International Trade: Policy and Practice by MacDonnell and MacEvoy.

My reactions on reading this book were twofold. I was struck first of all, by the importance of international trade in the economic development of the human race, and secondly by the complexity of the mechanisms which underpin that development. One might not go all the way with the authors who argue that the Columbian adventure, which started with the quest for a new route to the spice producing lands to the East, was purely trade driven or that the industrial revolution in England was solely attributable to a trade embargo on imported cotton fabrics. Nevertheless there is no gainsaying the importance of trade in man’s history and its effect on a small economy like Ireland’s. Neither must we overlook the motive force of much of this trade, foreign direct investment.

The complexity arises from the fact that exporting involves moving from one jurisdiction – the domestic market - where the rules are familiar, to the relatively uncharted waters of export markets with their multiplicity of languages, business cultures, jurisprudence, religion, economic, social and political systems. This is where this book is at its most useful, taking the reader through the complex issues involved, setting out a modus operandi in order to minimise risks and comply with the requirements of the chosen market.

One of the most important issues for the exporter is currency value. Fluctuations in the exchange rate have three times the impact of a change in any of the major cost components – labour, raw materials, profits and overheads. It may come as a surprise to the reader to learn that, three years after the introduction of the euro, some sixty per cent of Ireland’s exports are priced and delivered in currencies other than the euro. When one considers that the $US has depreciated by 35% against the euro in less than two years, the importance of exchange risk management becomes obvious. The book helpfully outlines internal and external hedging mechanisms, which can be used.

I was also struck by some interesting statements contained in the chapter on the importance of Intellectual Property Rights (IPR). The Coca Cola brand was valued at US $68.9 billion in 2001, Microsoft at $65.1 billion and IBM $52.7 billion. While copyright issues may appear to be primarily matters of the modern age, with the USA complaining to China about software infringements, the authors quote a famous Irish case involving the unauthorised copying of St. Fintan’s bible by St. Colmcille. This gave rise to the High King’s judgement enshrining the dictum, “ to every cow its calf, to every book its copy”. Trade secrets or undisclosed information can now be protected as part of every company’s intellectual property. Apart from being a company asset, IPR can be a source of income by selling on or licensing its use to others. It was reported that Eli Lilly paid Sepracor $90 million for the rights to an improved version of Prozac; perhaps not unreasonable when measured against Prozac annual sales of over $3 billion.

There is an interesting chapter on trade policy, which reviews international efforts in recent times to liberalise trade and to provide a set of rules within the multilateral framework of the World Trade Organisation. The authors point out that there are always threats to free trade from national or regional interests. The disruptive element behind the Seattle debacle may not have been the dispossessed of the Southern hemisphere but rather US trade union interests who saw increasing free trade as a threat to their members’ interests. President Bush’s imposition of a 30% tariff on steel imports is clear evidence of this threat. In fact US trade policy must be causing sleepless nights to those who champion the liberal trade agenda, if we consider the recent US quotas imposed on textile products from China as well as the likelihood of protectionist retaliation by Europe, Japan and China, all coming on top of the breakdown of the Cancun talks.

It is worth digressing to note that these restrictions on imports are also causing serious damage to the US economy as evidenced by numerous complaints from America’s industrial steel users and consumers of imported textiles. It is sometimes forgotten that the classical economists viewed international trade as a means of importing products, which could be made more competitively elsewhere. The purpose of exports is to pay for these imports. The entire process allows a more efficient allocation of resources.

Of course the USA is running a current account deficit of over $500 billion, which may be influencing its foreign trade agenda. This is financed by East Asian bondholders who provide the capital inflow to keep American interest rates low, and whose exporters are supplying the USA with cheap imports. Asian exporters are in effect lending the Americans the money to pay for these imports. The USA lectures China meanwhile on its undervalued currency while Europe’s exporters are being squeezed out by the rising euro.

It may be considered that Ireland’s position within the European Union provides a welcome shelter against any disruptions, which would result from a trade war. We should not take too much comfort because, apart from any indirect impact, the share of our merchandise trade with countries outside the European Union had grown from 26% in 1973 to 40% of a much larger total by 2001.

International trade can flourish only in times of peace. Although we think of globalisation as a twentieth century phenomenon, the first phase commenced in the year 1870, when the Prussians finally emerged as victors within Europe, putting an end to centuries of war. The ensuing half-century of peace saw world trade double as a percentage of world production, huge British investment in infrastructure in the New World and a massive movement of economic migrants from Europe to America, North and South, Australia and New Zealand. This came to an end with the outbreak of World War I.

It was not until the end of World War II that new institutions with an economic remit played a role in the second wave of globalisation and the world recovered the impetus lost through wars and economic depression. Peter Sutherland’s Tacitus lecture, which is included as an appendix, quotes Cordell Hunt, later to become the US Secretary of State, advising Woodrow Wilson, “If goods do not pass frontiers, armies will”.

The significant feature of the third phase, which dates from the 1980s, has been the rise of the multinational corporation and the entry of suppliers in the developing world into the international supply chain. Manufactures and services, rather than the traditional minerals and raw materials, now dominate developing country exports.

Given the background of the authors, their advocacy of free trade is unsurprising. While recognising that the world is still far from perfect, they cite a recent World Bank report, which concludes that poor countries with some 3 billion people have broken into the global market for goods and services. The new globalisers have experienced large-scale poverty reduction in the 1990s. “The number of people who were poor declined by 120 million” Ireland provides an outstanding example of the benefits of internationalisation of trade and investment. As investment tends to move to lower cost environments, however, we must endeavour to get costs under control and encourage our industry to move up the value chain. Otherwise the benefits are in danger of being lost.

Peter Sutherland, under whose direction the World Trade Organisation became a reality, has written the foreword to this important and useful book.