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International Trade II - Coggle Diagram
International Trade II
Argument for trade protection
National security
Certain industries essential for national defense (eg: weapons) and should be protected that country can produce them itself. However, there may be dangers in having 'unfriendly' nations specialize in weapons industry
example: 2018, US imposed high tariffs on steel which ended up with trade war
Health, safety and environmental standards
Many countries maintain health, safety and environmental standards that all imported goods must meet before they allowed to enter. However, there is concern that these standards may be used as 'hidden' protection to keep certain goods out
Infant industry argument
Def: new domestic industry that has not had time to establish itself and achieve efficiencies in production, therefore, cannot compete with abroad competitors
a new firm with high costs of production that has not yet grown in size may need protection from imports until it grows to a size where protection is no longer needed
Efforts of a developing country to diversify
Def: Diversification is change involving greater variety
Economic diversification refers to increasing the variety or goods and services produced
Countries especially (ELDC's) are highly specialised in producing and exporting only primary commodities which come with dangers so countries may be better off diversifying their production and exports with the use of trade protection to keep out imports of goods they want to produce themselves
Arguments that economists justify under certain conditions
Validity depends on non-economic considerations or longer term economic benefits trade protection> short term economic costs
Arguments that economists find questionable
Correcting a balance of payments deficit
A balance of payments deficit occurs when the outflow> inflow.
Solution: impose barriers to the entry of imports, limiting imports
Problem: Decreased imports would come at the expense of falling exports in exporting countries, there is risk of retaliation(saling membalas)
Tariffs as source of government revenue
The use of tariffs for revenue purposes is more frequent in developing countries, Th reason for strong reliance on tariffs is related to ease with which imports can be taxed
Problem: Regressive tax will have negative impacts on income distribution and have a negative effects on allocative efficiency
Unfair competition
Def: Unfair competition refers to practices that countries may use in order to gain a competitive advantage over other countries in order to increase exports
dumping
production and export subsidies
administrative barriers
undervalued currencies
violation of intellectual property
Problem: Difficult to identify and time consuming. Trading partner may take advantage to impose protectionist measures
Protection if domestic jobs
Import restrictions increase domestic production, thus increasing employment.
Problems:
High cost of production due to higher prices of imported inputs
If unemployment increases in the countries that are forced to export less
Anti-dumping
Def: Dumping refers to the practice of selling a good in international markets at a price below the producing cost
It is illegal according to international agreements. If a country suspects that a trading partner is practicing dumping, it should have the right to impose tariffs
Problem: The difficulties involved in proving that dumping is being practised/ many government use it as excuse to give protection to domestic producers when it is not necessary
Arguments against trade protection
Foreign producers are worse off in all cases
Domestic and global resource allocation lose under all forms of trade protection
Income distribution is most cases worsens: Only exception is subsidies
Domestic and global resource allocation lose under all forms of trade protection
Consumers lose in most cases: This is due to higher prices of protected goods and lower quantities of goods available
Trade protection may have negative effects on a country's export competitiveness
However, the gain of producers has a cost in terms of higher costs of production and reduced efficiency
Trade protection may give rise to trade wars through retaliation
Producers and workers are the only stakeholders who gain from all types of trade protection
Trade protection creates a potential for corruption
Economic integration:
Trading Bloc
Def: Economic integration refers to economic co-operation between countries and co-ordination of their economic policies, leading to increased economic policies
Preferential trade agreements (PTA): an agreement between two or more countries to lower trade barriers on particular products in trade between each other
Trade barriers may remain on the rest of the products, and on imports from non-member countries
a member of the agreement has easier access to the markets of other members for the selected products than countries that are not members
Trading bloc: a group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging free or freer trade and co-operation between them
Free trade area (agreement): a group of countries that agree to gradually eliminate trade barriers between themselves
Each member of country retains the right to pursue its own trade policy towards other non-member countries
Problem: a product may be imported into the FTA by the country that has the lowest external trade barriers, and then sold to countries within FTA that highest external trade barriers
Customs union: a group of countries that fulfills the requirements of a free trade are (
elimination of trade barriers between members
)
Each country in a customs union is no longer free to determine its own trade policy towards non-member countries
a higher degree of economic integration than FTA
CU have the advantage over FTA's that they avoid having to create complicated 'rule of origin' for imports
Common market: an even higher degree of economic integration, in which countries have formed a customs union proceed further to eliminate any remaining tariffs in trade between them
The agree to eliminate any remaining tariffs in trade between them. The factors of production of importance are labour ad capital, which in common market are free
Advantage: advantage to its members compared to FTA's and CU. They enjoy free trade and all its advantage
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Bilateral(between 2 countries), regional(group of countries within geographical region) and multilateral(between many countries) trade agreements
Main objective: promote trade liberalisation (free trade) by reducing or eliminating trade barriers between members
Advantages of trading bloc
Lower prices for consumers and greater consumer choice
Increased investment
Economies of scale
Better use of factors of production: improved resource allocation and greater employment opportunities
free movement of factors of production (capital and labour)
Expansion into larger markets
When firm able to sell beyond their national boundaries, they be able to increase exports and achieve lower average cost
Improved efficiency in production and greater economic growth
Increased competition
increased competition offers major in terms of production by more efficient producers, lower prices
Political advantages
reduced likelihood of hostilities arising between countries where economies become more interdependent
Trade creation
Def: situation where higher cost products (imported or domestically produced) are replaced by lower cost imports
Advantage: getting rid of disadvantage of tariffs/ greater efficiency and greater allocative efficiency.
Example: Cottonia has a comparative advantage of cotton and has lower price so Microchippia import from them. Cottonia form a bilateral trade agreement, and tariffs on cotton are abolished
Stronger bargaining power
much greater power, increasing chances of being heard and achieving their objectives
Disadvantages of trading bloc
Trading bloc may be a challenge to multilateral (WTO) trading negotiations
the break up of the world trading system into many blocs can create trade conflicts between different blocs that may slow down the process of global trade liberalisation
Unequal distribution of gains and possible losses
Trade diversion
Def: lower cost imports are replaced by higher cost imports from a member after formation of the bloc
the possibility of trade diversion resulting from a trading bloc is an argument against trading bloc, and in favour of multilateral
Economic integration involves a loss of sovereignty
Def: Sovereignty refers to authority over decision-making within the national economy
Economic integration: monetary union
far greater degree of integration than a common market, and occurs when the countries of a common market adopt a common currency and central bank
Monetary union, or the formation of a single currency, can be partly thought of a system of 'fixed' exchange rates among participating currencies
A monetary union has been formed by number of the countries of the European Union (euro zone countries)
World Trade Organization
WTO functions and objectives
It handles trade disputes
It monitors national trade policies
It provides a forum for trade negotiations
It provides technical assistance and training for developing countries
It administers WTO trade agreements
It facilitates co-operation with other international organisations
Criticims and challenges
accused of not distinguishing between developed and developing economies
accused of ignoring environmental and labour issues
members have unequal bargaining power
fragmentation of global trade
the blocking of its powers to resolve disputes
unable to reach an agreement on agricultural protection and services
accused of promoting trade rules that do not favour developing countries