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Trade and restriction of trade (Key points (Even if societies as a whole…
Trade and restriction of trade
Key points
As businesses grow, many wish to sell and buy outside of their domestic market
Expanding into overseas markets offers opportunities for a business
Growth in revenue
But it brings with it considerable challenges
Businesses need to be clear why it wants to trade internationally.
Might be that the business is already buying in some overseas markets and now wishes to sell to these markets.
There are some risks associated with undertaking international trade
Trade among nations is good
International trade can be one of the most contentious of political issues, both domestically and between governments
When a firm or an individual buys a good or a service produced more cheaply abroad
Living standards in both countries increase
Other reasons consumers and firms buy abroad that also make them better off
The product may better fit their needs than similar domestic offerings
It may not be available domestically
The foreign producer also benefits
Making more sales than it could selling solely in its own market
Earning foreign exchange (currency) that can be used by itself or
others in the country to purchase foreign-made products
Even if societies as a whole gain when countries trade - not every individual/company is better off
When a firm buys a foreign product because it is cheaper, it benefits
The (more costly) domestic producer loses a sale
Usually, the buyer gains more than the domestic
seller loses.
The world is better off when countries import products that are produced more efficiently in other countries.
Except in cases in which the costs of production do not include
such social costs as pollution
Why countries trade
Ricardo observed that trade was driven by
comparative
rather than
absolute
costs (of producing a good)
One country may be more productive than others in all goods (it can produce any good using fewer inputs eg capital and labour) than other countries require to produce the same good
Such a country would benefit t from trading according to
its comparative advantage
Exporting products in which its absolute advantage was greatest, and importing products in which its absolute advantage was comparatively less (even if still positive)
A country might be e twice as productive as its trading partners in making clothing
If it is three times as productive in making steel or building airplanes, it will benefit from making and exporting these products and importing clothes.
Its partner will gain by exporting clothes – in which it has a comparative but not absolute advantage – in exchange for these other products
The notion of comparative advantage also extends beyond physical goods to trade in services – such as writing computer code or providing financial products.
Comparative advantage
Because of comparative advantage, trade rises the living standards of both countries
Irwin (2009) - calls comparative advantage 'good news' for economic development
Even if a developing country lacks an absolute advantage in any field, it will always have a comparative advantage in the production of some goods and will trade profitably with advanced economies
Differences in comparative advantage
Factor endowments
Eli Heckscher and Bertil Ohlin identified the role of labour and capital as a determinant of competitive advantage
The 'Heckscher-Ohlin proposition'
Maintains that countries tend to export good whose production uses intensively the factor of production that is relatively abundant in the country.
Countries well endowed with capital (ef factories and machinery should export capital-intensive products
Countries with well endowed labour should export labour intensive products
Economists today think that factor endowments matter - but that there are also other important influences on trade patterns
Research
Trade opening are followed by adjustments not only
across
industries, but
within
them aswell
The increase in competition coming from foreign firms puts pressure on profits, forcing less efficient firms to contract and making room for more efficient firms
Expansion and new entry bring with them better technologies and new product varieties
Trade enables greater selection across different types of goods
Explains why there is a lot of intra-industry trade - countries that export household fridges may import industrial coolers
Efficiency benefits
Results in more products, not only more of the same products, but also a greater variety
The more efficient investment spending that results from firms having access to a wider variety and quality of intermediate and capital inputs - by enhancing overall investment and facilitating innovate, trade ca bring sustained higher growth
Why is trade reform difficult
Trade continues to global efficiency
When a country opens up to trade capital and labour shift toward industries in which they are used more efficiently
That movement provides society a higher level of economic
welfare
Trade brings dislocation to those firms and industries that cannot cut it
Firms that face difficult adjustment because of more efficient foreign producers often lobby against trade as well as their workers
Typically seek barriers such as import taxes (called tariffs) and quotas to raise the price or limit the availability of imports
Processors may try to restrict the exportation of raw materials to depress artificially the price of their own inputs
The benefits of trade are spread diffusely and its beneficiaries often do not recognise how trade benefits them
As a result, opponents are often quite effective in discussions about trade
Trade policies
Reforms since World War II have substantially reduced government imposed trade barriers.
Policies to protect domestic industries vary
Tariffs are much higher in certain sectors eg agriculture and clothing and among certain country groups (developed countries)
Many countries have substantial barriers to trade in services in areas where as others have policies that welcome foreign competition.
Transportation
Communications
Financial sector
Trade barriers affect some countries more than others
The hardest hit are less developed countries whose exports are concentrated in low skill,labour-intensive products that industrialised countries often protect
USA
Is reported to collect about 15 cents in tariff revenue for each $1 of imports from Bangladesh
Compared with one cent for each $1 of imports from some major
western European countries
Imports of a particular product from Bangladesh face the same or lower tariffs than do similarly classified products imported from Western Europe
World Bank economists calculated that exporters from low-income countries face barriers on average half again greater than those faced by the exports of major industrialised countries
The WTO referees international trade
Agreements devised since 1948 by its 153 members
Promote non-discrimination and facilitate further liberalisation in
early all areas of commerce, including
Tariffs
Subsidies
Customs valuation and procedures
Trade and investment in service sectors
Intellectual property
Commitments under these agreements are enforced through a powerful and carefully crafted dispute settlement process.
Under the rules-based international trading system centred in the WTO, trade policies have become more stable, more transparent, and more open
The WTO is a key reason why the global financial crisis did not spark widespread protectionism
Doha Round of WTO trade negotiations
The institution faces big challenges in reaching agreements to open global trade further
Despite successes, restrictive and discriminatory trade policies remain common
Addressing them could yield hundreds of billions of dollars in annual global benefits.
Narrow interests have sought to delay and dilute further multilateral reforms
A focus on the greater good, together with ways to help the relatively few that may be adversely affected, can help to deliver a fairer and economically more sensible trading system
Countries will introduce trade reducing measures
To protect domestic jobs from ‘cheap’ labour abroad
To improve a trade deficit
Trade barriers make imports more expensive and will decrease demand for imports
Trade partners can do the same and will make it more expensive for a country to export
This policy also doesn’t necessarily fix the problem if domestically produced goods aren’t competitive or are not of good quality
Countries will also spend less on imports if their exports go down
To protect ‘infant industries
Countries want to give newly developing industries (known as infant industries) time to grow and become competitive
In some cases the government protection never ends and these industries become competitive only because they have been given the benefit of the trade barrier
Protection from ‘dumping’
If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be ‘dumping’ the product
Some argue that this is unfair competition, but many governments take action against dumping in order to defend their domestic industries
The WTO agreement does not pass judgement and instead seeks to address how countries can or cannot react to dumping
It is generally hard to prove dumping and sometimes countries impose anti-dumping duties just to buy more time
To provide more revenue
The World Trade Organization (WTO)
A multilateral trading system that seeks to liberalise trade
between its members
One of the youngest international trading organisations, the WTO, was originally set up under the General Agreement on Tariffs and Trade (GATT).
Succeeded GATT in 1995 and, as of July 2016, there are 164 member countries.