INTERNATIONAL TRADE

 International trade is the exchange of goods and services between

countries.

 Trading globally gives consumers and countries the opportunity to be

exposed to goods and services not available in their own countries, or
which would be more expensive domestically.

 Still, some argue that international trade actually can be bad for smaller
nations, putting them at a greater disadvantage on the world stage.
Disdvantages
 PROTECTIONISM

 Protectionist policies place specific restrictions on international trade for

the benefit of a domestic economy.

 Protectionist policies typically seek to improve economic activity but may

also be the result of safety or quality concerns.

 Tariffs, import quotas, product standards, and subsidies are some of the
primary policy tools a government can use in enacting protectionist
policies.
 The methods of protection
Tariffs
 A tariff is a tax on imports, which can either be specific (so much per unit
of sale) or ad valorem (a percentage of the price of the product).

 Tariffs reduce supply and raise the price of imports. This gives domestic
equivalents a comparative advantage. As such, tariffs are distorting the
market forces and may prevent consumers from gaining the benefit of all
the advantages of international specialization and trade
 Import tariffs are one of the top tools a government uses when seeking to
enact protectionist policies. Scientific tariffs are import tariffs imposed
on an item by item basis, raising the price of goods for the importer and
passing on higher prices to the end buyer.

Quotas
 Quotas have the effect of restricting the maximum amount of imports
allowed into an economy. Once again, they reduce the amount of imports
entering an economy and increase the equilibrium price within the
market. The government receives no revenue from a quota, as it does
with a tariff, unless it can set up a system of licences.
Hidden restrictions
 Administrative obstacles - countries can set administrative hurdles.
For example, they may require significant levels of paperwork and
then deal with these processes slowly making it difficult for importers
to compete on a level playing field with other firms.
 Health and safety standards - countries may set onerously high health
and safety standards for goods that are imported, once again making
life difficult for importers.
 Environmental standards - countries can set high environmental
standards that they know only domestic firms are likely to be able to
achieve, once again making life difficult for importers

Subsidies
 Government subsidies can come in various forms. Generally they may be
direct or indirect. Direct subsidies provide businesses with cash payments.
Indirect subsidies come in the form of special savings such as interest free
loans and tax breaks.
 Export subsidies provide an incentive for domestic businesses to expand
globally by increasing their exports internationally.
 Arguments for protectionism
 To protect employment - For example, if a nation with an advantage
successfully exports a good (e.g. Indian textiles), then this may result in
redundancies in a recipient nation (e.g. the UK).

 To help an infant (sunrise) industry -The classic argument for

protection is that new industries require help during their infancy because
of the high initial costs and lack of economies of scale. If this help was not
provided and they had to face competition from fully developed similar
industries, it is claimed that these industries might not survive.

 To protect declining industries to buy time for structural

readjustment- For example, the US government has made various
attempts to protect its declining steel industry.

 To raise revenue - Protective tariffs will raise revenue for the

government if such duties are levied on goods with inelastic
demand.
 To prevent unfair competition- A government may justify protection
by reference to the trading policies of its competitor nations. For instance,
certain producers in developing countries may try to sell fake British goods
in Britain. These imitations break the copyright and patent laws in
purporting to be of British origin, and are justifiably banned.

 To protect the balance of payments -One remedy suggested for

persistent balance of payments deficit is the use of import controls.

 To maintain security -Essential products may be produced at home even

when foreign goods may be more efficient, for example, defence
equipment.
 Arguments against protectionism
 Inefficiency is encouraged- If domestic firms are protected from
international competition, then they may settle for their existing market
share and profits. Such complacency will discourage innovation and risk-
taking. New technology may not be introduced and overmanning may
persist. The protected industry (e.g. the textiles industry) may lobby to
make temporary help permanent.

 Resources are misallocated -protection for one industry (e.g. steel)

may adversely affect another (e.g. buyers of steel) because unit costs are
raised.

 The cost of living is raised -Protection will probably raise prices and
so domestic consumers have to pay higher prices for (the taxed) imported
goods or for (the protected) home-produced goods.

 Regressive effect on the distribution of income: Higher prices

from tariffs hit those on lower incomes hardest, because the tariffs
(e.g. on foodstuffs, tobacco, and clothing) fall on products that lower
income families spend a higher share of their income
Bi-lateral and multi-lateral trade agreements

 A bilateral trade agreement confers favored trading status between two

nations. By giving them access to each other's markets, it
increases trade and economic growth. ... First, it eliminates tariffs and
other trade taxes. This gives companies within both countries a price
advantage

 Multilateral trade agreements are commerce treaties among three or

more nations. The agreements reduce tariffs and make it easier for
businesses to import and export. Since they are among many countries,
they are difficult to negotiate.
Free trade areas

 (FTA) is where there are no import tariffs or quotas on products from one
country entering another.

EFTA: European Free Trade Association consists of Norway, Iceland, Switzerland

and Liechtenstein
NAFTA: United States, Mexico and Canada (being renegotiated)
SAFTA: South Asian Free Trade Area comprising Afghanistan, Bangladesh,
Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka
Pacific Alliance: Chile, Colombia, Mexico and Peru
Customs unions

 A customs union comprises countries which agree to abolish tariffs and

quotas between member nations to encourage free movement of goods and
services. A customs union also adopt a common external tariff (CET) on
imports from non-members countries

Single markets (economic communities)

 A single market is a type of trade bloc in which most trade barriers have been
removed (for goods) with some common policies on product regulation, and
freedom of movement of the factors of production (capital and labour) and of
enterprise and services Ex: EU (European Union)

Economic unions

 An economic union is one of the different types of trade blocs. It refers to an

agreement between countries that allows products, services, and workers to
cross borders freely. The union is aimed at eliminating internal trade barriers
between the member countries, with the goal of economically benefitting all
the member countries and they share the same currency.