Chapter 2: Free trade and protection Flashcards
1
Q
define free trade
A
the absence of artificial barriers to trade that restrict the free exchange of goods and services between countries, which aim to protect domestic producers from foreign competition
2
Q
define factor endowments
A
the quantity and quality of resources a country has available for economic activity eg. land, labour, capital and tech
3
Q
define comparative advantage
A
a principle that states that even if one country can produce all goods more efficiently than another country, the trade will still benefit both countries if each specialises in the production of the good in which it is comparatively more efficient, as measured by the opportunity cost of producing each good
4
Q
what are the advantages of free trade
A
- obtain goods and services that they cannot produce themselves
- specialised in production in which they are most efficient
- generate economies of scale, lowering production costs and downward pressure on prices
- Exposure to greater foreign competition forces
- encourages innovation and spreading new technology and production processes
- higher living standards and increased consumer choice
- multiplier effect of growth in export income
5
Q
what are the disadvantages of free trade
A
- short-term - increase in unemployment, long term - net increase in employment as productive resources in the economy are redirected to more efficient production
- Production surpluses dumped
- encourage environmentally irresponsible production methods or exploitation of workers
- infant industries - cant compete
- Countries may be unable to diversify their economic base eg. countries who specialise in agriculture rely on imports
- persistent trade deficits –> reliance on overseas borrowing or foreign investment
- National security may be undermined
6
Q
list the reasons for protection
A
- shielding infant industries
- prevention of dumping
- protection of domestic employment
- Defence, national security and self-sufficiency
- Environmental protection
- Diversification of industry
- cultural heritage
- Improving the balance of payments position
7
Q
why do Infant industries need to be shielded from competition
A
- in short term: enable them to build capacity, establish markets and achieve economies of scale so they can compete globally
8
Q
why is the Infant industries argument not credible
A
- If protectionist policies are not removed, there will be no real incentive for firms to reach a level of efficiency that would enable them to compete without protection
- Many industries continue to rely on this assistance for many years
9
Q
define dumping
A
occurs when foreign firms sell their goods in another market at unrealistically low prices (below cost or below the price charged in their home market)
10
Q
what is the effect of dumping
A
- Domestic producer may be forced out of business, reducing the productive capacity of the economy and increasing unemployment
11
Q
why do firms dump
A
Used to clear large production surpluses or to establish a market position in another country
12
Q
why is Protection of domestic employment beneficial
A
saves jobs ie if local producers are protected from foreign competition, demand for local goods will be greater, boosting domestic employment
13
Q
why is protection of domestic employment bad
A
- distorts the allocation of resources away from areas of efficient production towards less efficient industries
- long run: higher levels of unemployment, lower rates of economic growth and higher prices
14
Q
why is phasing out protection economically better than protectionism
A
- better and more lasting jobs will be created in internationally competitive sectors
- Implementing protectionist measures often results in foreign govs retaliating
- Likely net result: economy maintains employment in less efficient protected industries but loses greater amount of employment in more efficient export industries
15
Q
what strategic non-economic reasons for wanting to retain certain key industries
A
- retain steel and defence industries in event of war
- self sufficiency of food supplies
- national security at the expense of economic efficiency
- increasing weight due to rising geopolitical tensions eg. China’s military ambitions
16
Q
list some real life examples of the need for self-sufficiency
A
- Russia-Ukraine war prompted 38 countries to restrict their agricultural exports due to the potential global food shortages
- pandemic: vaccine and protective equipment shortages
concerns that globalisation has made many economies too reliant on fragile global supply chains eg. aus’s FMIA policy overcome challenges from AUS’ integration with global supply chains, reliance on imports and limited domestic manufacturing capacity
17
Q
what are the benefits of Protecting domestic firms
A
- higher living standards and human rights
- shield from competitors using low-cost labour protect local jobs and working conditions
18
Q
what are the benefits of protecting the Diversification of industry
A
educing dependence on key export industries → equalising incomes and increasing economic stability
19
Q
what is the strategic industry policy to ‘pick winners’
A
supporting industriess that will most likely be the most efficient
20
Q
