International Trade Flashcards
What is international trade
International trade is the buying and selling of imports and exports between countries.
Goods and services can be traded between countries.
An import is buying goods and services from abroad.
An export is selling goods and services to a country abroad.
Why do countries trade with each other
Countries do not produce all their own goods in order to satisfy the needs and wants of their population because other countries have different natural, human and capital resources available to them and these countries also employ different ways of combining these resources.
Different countries can specialise in producing specific goods and services in a more efficient manner than other countries. They are then able to trade any surpluses they produce for other goods and services produced by other countries in which they are most efficient at producing.
Free trade
Free trade means international trade conducted without any barriers, such as tariffs and quotas.
Therefore, members can trade goods and services between countries in the free trade area without trade restrictions.
Protectionism
Protectionism is an economic policy of restraining trade between countries through the imposition of barriers to trade, such as tariffs or quotas.
Despite all the advantages that free trade between nations offers, some countries actively pursue a policy of protectionism for a variety of reasons.
The impact of tariffs and quotas
Tariffs can be used by a government to raise revenue to finance expenditure. They can also be used to restrict imports because by imposing a tax on a good, it is likely that the final price to the consumer will rise. As a result of this tariff, it makes the product more expensive and could lead to the demand for imports falling. A tariff is used to help domestic producers as some consumers will switch consumption from the more expensive imported goods to domestically produced substitutes.
Similarly, a quota also helps domestic producers by increasing the share of the market available for them. This is because of the physical limit put on imports of other goods entering the country from other businesses abroad. This will lead to the price of the protected good increasing because of its limited supply.
As well as tariffs and quotas, there are other forms of protectionism:
Voluntary export restraint
Non-competitive purchasing by governments
Embargos
Voluntary export restraint
This is a type of quota put in place by exporters. VERs are often created because the exporting countries would prefer to impose their own restrictions rather than risk sustaining worse terms from tariffs or quotas.
Non-competitive purchasing by governments
This involves a government only buying from domestic producers, even if this means paying higher prices. It can also be known as illegal subsidies or over subsidising own industries.
Embargos
This involves complete or partial prohibition of commerce and trade with a particular country in order to isolate it.
What is a trading bloc
Trading blocs are groups of countries that promote and manage trading activities in their region. Trading blocs are a form of free trade, meaning that members can trade in goods and services without protectionist measures being imposed. In turn, this creates and encourages trade and trading relationships between members.
Reasons for protectionism
Industries just starting up (infant industries) may face much higher costs than foreign competitors.
Industries protected by trade barriers lack the competitive pressure to become efficient.
Preventing those imports which consumers are likely to purchase can create, or at least, preserve jobs.
Consumers are likely to have less choice and therefore be willing to pay higher prices and foreign countries could retaliate by imposing trade restrictions on exports.
This is the practice of selling goods at less than cost price by foreign producers in another country’s domestic market.
Preventing dumping stops consumers from being able to buy cheaper foreign goods.
Factors that could challenge their entry into international markets
Economic
Cultural/social
Technological
Legal
Competition and marketing
