UNIT 27.

INTERNATIONAL TRADE
LEARNING OBJECTIVES
After you have read and studied this unit, you should be able to

 Understand the theory of free trade

 Discuss the advantages and disadvantages of international trade

KEY TERMS

 International trade: Purchase, sale, or exchange of goods and services across

national borders.
 Free trade: a trade policy that does not restrict imports or exports. It can also be
understood as the free market idea applied to international trade.
 Protectionism: the economic policy of restraining trade between nations, through
methods such as tariffs on imported goods, restrictive quotas, and a variety of other
restrictive government regulations designed to discourage imports, and prevent
foreign take-over of local markets and companies.
 Trade barriers: Government laws, regulations, policies or practices that either
protect domestic products from foreign competition or artificially stimulate exports
of particular domestic products.
 Tariff: A duty (or tax) levied upon goods transported from one Customs area to
another, for either protective or revenue purposes. Tariffs raise the prices of
imported goods, thus making them generally less competitive within the market of
the importing country, unless that country does not produce the items so tariffed.
 Quota: Restriction on the amount (measured in units or weight) of a good that can
enter or leave a country during a certain period of time.
 Absolute advantage: Ability of a nation to produce a good more efficiently than
any other nation.
 Comparative advantage: Inability of a nation to produce a good more efficiently
than other nations, but an ability to produce that good more efficiently than it does
any other good.
 An infant industry: a new industry, which in its early stages experiences relative
difficulty or is absolutely incapable of competing with established competitors
abroad.
 A strategic industry: an industry which is essential for the promotion or
 stabilization of the growth of the locality in which that industry is situated.

LEAD- IN

 Look around you. How many things can you see that were imported from another
country?
 How much of the food you've eaten in the last 24 hours came from abroad?
 What are your country's major trading partners?
 What are your country's most important exports?
 Does your country try to restrict imports?
READING 1:
Education and protection
The Korean economist Ha-Joon Chang is the author of several books including Bad Samaritans
- Guilty Secrets of Rich Nations and the Threat to Global Prosperity. Here is part of an
interview about this book. Read it and answer the questions below.
To explain this idea in the book I use the example of my young son. This little guy is perfectly
capable of making a living. He's already eight now, but when I wrote the book he was six.
Millions of children work in developing countries from the age of four or five, as did millions of
children in rich countries in the 19th and early 20th centuries. Maybe I should send my son to the
labour market and make him get a job. If he can earn his own living, that's a lot of money saved
for me. But more importantly, this will expose him to competition and make him a very
productive person.
Well, of course, I don't do this. He is quite a clever kid and maybe if I support him for another 12
or 15 years, he could become a software engineer or brain surgeon or nuclear physicist. Of
course, there's a danger that he might turn out to be a total waste of time, but that's a risk I'm
willing to take. know for sure that if I kick him into the labour market now, he will become a
shoe-shine boy, and will maybe grow up to be a street hawker, but he will never be a brain
surgeon or a nuclear physicist.
The analogy is: When you are trying to get into a more difficult and thereby higher-return
activity, developing countries have to invest in it. The investment comes in the form of
protection, which makes, for the moment, your local consumer use expensive and inferior
domestic products. But unless you do that, these industries are not going to grow. you accept that
you will use inferior products from inefficient producers for the time being. In the meantime, you
do certain things to make sure that these firms grow up, i.e. they increase their productivity and
eventually give you cheaper domestic goods, create jobs and stimulate other activities. In the
end, you are better off that way.
So, inefficiency is part of the deal. Only you are deliberately creating these inefficiencies With
the view of becoming even more efficient than otherwise possible.
Comprehension:
1. Explain in detail the analogy Chang makes between child labour and free trade (or between
education and protectionism).
2. What is the short-term disadvantage of protecting growing industries?
Discussion:
• Which industries or sectors could be usefully protected in your country until they had a
comparative advantage?
• To what extent would you be prepared to use inferior, expensive products from inefficient
producers? What if you thought this “might turn out to be a total waste of time”?
Vocabulary: Before discussing arguments for and against free trade, match up these words and
definitions.