what are the benefits of protecting cultural heritage (the national spending argument)
A
encourages switching from imports to locally-made goods to protect national sovereignty and cultural identity
21
Q
what are the benefits of Improving the balance of payments position
A
switching to domestically produced goods reduces trade deficit and build up of foreign debt, however, diverting resources to less efficient industries → reduce output and income → higher prices, lower living standards → firms less internationally competitive (higher input costs) → retaliatory protection may lower exports nullifying any imporvement in the trade balance
22
Q
what has been the shift in protectionist measures
A
- shift away from traditional measures such as tariffs towards ‘behind the border’ measures such as subsidies, tax concessions, cheap loans, local content rules and domestic reservation policies
23
Q
define tariffs
A
tax imposed on certain imports to protect domestic industries
effect - raising price of imported goods, making domestic producers more competitive in the national market
24
Q
what are the main economic effects of tariffs
A
- short term: Quantity of imports falls and stimulate domestic production and employment
- reallocation of resources towards less efficient producers
- Consumers pay a higher price and receive fewer goods - redistributes income away from consumers and foreign firms to gov and domestic firms
- Government raises revenue
- retaliation
25
define quotas
limit placed on the volume of imports of particular goods, guaranteeing domestic producers a share of the national market (though are sometimes used to limit the quantity of certain undesirable goods entering the economy)
26
define tariff quotas
goods imported up to the ‘soft’ quota are levied at the standard tariff rate, with goods imported beyond the quota involving a higher tariff
27
define voluntary export restraint
where a country agrees to limit its exports to another country to reduce its trade surplus with that country
28
what are the main economic effects of import quotas
1. short term: Domestic producers supply a greater quantity of the good, stimulating domestic production and employment
2. reallocation of resources from more efficient sectors of the economy (resoruces attracted to protected industry)
3. consumers pay a higher price and receive fewer goods
4. do not directly generate revenue for government (make some from import licences)
5. retaliation
29
define subsidies
financial assistance to domestic producers, enabling them to reduce their prices and compete with imported goods
- encourage certain production eg. renewable energy
- Enable domestic firms to sell more globally
- lead to lower prices since they generate fiscal costs rather than revenue
30
what are the main economic effects of subsidies
1. short term: Increased domestic supply, higher output and employment
2. Reallocation of resources from more efficient industries
3. Consumers pay a lower price and receive more goods
4. Subsidies impose fiscal costs on governments ie fewer resources for education etc
5. encourage rent seeking behaviour
31
define local content rules
industry regulations and government procurement policies where a certain percentage of inputs or outputs must be manufactured within AUS
32
what do export incentive programs do
assist producers in encouraging domestic firms to penetrate global markets or expand their existing overseas market share
33
in what forms can assistance come
- grants to reimburse firms for expenses incurred creaking into international markets
- allowing tax deductions on expenditure incurred in developing export markets
- concessional loans (with more favourable terms than market lenders)
- technical assistance (such as marketing and legal advice)
34
what are the disadvantages of export incentives
- dont protect domestic firms from foreign competition in the domestic market
- artificial barrier to free trade
35
define export taxes (export duties or export tariffs)
taxes on exports from domestic firms eg. developing countries put export taxes on raw materials firms are selling overseas
36
what are some Reasons for imposing export taxes
- Generating revenue (eg. by taxing exports of oil)
- Encouraging development of domestic processing industries eg. taxing export of iron ore but not steel
- Ensuring supply of goods for the domestic market (eg. food security) - can apply minimum quota on domestic supply
37
what are the Overall economic effects of protectionism on the domestic economy
- long term: lower output, employment and income → less consumer choice → lower living standards, and higher prices due to misallocation of resources
- Weaker fiscal position: lower tax revenue
- Weaker balance of payments position
- lower productivity growth --> lack exposure to international competition → lack of incentive to innovate
38
what are the Overall economic effects of protectionism on the global economy
- Reduced trade b/w nations (lower world output due to potential gains from trade lost)
- Lower living standards - reduced global eco growth and productivity growth, higher unemployment and prices due to shielding of inefficient producers
- uncooperative system with lost opportunities
39
what are the lost opportunities for both developing and advanced economies as a result of protectionism
