Economic Integration, Free trade, Protectionism- MM

Question 1

What is economic integration?

Answer 1

An agreement among countries in geographic region to reduce & ultimately remove tariff & non-tariff barriers for the free flow of goods & services & FOP between each other

Question 2

How many stages/types of economic integration are there?

Answer 2

5

Question 3

What is the weakest (1st) stage of economic integration & an example?

Answer 3

Free trade area (FTA) e.g. NAFTA- north american FTA with USA, Canada & Mexico

Question 4

What does a free trade area do?

Answer 4

At least 2 states partially or fully abolish custom tariffs between themselves, eliminating tariffs & quotas on most/all goods traded between them (e.g. NAFTA- Canada, Mexico the US)

Question 5

What is the 2nd stage of economic integration & an example?

Answer 5

A customs union e.g. EU’s (when founded in 1957) EEC

Question 6

What does a customs union do?

Answer 6

Introduces united tariffs on the exterior borders of the union (common external tariffs)- customs union= FTA with a CET with participants setting up their external trade policy

Question 7

What is the 3rd stage of economic integration & an example?

Answer 7

A single market e.g. the EU

Question 8

What does a single market do?

Answer 8

Same components as a customs union but with common policies on product regulation & free movement of FOP (not land) = efficiently allocated members & ↑ productivity
Competitive environment, hard for monopolies, efficient firms prosper

Question 9

What is the 4th stage of economic integration?

Answer 9

Monetary union e.g. the eurozone

Question 10

What does a monetary union do?

Answer 10

Type of trade bloc composed of a customs union/ single market BUT with a common currency- restricting ability of the gvnmt to manage their own economy (have to converge with other members)- mainly no monetary policy (one central bank & interest rate

Question 11

Example of monetary union with different countries?

Answer 11

Germany & Greece both in Eurozone
Germany= strong economy & high standards of living
Greece is much poorer, hard to develop a single economic strategy using central bank in Germany to satisfy both

Question 12

What is the strongest (5th) stage of economic integration & example?

Answer 12

Full economic union e.g. USA

Question 13

What does a full economic union (FEU) do?

Answer 13

Involves different states having complete free trade, a CET, a single market, monetary union & also fiscal & supply-side union- the same federal taxation policies

Question 14

What are 3 benefits of free trade?

Answer 14

1) Countries can benefit from comparative advantage- allowing econ. of scale
2)Can ↑ volume of exports, ↑ AD
3) ↑ trade= ↑ competition= ↑ prices

Question 15

What is the world trade organisation (WTO)?

Answer 15

Established in 1995, major driver in the trend towards globalisation, ensuring trade flows smoothly & freely.

Question 16

What is the main objective of the WTO?

Answer 16

“Lowering trade barriers to encourage trade”

Question 17

How many countries are signed up to the WTO?

Answer 17

164

Question 18

What is protectionism?

Answer 18

Represents any attempt to impose restrictions on trade of goods & services

Question 19

What are 7 examples of protectionism (first 5 most important to learn)?

Answer 19

1) Tariffs
2) Quotas
3) Export subsidies
4) Domestic subsidies
5) Technical barriers to trade
6) Import licensing
7) Intellectual property laws

Question 20

What are tariffs as a form of protectionism?

Answer 20

A tax on imports, contracting domestic demand & expanding domestic supply

Question 21

What are quotas as a form of protectionism?

Answer 21

Quantitative limits on the level of imports allowed into a country per year

Question 22

What are export subsidies as a form of protectionism?

Answer 22

A payment to encourage domestic production by lowering their costs

Question 23

What are domestic subsidies as a form of protectionism?

Answer 23

Government help for domestic businesses facing financial problems

Question 24

What are technical barriers to trade as a form of protectionism?

Answer 24

Including product labelling rules & stringent sanitary standards, increasing product compliance costs & impose costs on export agencies

Question 25

What is import licencing as a form of protectionism?

Answer 25

Government grants importers the license to import goods

Question 26

What are intellectual property laws as a form of protectionism?

Answer 26

Patents & copyright protection

Question 27

What are 5 arguments in favour of protectionism/ against free trade?

Answer 27

1) Fledging industry
2) Externalities & market failure correction
3) Protection of jobs & improve BoP
4) Protection of strategic industries
5) Discourages dumping

Question 28

Explain the fledging industry as an argument in favour of protectionism

Answer 28

Certain industries possess possible comparative advantage but haven’t exploited econ. of scale- protection allows it to develop this

Question 29

Explain externalities & market failure correction as an argument in favour of protectionism

Answer 29

Protectionism can internalise social costs of de-merit goods, or correct environmental market failure of certain imports

Question 30

Explain protection of strategic industries as an argument in favour of protectionism

Answer 30

Gvnmt may want to protect employment in strategic industries, reducing long-term dependence on certain imports

Question 31

Explain discouraging dumping as an argument in favour of protectionism

Answer 31

Goods are dumped when they are sold for export at less than normal value- a type of predatory pricing behaviour & a form of price discrimination

Question 32

What are 5 arguments against protectionism/ pro free trade?

Answer 32

1) Market distortion
2) Reduced market access for producers
3) Regressive effect on distribution of income
4) Trade wars
5) Second best approach

Question 33

Explain market distortion as an argument against protectionism

Answer 33

Protectionism can be ineffective & costly- leads to higher prices for consumers & creates allocative inefficiency & significant deadweight loss of economic welfare

Question 34

Explain reduced market access for producers as an argument against protectionism

Answer 34

Export subsidies depress world prices= damage to output, investment & jobs in developing countries relying on exports

Question 35

Explain regressive effect on distribution of income as an argument against protectionism

Answer 35

Higher prices that result from tariffs hit lower income households hard as the tariffs often fall on products lower income households spend more on

Question 36

Explain trade wars as an argument against protectionism

Answer 36

Danger that a country imposing import controls will lad to retaliatory action by another, ↑ costs of importing new technology, affecting LRAS

Question 37

Explain second best approach as an argument against protectionism

Answer 37

Protectionism is a second best approach, going against principles of free trade & can be seen as examples of gvnmt failure arising from intervention in markets

Question 38

What is dumping?

Answer 38

When a country sells large quantities for a cheaper price to free up space

Question 39

What is the difference between export & domestic subsidies?

Answer 39

Domestic subsidies are paid to all producers in a particular industry to ↑ supply & protect from foreign comp. Hard to justify unless it’s a fledging/strategic industry
Export subsidies used to help UK businesses expand to other markets to ↑ AD- less controversial

Question 40

What does the WTO want to do about export/domestic subsidies?

Answer 40

Minimise their use

Question 41

Why could export/domestic subsidies be bad?

Answer 41

Unfair- rich countries can afford more subsidies to undercut poorer countries who can’t afford subsidies as they’re poor (rich get richer)