Copyright dumping generic subsidize trademark

1. a cheaper copy of a product that is not marked with the producer's name
2. a name or a symbol showing that a product is made by a particular producer and which cannot
be legally used by anyone else
3. selling unwanted goods very cheaply, usually in other countries
4. the legal right to control the production and selling of a book, play, film, photograph, piece of
music, etc.
5. to pay part of the cost of something
READING 2: Read the text and answer the following questions
1. Why do most economists oppose protectionism?
2. Why do most governments impose import tariffs and/ or quotas?
3. Why were many developing countries for a long time opposed to GATT?
4. Why have many developing countries recently reduced protectionism and increased their
international trade?
5. What can give a country an absolute or comparative advantage in goods and services over
other producers?
6. Why does the theory of comparative advantage seem inadequate to explain international
trade?
 PROTECTIONISM AND FREE TRADE
The majority of economists believe in the comparative cost principle, which proposes that all
nations will raise their living standards and real income if they specialize in the production of
those goods and services in which they have the highest relative productivity. Nations may have
an absolute or comparative advantage in producing goods and services because of factors of
production (notably raw materials), climate, division of labour, economies of scale, and so forth.
This theory explains why there is international trade between North and South, e.g.
semiconductors going from the USA to Brazil, and coffee going in the opposite direction. But it
does not explain the fact that over 75% of the exports of the advanced industrial countries go to
other similar advanced nations, with similar resources, wage rates, and levels of technology,
education, and capital. It is more a historical accident than a result of natural resources that the
US leads in building aircraft, semiconductors, computers and software, while Germany makes
luxury automobiles, machine tools and cameras.
However, the economists who recommend free trade do not face elections every four or five
years. Democratic governments do, which often encourages them to impose tariffs and quotas in
order to protect what they see as strategic industries- notably agriculture-without which the
country would be in danger if there was a war, as well as other jobs. Abandoning all sectors in
which a country does not have a comparative advantage is likely to lead to structural
unemployment in the short (and sometimes medium and long) term.
Other reasons for imposing tariffs include the following:
 to make imports more expensive than home-produced substitutes, and thereby reduce a
balance of payments deficit;
 as protection against dumping (the selling of goods abroad at below-cost price in order to
destroy or weaken competitors or to earn foreign currency to pay for necessary imports);
 to retaliate against restrictions imposed by other countries;
 to protect ‘infant industries’ until they are large enough to achieve economies of scale
and strong enough to compete internationally.
 with tariffs, it is impossible to know the quantity that will be imported, because prices
might be elastic. With quotas, governments can set a limit on imports. Yet unlike tariffs,
quotas provide no revenue for the government. Other non-tariff barriers that some
countries use include so-called safety norms, and the deliberate creation of customs,
difficulties, and delays.
The General Agreement on Tariffs and Trade (GATT), an international organization set up in
1947, had the objectives of encouraging international trade, making tariffs the only form of
protectionism, and of reducing these as much as possible. The most favoured nation clause of the
Gatt agreement specified that countries could not have favoured trading partners, but had to grant
equally favourable conditions to all trading partners. The final Gatt agreement- including
services, copyright, and investment, as well as trade in goods- was signed in Marrakech in 1994,
and the organization was superseded by the World Trade Organization.
It took nearly 50 years to arrive at the final Gatt agreement because, until the 1980s, most
developing countries opposed free trade. They wanted to industrialize in order to counteract what
they rightly saw as an inevitable fall in commodity prices. They practised import substitution
(producing and protecting goods that cost more than those made abroad) and imposed high tariff
barriers to protect their infant industries.
Nowadays, however, many developing countries have huge debts with Western commercial
banks on which they are unable to pay the interest, let alone repay the principal. Thus, they need
to rollover (or renew) the loans, reschedule (or postpone) repayments, or borrow further money
from the International Monetary Fund, often just to pay the interest on existing loans. Under
these circumstances, the IMF imposes severe conditions, usually including the obligation to
export as much as possible.
Quite apart from IMF pressure, Third World governments are aware of the export successes of
the East Asian ‘Tiger’ economies (Hong Kong, Singapore, South Korea, and Taiwan), and of the
collapse of the Soviet economic model. They were afraid of being excluded from the work
trading system by the development of trading blocks such as the European Union, finalized by
the Maastricht Treaty, and the North American Free Trade Agreement (NAFTA), both signed in
the early 1990s. So, they tended to liberalize their economies, lowering trade barriers and
opening up to international trade.