- Lack of access to advanced eco’s markets hinder developing ecos from specialising in production in which they have comparative advantage
- Greater liberalisation - achieve far greater gains from trade
- Advanced ecos gain substantial eco benefits from a reduction of agricultural trade barriers --> reallocation --> allows consumers increase spending on other products
40
what are the types of trade agreements
TA can be bilateral, multilateral or global, promoting free trade exclusively amongst members or open to all nations
41
what is the general trend of FTAs
increasingly moved towards forming agreements and trade alliances with particular countries to gain from growing trade opportunities and avoid being excluded from emerging trading blocs
42
define trading bloc
formed by a number of countries joining together in a formal preferential TA to the exclusion of other countries eg. EU and USMCA/NAFTA
43
define free trade agreements
formal agreements between countries designed to break down barriers to trade between those nations
44
which TAs are more beneficial
Bilateral and regional TAs are more preferential as they give more favourable market access to imports from partner countries
45
what are the disadvantages of trade agreements
- may create worse conditions for global free trade
- This proliferation of smaller scale agreements cited the emergence of regionalisation → risk that regional trade blocs could result in trade fragmenting into self-contained regions, hindering spread of global free trade
- economists argue - hinder progress as they establish separate trading areas and often raise protectionist barriers for non-members
46
define Trade diversion
where a country’s imports switch from the most efficient producer to another less efficient country due to the provision of a trade agreement
47
what is the general agreement on TAs effect
General agreement that preferential agreements are not as effective in realising potential gains from trade as wider multilateral action to reduce or eliminate trade barriers globally
48
what is australias approach to TAs
AUS has a pragmatic approach, pursuing bilateral and regional trade to improve market access for AUS exporters in the absence of further global agreements (far more difficult to negotiate)
49
define trade liberalisation
the process of reducing or removing barriers to trade
50
why was APEC formed
in response to the formation of trading blocs in other parts of the world, such as the EU and NAFTA
51
why was ASEAN formed
- promotes eco growth and development in the region through trade liberalisation and by giving member countries a greater voice than within APEC (dominated by US, China, Japan)
- strengthened intraregional trade ties by further reducing trade barriers b/w members
- Member achieved greater specialisation, economies of scale and have attracted more foreign investment
52
why was the EU formed
- helped dismantle trade barriers within Europe
- Single market for goods and services driving strong trade
- Used tariffs and other protectionist trade barriers against non-members leading to accusations that its a closed trading bloc
- Agricultural products heavily protected
53
how can brexit benefit aus
opportunities for AUS exporters to replace EU exports to Britain (and to a lesser extent, British exports to EU members)
54
define monetary union
- the adoption of a common currency (the Euro) and common interest rates
- role in extending eco integration
55
what are the benefits of monetary union
- increased trade through the elimination of transaction costs associated with currency conversion
- increased investment by firms - certainty around price
- increased stability of currency and prices for smaller ecos susceptible to high exchange rate volatility and bouts of high inflation
- higher economic growth and job creation
56
what are the disadvantages of monetary unions
- lack of flexibility - failure to account for different economic conditions across the region and the asymmetric impact of external shocks
- Loss of macroeconomic policy autonomy
- Loss of national sovereignty - inability to utilise exchange rate movements to boost export competitiveness
- Political opposition
57
why did USMCA replace NAFTA
- increased economic integration in the region significantly with real value of trade more than tripling
- Trump threatened to withdraw from NAFTA unless terms were renegotiated
- main criticism of NAFTA: Us experienced substantial trade deficits and job loss as manufacturing shifted to Mexico (lower wages)
58
What were the chanegs to NAFTA under the USMCA
-Tightening of local content rules for car manufacturers
- Improving access to the Canadian dairy markets and strengthening labour protections (particularly minimum wages) and rights to unionise in Mexico
- Changes relatively minor and estimate economic effects as negligible
59
breifly outline the roles of international organisations
- WTO - providing a forum for the promotion of free trade, negotiation of global trade agreements and resolution of trade disputes
- IMF - lending funds to countries experiencing short-term balance of payments, exchange rate or financial crises
- World Bank - provision of grants, loans, aid and technical assistance to developing countries to promote development
