Modern theory of trade

In recent years, the traditional "comparative costs theory" has been replaced by the "factor-proportions analysis" of Ohlin, known as the 'modern theory of
international trade.' It is also called "the General Equilibrium Theory."

Before examining Ohlin's theory, it is worth the while to consider Ohlin's objections to the theory of comparative costs. Ohlin criticised the theory of comparative
costs on the following counts:

(i) that the comparative costs principle is applicable to all trades, and international trade is no exception to it;

(ii) that immobility of factors is not a special feature in international trade as assumed by the classicists but is also prevalent within the different regions of the
same country.

This is evident from the different levels of wages and interest rates prevailing in different regions of the same country. The larger the size of the country, the greater
might be the differences in wages and interest rates, as also between different trades in the same region. Secondly, just as labour and capital can move - even if in a
limited way - within a country, they can also move, though, less speedily and freely, as between countries.

For instance, countries like, Australia, Canada, U.S.A., U.K., etc., have definitely encouraged influx of labour and capital from many other countries. The
immobility of factors of production is, therefore, a question of difference of degree only, rather than of kind when applied to international trade.

Ohlin further states: "International trade is but a special case of inter-local or inter-regional trade"; that there is not much substantial difference between domestic
trade and foreign trade, as he classicists assumed. Ohlin held that it is not cost of transport which differentiates foreign trade from domestic trade (as thought by
classicists), for cost of transport is always there in home trade also.

He, therefore, opines that there is no need for a separate theory of international trade. Even the existence of differing currencies does not necessitate a new theory
of international trade as different currencies are connected with each other through the system of foreign exchange rates, which is the value of one currency in
terms of another, reflecting the purchasing power of the two currencies.

Hence, there is no basic distinction between the phenomena of inter-regional trade and international trade. To him, nations are only regions distinguished from
one another by such obvious demarcations as national frontiers, tariff barriers and different tongues, customs etc. But such differences can only be temporary and
not permanent obstacles to a free flow of trade between countries. With territorial expansion and for other political reasons, frontiers change and tariff barriers
collapse.

Thus, regions may be very well identified with nations and inter-regional trade may be the same as international trade. Hence, no separate theory of international
trade is needed but the existing general theory of value as applied to inter-regional trade can be easily extended to the phenomenon of international trade.

In Ohlin's view, the same fundamental principle of general value theory, as propounded by the Austrian school, holds good for all trade, whether, it is trade within
a country or between different countries.

According to Ohlin, therefore, the most natural and advantageous approach to the theory of international trade is to start from the mutual interdependence price
theory (i.e., the general theory of value).

According to the value theory, the price of a commodity is determined by the total demand and supply forces in the market. At the point of equilibrium, demand is
equal to supply and the price of the commodity equals its average cost of production. However, cost of production is composed of prices paid to factors of
production employed in producing the commodity.

These factor prices determine the consumers' income (for consumers receive their income by acting as agents of production) from this arises the demand for the
commodity. Thus, there is mutual interdependence of price of commodities, the price of the required factors, the demand for the commodities, and the demand for
and supply of factors. This is the fundamental fact analysed by the General Theory of Value.

This general equilibrium analysis is applicable to a single market in a region or a country. In fact, the general theory of pricing is a one-market theory. Ohlin
observes that it considers only the time element but ignores the space factor.

According to him, however, space is very important in economic life at least for two reasons: (i) the factors of production are to some extent confined to certain
localities and move only with difficulty; and (ii) costs of transport and other impediments prevent a free movement of commodities.
Ohlin thus, said that taking the space factor into consideration with regard to the general theory of value, it can be extended to determine the values in many
markets involved in trade between different countries or regions. Thus, the theory of international trade is simply a 'multi-market theory of value.

It is interesting to note that it was Eli Heckscher who pointed out first that when trade between countries arises, the mutual interdependence theory of pricing
comes into action. Bertil Ohlin accepted this lead and more emphatically and scientifically developed a new theory of international trade based on the general
equilibrium analysis. As such the modern theory of international trade is often referred to as 'Heckscher-Ohlin Theorem.'

