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4.1.4: Protectionism and Trade Blocs - Coggle Diagram
4.1.4: Protectionism and Trade Blocs
Protectionism: when a government protects domestic businesses and jobs from foreign competitors. (discouraging trade between countries)
Types:
Tariffs + quotas
Tarrif: A tax that has to be paid when goods are imported.
Quotas: Limits on the physical volume of goods that can be imported into a country in a certain time period.
This discourages international trade by making imported goods more expensive than domestic products (or limiting how much can be brought into a country).
Benefits and drawbacks:
helps domestic firms to grow as they face less competition from international businesses.
However, this can restrict consumer choice meaning they could have to pay more than they would otherwise. A lack of competitiveness also means there is no incentive for domestic firms to improve efficiency and quality.
Domestic subsidies
Sums of money provided to certain domestic firms by the government.
Benefits: These reduce production costs, allowing domestic products to achieve lower prices than imports. This creates higher demand for domestic products over imports.
Drawbacks: Subsidies are funded through tax, which may mean raising tax to fund subsidies.
Government legislation
Trade sanction: strongly restricts trade with a country.
Trade embargo: bans trade altogether (usa and cuba)
These can make international trade extremely difficult and expensive. It could also cause retaliation, where the country also does the same to your country.
This can restrict a country's development, as they cannot make any money exporting goods.
Trade blocs: (encouraging trade between countries)
Trade blocs are agreements between different governments to promote and manage trade for a particular region. Members sign agreements to remove or reduce protectionist barriers between them.
USMCA (formerly NAFTA)
North american free trade agreement
Made up of canada, mexico, and the USA.
Reduced barriers to trade between the three countries, but individual countries could still impose them on outside countries.
ASEAN
Made up of 10 countries in south asia, including Thailand, Malaysia and Indonesia.
Allows for free movement of labour and money between the countries, as well as free trade.
EU
Made up of 27 countries in Europe.
A single market: meaning there are no barriers to movement of labour, products, and capital.
There is also a common regulation of products between all member states, such as regarding quality or energy use (e.g. food standards)
Many member states also share a common currency, the Euro.
How trading blocs affect businesses within them
Advantages
Businesses can obtain supplies from other countries much more cheaply than before.
Some trade blocs allow for movement of labour, meaning the business is able to hire more/more skilled people with less restrictions.
As a bloc expands, or as a country joins it, businesses within them gain access to a much larger market, meaning they could achieve more sales and reach economies of scale.
Greater competition from within the bloc can lead to firms becoming more efficient (where they reduce their costs as much as possible to offer consumer competitive prices)
External tarrifs from outside the bloc protect firms from international competition.
DIsadvantages
It can become more expensive to import products from countries outside of a trading bloc. If a business is using an external supplier and then the country joins a trading bloc, they may have to accept a higher cost or spend time finding a new supplier.
INternational competition (within the bloc) increases when a country joins the trading bloc. This means that small business may be forced out or over competed by other businesses within the bloc, potentially leading to higher unemployment.
Short term costs may increase if a business has to adapt their products to meet trading bloc regulations.
Trading blocs can affect businesses from outside the bloc
Demand for countries outside of the trading bloc may fall. This is because some trading blocs have regulations that restrict trade outside of the bloc. This makes it more expensive for a country inside the bloc to import products from outside of it, which reduces the demand for the exporting country.
However, this can be advantageous if a country that a firm exports to (or has operations in) joins a trading bloc. INitially, although products may have to be altered to meet trading standards, the product can then be sold throughout the bloc itself. This would lead to the firm gaining access to economies of scale and therefore becoming more competitive.