- UN - promoting economic growth and development and free trade
- OECD - carrying out research and making policy recommendations to improve economic performance of members
60
what are the overall roles of international orgs
These global organisations promote policy coordination, set rules for international trade and investment and provide a forum for the discussion of trade-related issues and disputes
61
what is the role of WTO
- Role of WTO (1995) is to advance and implement global trade agreements, and to resolve trade disputes between countries according to the rules of world trade
- The WTO has overseen a halving in average tariff rates among member countries and is the first international organization with powers to enforce trade agreements
62
why did GATT change to WTO
- Weakness of GATT - no effective mechanism to enforce TAs so many countries implemented GATT agreements selectively
- Led to an agreement to form a new global trade organisation wiht enforcement powers
63
why is WTO significant
WTO is significant because it extends beyond trade in goods to also include trade in services and intellectual property (patents, copyrights and trademarks)
64
what are the basic guiding principles of the WTO
- Non-discrimination - trade terms or concessions granted to one member nation must be extended to all member nations
- Trade liberalisation - working towards the elimination of all trade barriers through multilateral negotiations (trade rounds)
- stability of trade relations - mechanisms to discuss and resolve disputes between countries
- transparency - trade agreements and preferences should be open to scrutiny and discussion in the WTO forum
65
what is the process of WTO settling disputes
- can lodge a complaint → initiates dispute resolution and if no direct agreement is reached through consultations, a WTO panel will hear the complaint and issue a decision
- If the country doesn't comply with a WTO directive, other countries may impose trade sanctions of high tariffs on imports from the offending nation
66
why has WTO been effective with small economies but not large forces such as the US, China and EU
While these powerful economies have not formally refused to comply, they routinely delay compliance and continue to lodge appeals rather than accepting and acting on WTO decisions
67
why has WTO’s role significantly weakened in recent years
- rise in protectionist sentiment globally
- Decline in public support for free trade in many countries since the GFC and a shift towards focusing on bilateral and regional TAs
- The biggest threat to WTOs relevance has been the ongoing trade tensions b/w the world’s two lagrest ecos
- Trump and Biden have resolved the WTOs ability to resolve trade disputes by blocking the apointment of replacement judges to the appeals body making it unable to function
68
How has the WTO helped AUS with China's retaliation
- A significant group of WTO member have signed an interim agreement (the Multi Party Interim Arbitration Arrangement, or MPIA) to ensure WTO rules remain enforceable veen while the US holds the system hostage with its veto of the appointment of WTO appellate judges
- AUS used this process to pressure China to remove punitive tariffs placed on AUS exports such as wine and barley in 2020 (took several yrs to influence chinese gov)
- The open multilateral trading system facilitated by the WTO allowed most AUS exporters to find other markets previously served by China’s new suppliers
69
what si the IMF
- One of the most important institutions in the global economy, managing the stability of the global financial system - foreign exchange markets
- IMFs role expanded into assisting individual economies experiencing currency crises or financial instability to prevent flow-on effects
70
what does IMF promote
- the expansion of trade and investment flows by maintaining stability in foreign exchange markets which facilitate economic relationships b/w countries
- Global eco activity through targeted rescue packages
- Or forces, in the case of ecos in desparate need of assistance to open their ecos by adopting policies supporting free tarde and free movement of finance and capital
- Impact of IMF’s policy approach is increase by the fact that many international banks and other private lenders require governments to adopt such policies before they are willing to provide loans
71
The IMF’s role in ensuring stability in global financial markets and global economic activity is illustrated through 3 recent examples of IMF interventions:
- in 2018 the IMF provided Argentina a US$57bn loan package – the largest ever for a single country at the time – after a currency crisis in which the Argentinian peso lost half its value, contributing to a surge in inflation to 55% by mid-2019 and concerns that Argentina would default on its external debt
- in response to the COVID-19 pandemic, the IMF approved its largest ever relief package in 2021 – a US$650bn emergency aid fund to assist developing countries to buy and roll out vaccines and repay debts accrued during the pandemic
- the IMF has provided over US$120bn to Ukraine since Russia’s invasion in 2022 to help manage the economic impacts of the war
72