MAIN FEATURES OF THE MULTILATERAL AGREEMENT ON INVESTMENT

1. Since 1995, OECD Member countries and the European Commission have been engaged in
negotiations to develop a multilateral agreement on investment (MAI). Their task is to elaborate
the first comprehensive framework for investment with high standards of liberalisation and
investment protection, with effective dispute settlement, and open to non-Members. After months
of intensive discussions, the essential elements of the agreement are ready (see annex). To fulfil
our mandate, we must deliver an agreement on the MAI in time for the 27-28 April 1998
Ministerial meeting. This goal is now within sight.

2. This past year, MAI negotiations have focused on refining the text and exploring solutions to
the main political issues, including environment and labour matters.1 A successful conclusion of
the negotiations will depend on achieving agreement on the text and on an exceptions regime 2
that will, when combined with the disciplines in the text, result in both high standards of
liberalisation and protection and a satisfactory balance of rights and obligations among the
parties. There are other issues of political importance, such as conflicting requirements, and
proposals are being discussed to address these concerns.

3. In a globalised economy, foreign investment plays a major role in economic growth and
development of both home and host countries. Yet, the multilateral system lacks a comprehensive
framework for investment. The MAI is intended to fill that gap by setting clear, consistent and
transparent rules on liberalisation and investor protection. In particular, the MAI will: set a
strong non-discriminatory legal regime for the treatment of investors and investments, based on a
top-down approach and the core principles of national treatment, MFN and transparency; be
comprehensive in its scope and coverage of investors and their investments, extending
disciplines to special topics such as privatisation and monopolies and providing mechanisms for
further liberalisation; provide the first multilateral codification of high standards of investment
protection; reflect a balanced approach to investment by associating the OECD Guidelines for
Multinational Enterprises which set voluntary standards of behaviour for international investors.

4. Dispute settlement is a fundamental element of the MAI. The combination of state-to-state

and investor-to-state investor mechanisms is a major innovation in multilateral agreements.
Questions have been raised about the application of the investor-to-state mechanism to
obligations in the MAI which are not generally covered by bilateral investment protection
treaties where investor-state dispute settlement is an accepted feature.

5. The MAI has been designed as a free-standing treaty, open to participation by non-Members
willing and able to meet the obligations of the agreement. The Negotiating Group made
considerable The Negotiating Group was pleased to welcome last September five nonMembers
as observers in the Group4 . A number of other countries have also expressed interest in early
participation in the MAI.
6. As the negotiations progressed, it was evident that more efforts were needed to explain the
MAI to a wider audience. Concerns were voiced that the MAI could threaten governments
regulatory sovereignty including in environmental and labour matters, that it could undermine
economic development policies, and that it would fail to achieve that level of liberalisation that it
had set about to create. If the MAI is to become an engine for economic growth and prosperity,
domestic constituencies need to be convinced that these fears are unfounded. Many national
governments have responded to these concerns by actively engaging in a dialogue with different
segments of society. To assist this process, the Negotiating Group has been seeking the views of
non-governmental organisations and business and labour representatives.5

7. As an investment agreement, the MAI is primarily designed to provide security, transparency

and non-discriminatory treatment for international investment. But it will not interfere with
national regulations and policies which are non-discriminatory and respect basic international
norms. It will provide the possibility of country specific exceptions and mechanisms for
progressive liberalisation. It would serve as a reference for investment rules world-wide and
provide a framework for dialogue between developed and developing countries. 8. The MAI
presents a unique opportunity to meet the challenge of globalisation and to respond to the
concerns of our civil societies. For all outstanding questions, options for solutions can be further
refined, or new solutions explored. What is most needed is the political determination to
conclude the MAI. If agreement can be reached on all substantive elements, the text and the lists
of country specific exceptions, after necessary legal work, could be ready for signature in the
second half of 1998.

Role of International Chamber of Commerce in Arbitration and Conciliation