Free trade, protectionism, WTO Flashcards
what is free trade
unrestricted international trade eg tariffs or quotas
benefits of free trade
all the benefits of trade eg specialisation, increased competition
what have happened to trade restrictions recently?
they have reduced mainly amongst members of trading blocs
what does the WTO do?
- aims to help trade be as free as possible
- provides a forum for its member states to discuss trade/ settle disputes
how many members in wto
over 150 members
what are protectionist policies + who uses them?
- they are trade barriers
- govts use them to tackle disadvantages of free trade
reasons for protectionist policies
- to protect jobs in event that domestic firms outcompeted
- protect infant industries who struggle to compete with international companies until they are big enough (risk they never will become v competitive and consumers stuck with high prices + low quality)
- to ban certain goods they consider bad for society
- to avoid overreliance on one industry
- to protect from dumping (firms selling at price below production cost to force domestic firms out of business)
- to correct imbalance in the BOP
trade barriers examples
- tariffs used in form of tax on select imports (raises tax revenue, helps domestic firms compete)
- quotas can be fixed (limit quantity of certain good that can be important, excess demand goes to domestic firms)
- embargoes (bans) on some products (usually extremes like drugs or political disagreements, usually not about protecting industries)
- value of the currency can be reduced (raises import prices and lowers domestic export prices)
- product standard regulations (foreign products that don’t comply cant enter)
- subsidies for domestic firms (reduces production costs, cheaper to buy. HOWEVER often costly for governments)
what are trade disputes
- when country or trading bloc seen as acting unfairly when trading
- eg country can say subsidies paid by another’s government to its domestic firms as unfair
what else can tariffs and subsidies be used to do + context
make country’s products seem more competitive (eg making domestic products cheaper)
context:
- china dumping accusations: selling goods abroad at artificially low prices due to subsidies.
The steel industry Western steelmakers have complained that China’s state-backed firms flood global markets with cheap steel, driving down prices and making it difficult for unsubsidised firms to compete.
what are the two types of tariffs
- fixed amount per unit
- ad valorem (% of value of good)
tariff diagram explain
- curves are Sd (domestic supply) and Dd (domestic demand)
- world supply somewhere under the equilibrium (curve is called Sw + Charging at price Pw)
- Q1 domestic supply (where Sw meets Sd). Q2 domestic demand (where Sw meets Dd)
- world price brings domestic supply down as they will be undercut if they raise their prices to the Sd/Dd equilibrium
- demand is higher because prices are lower
- the excess demand and supply are fulfilled by imports
- with tariff imposed, costs for Sw increase. So Sw shifts upwards to Sw + tariff
- Price increased to Pw + T
- domestic production extends to Q3, domestic demand contracts to Q4
- government revenue is increased, middle box between Q3 and Q4 and Pw and Pw+T
- right triangle is DWL of consumer surplus
- DWL of world efficiency
what are quotas used for
divert demand to domestic products by limiting amount that can be imported
quota diagram explained
search it up
why isn’t protectionism always a good thing
- once trade barriers exist they can be difficult to remove
- restricting imports reduces specialisation, diverting resources away from their most efficient use (reduces allocative and productive efficiency)
- protectionism mean prices are higher for consumers + producers (lack of competition)
- price of everyday goods rising affects poor more than rich (increased inequality, living standards fall)
- if demand for imports is high its because domestic firms have poor efficiency. Lack of competition doesnt make them improve, misallocation of resources continues. They would make more money (esp in the LR) by improving efficiency, not relying on protectionist policies.
- trade barriers may lead to retaliation by other countries (TRADE WAR) this worsens other problems and may affect other industries causing a bigger misallocation of resources and reducing specialisation + efficiency
What are trading blocs + what happens in them
- associations between governments that promote and manage trade
- members agree to reduce protectionist barriers
bilateral agreements
between two countries or two trading blocks
multilateral agreements
between 3 or more countries/trading blocs
economic integration
process by which countries coordinate to reduce trade barriers and harmonise monetary and fiscal policies
types of trading blocs
- (PTA) Preferential Trading Area:
grant each other preferential treatment, eg reduced tariffs + more market access, for certain goods. So they make specific deals - Free trade area: countries eliminate all trade barriers between each other but members can impose barriers on outside countries eg USMCA
- Customs union: free trade between all members, but they all have common external tariffs on non-members eg EU
- common (or single) market: a customs union but with free movement of labour + capital eg EU citizens can set up work elsewhere easily
- Economic and Monetary Union: combines economic union (members have similar policies + regulations) and monetary union (members have single common currency and same central bank controlling monetary policy) eg the eurozone
What is trade creation
trading blocs can lead to it: patterns of trade change after barriers are removed
describe trade creation diagram
search up picture on google
what is trade diversion?
trading blocs can also lead to this: if trade barriers are imposed on non members, trade is diverted away from non members who may have a comparative advantage. therefore they can’t fully use it as trade is restricted
trading blocs impact on developing countries
- limit development of developing countries who aren’t members and cant trade
- they may be prevented from protecting infant industries- stopping them from diversifying away from agriculture