CASE STUDY 1
Three countries, X, Y and Z, trade with each other. The government of Country X is worried
about the high level of imports from the other two countries. The government of Country Y
wants to encourage the two other countries to join a common currency. The currency of Country
Z has recently appreciated against the currencies of the other two countries.
a) State one way in which Country X could reduce imports from the other two countries.
b) Explain two ways in which businesses in Country X might be affected by the government
reducing imports.
c) Do you think that businesses in these three countries would benefit from a common (single)
currency? Explain your answer.
CASE STUDY 2
For and against free trade
Although many economists favour free trade, there is also a lot of opposition, there have been
huge and violent protests at meetings of the World Trade Organization (WTO).
- Classify the following statements (A-N): which are in favour of, and which are against
free trade and the policies of the WTO?
- Which set of arguments do you find the most convincing?
A. Free trade and international supply chains lead to peace and stability.
B. WTO policies prohibit developing countries from protecting infant industries until they are
internationally competitive, although the rich countries that dominate international trade all did
this.
C. Free trade guarantees the largest possible foreign markets for producers and exporters.
D. The WTO defends Trade Related Intellectual Property rights (TRIPs), granting
pharmaceutical companies patents, copyrights and trademarks which deny poor countries access
to lifesaving medicines and generic drugs.
E. Free trade guarantees consumers the lowest possible prices.
F. Lowering trade barriers also breaks down other barriers between peoples and nations.
G. The price of exported goods does not reflect the environmental cost of transporting them.
H. Instead of promoting internationally recognized labour and environmental standard., free
trade makes it easier for production to go where the labour is cheapest and environmental costs
are low.
I. Free trade, comparative advantage and specialization always lead to economic growth and
development.
J. Total world trade in 2000 was 22 times higher than in 1450, and as a result, people were much
more prosperous.
K. The WTO classifies most environmental, labour, health and safety protection laws as illegal
barriers to trade; it has ruled against the US Clean Air Act and parts of the US Endangered
Species Act.
L. Free trade ensures secure supplies and a greater choice of components and raw materials for
producers, and of products and services for consumers.
M. The WTO has ruled that governments cannot take into account “non-commercial values”
such as human rights, opposing child labour, etc.
N. WTO policies allow rich countries to dump heavily subsidized industrially produced food in
poor countries, which damages local production.
In favour
Against

VOCABULARY
EXERCISE 1. Match each term to its correct definition.
1. Barriers to trade a. A type of protectionist measure that sets a numerical limit
on the imports allowed into a country over a specified time
2. Dumping
period.
3. Embargo
b. International trade without any protectionist barriers
4. Free trade between countries.
5. Globalization c. The act of selling exports at artificially low prices, below
6. Infant industries those charged by domestic firms, and often at less than the
costs of production.
7. International trade
d. Import taxes imposed on foreign goods and services.
8. A multinational
corporation (MNC) e. A type of trade protectionist measure banning the trade of a
certain good, or banning trade with a particular country.
9. Protection
f. Obstructions to free trade, imposed by a government to
10. Quota
safeguard national interests by reducing the competitiveness
11. Subsidies of foreign firms.
12. Tariffs g. The process by which the world's economies become
increasingly interdependent and interconnected.
h. An organization that operates in two or more countries.
i. The use of trade barriers to safeguard a country from
excessive international trade and foreign competition.
k. Financial support from the government to lower the
production costs of domestic firms, thereby improving their
competitiveness.
l. The exchange of goods and services beyond national
borders.
m. New, unestablished businesses that need protection from
foreign competitors.
Exercise 1:
1. f 2. c 3. e 4. b 5. g 6. m 7. l 8. h 9. i 10. a 11. k 12. d

