Macro 14 - Restrictions on free trade and trading blocs Flashcards
Define the term free trade
Free trade is international trade without restrictions such as tariffs or quotas
What are the reasons for restrictions on free trade?
- To protect infant industries
- To protect older “sunset” industries
- To ensure employment protection
- To prevent dumping
- To correct a balance of payments deficit on the current account
- To restrict imports from countries whose health and safety regulations and environmental regulations are less stringent
- For strategic reasons
- Retaliation against trading partners
Define the term dumping
Dumping refers to goods being exported to another country at below the average cost of production. If proved it is illegal under WTO rules
What are the different methods of protectionism?
- Tariffs
- Quotas
- Subsidies to domestic producers
- Non-tariff barriers
- Exchange rate manipulation
Draw a tariff diagram, label all the different areas on it and explain it
See page 4 in pack 14
See page 203 in the revision guide
On a tariff diagram what does the rectangle area in the middle of the diagram represent?
Tax revenue raised by the government
On a tariff diagram what does the area of the two triangles either side of the rectangle represent?
The net welfare loss
On a tariff diagram what is the supply and demand curve labelled as?
Domestic supply and Domestic demand
On a tariff diagram what are the two horizontal lines labelled as?
World supply and world supply plus tariff
What are the main evaluation points related to a tariff
- Size of the tariff (draw a diagram to illustrate this)
- The PED of the product being imported
- If tariff revenue is used to support infant industries
- Other methods of protectionism used at the same time
- Retaliation from trading partners
- Other factors changing at the same time
Draw a diagram to illustrate the size of a tariff in an evaluation point
See page 6 in pack 14
What are the positive and negative impacts of protectionism on producers in the country that imposed the tariff?
Positive:
- Higher revenue, producer surplus and profits as domestic demand for their products increase
Negative:
-Cost of component parts may also rise increasing costs of production
- Possible increase in inefficiency due to less effective competition
What are the positive and negative impacts of protectionism on producers in the country which the tariff has been imposed on?
Positive:
- Firms in the country may be forced to become more efficient in order to compete globally
Negative:
- Lower revenue and profit as demand for the exports contracts
What are the positive and negative impacts of protectionism on workers in the country that has imposed the tariff?
Positive:
- Employment will increase as domestic demand products rises, hence derived demand for labour also rises
Negative:
- The tariff could cause jobs in other sectors to be lost
- Possible retaliation may mean that exports will fall leading to potential job losses
What are the positive and negative impacts of protectionism on consumers in the country that imposed the tariff?
Positive:
- Might face a more stable supply long term
Negative:
- Consumers face higher prices. This may reduce living standards particularly if the tariff is imposed on essentials
What are the positive and negative impacts of protectionism on the government in the country that imposed the tariff?
Positive:
- Greater tax revenue from tariff and more revenue from corporation, income and sales taxes if demand for goods increases
Negative:
- If protectionism takes the form of subsidies to domestic firms the budget deficit may worsen
- Retaliation may mean no change in demand for domestic products
What is a trading bloc?
Trading blocs are associations between different governments that promote and manage trade
What are the four stages of economic integration in order of least restrictions to most?
1- Free trade area
2- Customs union
3- Common market
4- Monetary union
What are the features of a free trade area?
A free trade area is an agreement between 2 or more countries to abolish tariffs on trade between themselves whilst they maintain their own restrictions with other countries
What are the features of a customs union?
- Free trade area restrictions
- The countries involved establish a common external tariff against non-members
What are the features of a common market?
- Customs union restrictions
- The countries agree to the free movement of factors of production
- The countries introduce an agreement on the provision of state aid and public sector procurement policies
What are the features of a monetary union?
- Common market restrictions
- Members have the same currency and therefore the same monetary policy
What are the benefits of trade agreements?
- The benefits of specialisation
- Trade creation
- Attraction of FDI
Define the term Trade creation
Trade creation is where economic integration results in high cost domestic production being replaced by imports from a more efficient source within the economically integrated area
What is the main disadvantage of trade agreements?
- Trade diversion
Trade diversion occurs when economic integration results in trade switching from a low cost supplier outside the economically integrated area to a less efficient source within the area. It distorts comparative advantage
What are some evaluation points for trading blocs?
- Type/extent of integration used
- Relative efficiencies of countries inside and outside of the region
- Differences in the opportunity costs of production
- PEDs and PESs of goods and services affected by integration
- How other non-member countries react
- How many goods are included
What is the European Monetary Union?
This is the deepest form of economic integration. 19 members have joined the EMU
What are the main features of the European Monetary union?
- A single currency is used by all participants, the euro
- There is an independent central bank which regulates and sets the rate of interest and monetary policy of members in the Eurozone
- There is a stability and growth pact that limits the public sector borrowing of member countries to 3% of GDP.
What are the benefits to the member countries of the EMU?
- Avoidance of exchange rate fluctuations
- Price transparency
- Lower inflation
- FDI
What are the disadvantages to the member countries of the EMU?
- The euro operates on a floating exchange rate so individual countries would have little influence over the changing value of the euro
- Constraints on the use of fiscal policy
- There is lots of structural unemployment in the Eurozone
What is the world trade organisation (WTO)?
The world trade organisation (WTO) is an international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers
What are the WTO trading principles?
- Most favoured nation
- National treatment
What is the WTO trading principle - most favoured nation?
Most favoured nation means treating other people equally. Under WTO agreements, countries cannot normally discriminate between their trading partners. If you grant someone a special favour you have to do the same for all WTO members
What is the WTO trading principle - national treatment?
National treatment refers to treating foreigners and locals equally. Imported and locally produced goods and services should be treated equally
What are some of the criticisms against the WTO?
- Sometimes the pace of change is slow as all countries have to agree to a decision for it to be passed
- Many disputes between member countries remain unsettled