what additional loan is usually involved in Financial assistance from the IMF to countries experiencing financial difficulties
conditional loans known as structural adjustment programmes (SAPs)
73
what Washington policies does SAPS need countries to adopt
- austerity measures – particularly harsh cuts to government spending
privatisation – lowering public assets and revenue (and often sold below market value) and increasing inequality
- financial deregulation – designed to increased foreign investment, but has often led to an exodus of capital and subsequently rising interest rates (to entice investors back)
- market-based pricing – removal of subsidies on basic items such as food, water and energy
- trade liberalisation – opening domestic markets to greater imports (which has generally not been reciprocated by advanced economies)
74
why have the IMF and SAPS in particular been criticised
- Western economic imperialism – undermining the sovereignty of recipient countries by stripping governments of the tools to influence their economies through the imposition of a Western policy model
- a ‘one-size-fits-all’ approach which does not account for local economic conditions
- widespread ineffectiveness and stubborn persistence – the majority of SAP recipients have been left worse off following IMF assistance, yet policy prescriptions remained largely unchanged for many years
75
what did IMF do in repsonse to the criticism
- supporting expansionary macroeconomic policies while the global economy was facing recession
- Gave borrowing ecos more control over policy decisions (including freedom to increase gov spending to avoid recession)
- Undertook steps to make its governance more representative so that emerging and developing economies have a greater say over IMF policies
76
what is the role of the World Bank
- Original focus was to provide funding for rebuilding in Western Europe following WWII
- Primary role now is promoting economic development in poorer countries
- provides concessional loans to developing countries to fund infrastructure projects such as power plants, roads and damn
77
what are the 5 separate organisations in the World Bank Group providing specific assistance to lower-income countries
- The International Bank for Reconstruction and Development (main organisation) - focused on funding investment in infrastructure, reducing poverty and helping developing economies to adjust to the demand of globalisation
- the International Development Association – which provides ‘soft loans’ (loans at little or no interest to developing countries)
- the International Finance Corporation – whose role is to attract private sector investment to the Bank’s projects
- the Multilateral Insurance Guarantee Agency – which provides risk insurance to private investors
- the International Centre for Settlement of Investment Disputes – which provides conciliation and arbitration between states, and between states and corporations
78
who is the world bank funded by
primarily by contributions from member countries
79
what are the world banks two major goals
- Reducing extreme poverty rate to less than 3% of the world’s population by 2030 (current forecasts project 6-9% living below US$1.90 per day)
- Reducing inequality by promoting income growth for the world’s bottom 40%
80
what are the recent negative of world bank
- WB has been accused of undermining the sovereignty of developing countries through the conditionality of financial assistance
- Recent decades, WB’s importance as a lender has declined as private lending markets have expanded
81
what are the recent important roles of the world bank
- However, played an important role in providing US$47bn for credit support after the onset of the pandemic, when private credit markets seized up
- Important recent action - support of the Heavily Indebted Poor Countries Initiative, which aims to reduce debt by ⅔ in the world's poorest countries whose debt levels are considered unsustainable
- In 2023, WB provided $30bn in climate finance, making it the largest multilateral financier of climate action across the developing world
82
what is the broader agenda and role of UN
- Broader agenda - covering the global economy, international security (its original purpose), the environment, poverty and development, international law and global health issues
- Historically played an important role in supporting greater linkages between economies and promoting globalisation
83
why is UN Decision-making powers limited
it relies on the support of members and budgets of different UN agencies are small compared to governments of most advanced economies
84
what does UN do
- Developed international standards that make it easier for trade and investment flow to occur eg. food safety and rules on copyright and intellectual property
- Overseen the development of international agreements to enforce human rights and political freedoms to address underlying causes of poverty in developing nations
85
what is the UN's most important action
- establishment of the Sustainable development goals, which aim to reduce poverty and inequality from 2015-2030
- Comprise 17 targets covering global poverty, economic growth, hunger, wellbeing, education, gender equality, clean water and sanitation, clean energy, climate action and sustainable use of land and oceans, etc.
