ EX 17.7% and ñ IM 7.8% – ò DEF CA (only 1.9%) • 2000 ñ of oil prices + depreciation against $ Czech trade C. Comparison of changes in trade • 1. Volume of trade – factors of growth • 2. Territorial structure – factors of changes • 3. Commodity structure 1. Volume of trade • ñ in the volume – ñ turnover from 339 bil. Kč in 1990 to 2 357 bil. Kč in 2000 – ñ of turnover /GDP from 54% ð > 100% GDP – the country one of the most open in the world Turnover of Czech trade Factors with impact on Czech trade • positive factors – liberal trade policy – fixed exchange rate till 1997 – low wages – improving quality – inflow of the FDI – CEFTA, WTO, … • negative factors – ò in trade with the ex-CPE – appreciation of real exchange rate (ñ inflation at home > than abroad) – barriers in entering the western markets • ambiguous impact – ec. development in Czechoslovakia (Czech rep) (ñ GDP 1995 ð ñ IM) – ec. development in the countries of our main trading partners (ñ in Germany ð ñ Czech EX) – economic policy (restrictive policy eg after 1997 ð ò IM) – after 1997 changes in nominal exchange rate ($ X DM) – development of terms of trade (ò eg in 2000) Changes in EX and IM Trade balance 1990-2002 2. Territorial structure • main changes – ñ in trade with developed countries – ò in the share of ex centrally planed economies – ò in the share of developing economies Territorial structure of IM Territorial structure of EX causes of changes in territorial structure • decline in trade with ex CPE X CEFTA • growth impact in trade with developed – geography – agreements with international organizations: European community + European Free Trade Area + joining GATT … • ðð ñ of Czech dependence on European economy (into the EU 2/3 Czech´s EX) especially Germany Main trading partners 1.-10. 2005 3. Commodity structure • IM (changes in proportions) – ò food + ò raw materials – ñ industrial goods + ñ chemical goods and machinery and vehicles – ð from raw materials to more sophisticated products Changes in IM SITC • 0 – food and livestock • 1 – beverage and tobacco • 2 – raw materials without fuels • 3 – mineral fuels and lubricants • 4 – animals and vegetable oils, fats and waxes • 5 – chemicals • 6 – industrial products • 7 – machinery and vehicles • 8 – various finished products • 9 – goods unspecified in other categories • EX (changes in proportions) – first ñ of the share of raw materials and chemical products later on ò – vehicles ò and ñ – industrial products ñ • ð return to the long run structure Changes in EX Foreign Direct Investment Comparison of the FDI - Cumulative inflow per person 1990 - 2000