Chapter 15 International Trade - Trade protection arguments

Question 1

List ALL trade protection arguments YOU NOOB, including their drawbacks

Answer 1

Infant industry argument
- difficult to choose which industries to protect
- The protected industries may not have strong incentives to be efficient & may continue to ask for protection

National security
- Difficult to determine what goods are essential for national security
- Political and social reasons, not economical

Health, safety and environmental standards
- The standards may be used as a form of “hidden trade protection”

Diversification of industry
- Difficult to choose which industries to diversify

Unfair competition
- e.g. Dumping
- Difficult to prove if it is dumping
- Many governments use dumping as an excuse to offer protection

Balance of payment deficit
- Retailation

Source of revenue
- Regressive tax: worsening income inequality
- Tariffs have negative effects on allocative efficiency
- Tariff revenue may be an excuse for governments to delay necessary tax system change and reform

Protetion of domestic jobs
- monetary, fiscal and supply-side policies may be more appropriate
- Retailation
- Employment of an industry vs employment of the whole country

Question 2

Define common market

Answer 2

A customs union with common policies on product regulation, and free movement of goods, services, capital, and labour.

Question 3

Define customs union

Answer 3

A group of countries that agree to eliminate all trade barriers between members, and adopt common external barriers against any non-member countries attempting to export to the customs union.

Question 4

Define Economically least developed countries (ELDC’s)

Answer 4

Those countries classified by the UN as being “low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets”.

Question 5

Define Economies of scale

Answer 5

Unit cost advantages that a business may experience as an outcome of increasing its scale of operations.

Question 6

Define Free trade agreement (FTA)

Answer 6

An agreement made between countries, where the countries agree to trade freely (eliminate all trade barriers) among themselves, but are able to trade with countries outside the free trade area in whatever way they wish.

pretty similar to the definition of “free trade area” too

Question 7

Define Monetary union

Answer 7

This is where two or more countries share the same currency and have a common central bank.

Question 8

Define Preferential trade agreement (PTA)

Answer 8

An agreement between two countries to give preferential access (reduce trade barriers) (for example, reduced tariffs) to certain products from one or more trading partners.

Question 9

Define Preferential trade agreement (PTA)

Answer 9

An agreement between two countries to give preferential access (reduce trade barriers) (for example, reduced tariffs) to certain products from one or more trading partners.

Question 10

Define Trade protection

Answer 10

Trade protection is an economic policy aiming to limit imports and/or encourage exports by setting up trade barriers.

Question 11

Define World Trade Organization (WTO)

Answer 11

An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.

Question 12

State the advantages and disadvantages of setting up a trading bloc

Answer 12

Advantages, including:
* greater access to markets offer potential for economies of scale
* with freedom of labour, there are greater employment opportunities
* membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations
* greater political stability and cooperation

Disadvantages, including:
* loss of sovereignty
* challenge to multilateral trading negotiations