Exercise 2:
1. customs
2. handling
3. premises
4. truck
5. loading
6. freight
7. documentation
8. transit
9. terminal
10. clearance (xả kho)
Exercise 3:
1. K 2. H 3. L 4. G 5. D 6. A 7. F 8. B 9. E 10. M 11. I 12. C

EXERCISE 2. Complete the text about Incoterms with the words in the box. Notice the
glossary at the bottom.

clearance customs documentation freight truck

handling loading premises terminal transit

What are Incoterms?

Incoterms state the responsibilities of buyer and seller in relation to marine transportation - not
just the shipping costs, but all other associated costs such as insurance, (1) _____________
duties, and ground (2) _____________.
The buyer pays for the sea crossing
A price quoted EXW is where the seller makes the goods available at their own (3)
_____________, and the buyer collects them there. The buyer has responsibility for all the other
transport costs and risks from that point onwards.
If the price is FAS, then the seller also covers the cost of inland transport (by (4)
_____________ or rail) to the port of shipment, and of unloading the containers onto the dock.
The buyer pays for (5) _____________ onto the ship plus all the costs from that point.
FOB is almost the same, except here the seller pays for loading onto the ship, not the buyer.
The seller pays for the sea crossing
Now the goods are on the ship. If the price has been set so that the seller also pays the (6)
_____________ (= goods and the system of moving these goods) costs, then there are further
Incoterms to be used.
With CFR the seller pays the freight costs and handles the export (7) _____________ (=
paperwork), but does not pay the insurance while the goods are in (8) _____________ at sea.
With CIF the seller pays insurance as well. But in both cases, their responsibility ends at the port
of destination, while the goods are still on board. The buyer has responsibility for unloading
fees, local storage at a (9) _____________, the import licence, duties and taxes, the customs
broker's fees and onward delivery /ˈɒn.wəd/= (moving forward )to the buyer's own premises.
In the final case, DDP, it's the seller who pays for everything, and who also has to handle any
customs (10) _____________ problems. The buyer has no additional costs or risks at all - but of
course, the price quoted in the contract will reflect this!
EXERCISE 3. Match up these words and expressions with the definitions below
1. trade in goods A. autarky
2. trade in services (banking, insurance, tourism, and so on) B. deficit
3. direct exchanges of goods, without the use of money C. quotas
4. the difference between what a country receives and pays for D. balance of payments
its exports and imports of goods E. dumping
5. the difference between a country’s total earnings from F. surplus
exports and its total expenditure on imports
G. balance of trade
6. the (impossible) situation in which a country is completely
 self–sufficient and has no foreign trade H. invisible imports and
exports
7. a positive balance of trade or payments
I. tariffs
8. a negative balance of trade or payments
K. visible trade (GB) or
9. selling goods abroad at (or below) cost price
merchandise trade (US)
10. imposing trade barriers in order to restrict imports
L. barter or counter-trade
11. taxes charged on imports
M. protectionism
12. quantitative limits on the import of particular products or
commodities

UNIT REVIEW
1. Discuss whether imposing tariffs will benefit the domestic economy?
2. Explain the difference between international trade and free trade.
3. Identify three methods of trade protection that a country could use.
4. Explain two benefits of free trade.
5. Describe two disadvantages of international trade.
6. Explain two reasons why countries might decide to trade with each other.

REFERENCES
1. Mackenzie, I., 2010, English for Business Studies, Cambridge University Press.
2. Mascull, B., 2017, Business Vocabulary in Use Advanced, Cambridge University Press.
3. Hoang, P., 2019, Cambridge IGCSE and O Level Economics, Hodder Education.
4. Nickles, W.G., McHugh, J.M., McHugh, S.M., 2019, Understanding Business, Mc Graw
Hill Education.
5. Emmersion, P., 2009, Business vocabulary builder, Macmillan Publishers Limited.