86
what is the OECD and their primary goal
- The OECD is an international economic organisation of 38 mostly advanced economies committed to democracy and the market economy
- Primary goal - “to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries while maintaining fiscal stability and thus contribute to the development of the world economy”
- In practice, the main role is to conduct and publish research on economic policy issues and to coordinate economic cooperation among member countries to work towards common policy goals
87
why is OECD research widely regarded as the most reliable and highest quality in the world
- Undertake a large amount of research and compiling more detailed economic data and policy info on advanced ecos than any other international organisation
- Research in favour of globalisation, free markets, privatisation and deregulation (Washington Consensus policies)
88
OECD in recent years
- In recent years, they have tended to be more supportive of the role of government intervention in achieving economic policy goals
- OECD has had a significant influence on the global economic policy agenda in recent years, playing a key role in an international agreement in 2021 to reform corporate tax rules
89
what is the role and aim of government economic reforms - G7, G20
- Organisations that exist as forums for world leaders, play an important role in coordinating policies between major economies, especially during times of economic or financial crisis
- Aim of these forums - enable heads of state, along with their treasurers and central bank governors, to discuss global economic issues with particular focus on economic stability and growth
- Fostered great cooperation among advanced economies on major eco issues including the recovery from the pandemic, the fallout of Russia’s invasion and measures to address climate change
90
what si the G7 and what does it do
- one of the most important gov economic forums with the seven largest indsutrialised natinos including the US, japan, germany, UK, France, Italy and Canada
- became G8 but russia invaded so quit permanently in 2014
- Its agnda includes climate changem global poverty and security
- Unofficial forum coordinating global macroeconomic policy because of its influence over the fiscal and monetary policies of the world’s largest economies
91
why has the Significance of the G7 declined
- due to a shift in the global balance of power towards emerging economies - in particular China
-No longer representative of the most important focus in the global eco
- Eg. China and India are more important to future global growth than ecos like Canada and Italy
- G7’s share of GWP shrunk form 68% in 1992 to 44% in 2023, and the G7 nations cover only 10% of the world’s population
- Due to this, there have been proposals to include five emerging ecos referred to as the Outreach Five (O5) - Brazil, China, India, Mexico and South Africa
92
what is the G20
- 19 of the world’s largest ecos plus the EU and since 2023, the African Union
- Accounts for large majorities of GWP, global tared and the world’s population
- Membership includes several emerging economies that have become the driving force behind world economic growth since 2008, including each of the O5
93
what is the significance of G20
- Played a key role in coordinating the global response to the GFC and avoiding a global depression
- Coordinated fiscal stimulus packages and took steps to improve supervision of the global financial system and international financial institutions
-
94
why is G20 becoming less significant
- However, international economic cooperation has weakened in recent years with the G20 playing a smaller role in coordinating efforts, including the pandemic
- G20 likely to become less significant for the foreseeable future as countries and governments split into smaller, more manageable groupings or alliances
- China and Russia have boycotted recent summits
- The geopolitical forces encouraging deglobalisation and decoupling (the US and its allies reducing their economic interdependence with China) are currently much stronger than those encouraging global cooperation
