Module 15 - International trade

Question 1

Outline what is meant by the term globalisation

Answer 1

Globalisation refers to the process of developing increasing political, cultural and economic ties between people all around the world.

Question 2

Outline the four main drivers for globalisation

Answer 2

1. Market drivers
   Reflecting the increasing similarities between consumers and hence markets in different countries eg due to the convergence of per capita incomes, lifestyles and tastes amongst the industrialised nations
2. Cost drivers
   Reflecting the potential for reducing production costs (via factors such as outsourcing and economies of scale), technological innovation and advances in transportation
3. Government drivers
   Such as privatisation, the removal of tariffs and quotas and shifts to more open, free market economies
4. Competitive drivers
   Such as global competition leading firms to adopt, global business strategies, eg via networks, alliances and cross-border mergers.

Question 3

Discuss the benefits [6] and costs [4] of globalisation

Answer 3

Benefits:

1. Increased opportunities for specialisation and the exploitation of economies of scale, leading to increased production of goods and services and higher profits
2. The faster diffusion of new technology
3. Greater competition, lower prices and a wider range of goods for consumers
4. Increased investment in developing countries, leading to growth and improvements in living standards
5. Closer political ties and hence greater political stability
6. Greater cultural exchange to the benefit of people in different countries.

Costs:

1. Contributes to growing inequalities between countries
2. Makes poor countries even poorer as multinationals exploit their dominant position in foreign markets.
3. Contributes to environmental problems, as rapid growth and increased transportation cause pollution and the depletion of natural resources.
4. Leads to political, economic and cultural domination by large, multinational brands.

Question 4

Describe the growth in world trade

Answer 4

In the period of 1955 to 2014, the average annual growth in exports was over 6.3%, far larger than the average annual growth in world output at 3.6%. Growth in exports was also far more volatile.
For example, during the global recession in 2009, when world output fell by 2%, exports fell by 12%.
As trade increases as a share of GDP, countries’ interdependence increases and so too does their vulnerability to changes in global conditions.

Question 5

Discuss which countries are most active in world trade

Answer 5

The leading exporting nations are China, the USA and Germany.

In the period of 1992-2014, the share of the world exports from the BRICS (Brazil, Russia, India, China and South Africa) rose from 5.4% to 18.3%; and the share of the developing nations increased from 23% in 2000 to 43% in 2014.

Question 6

Describe the composition of the world trade in goods

Answer 6

The composition of internationally traded goods (excluding services) is approximately as follows:

• Manufactured products (67%)
• Fuel and mining products (20%)
• Agricultural products (10%)

Services account for around 20% of total trade.

Question 7

Explain the advantages and limits of specialisation

Answer 7

Countries trade with each other to take advantage of the benefits of specialisation. Countries have different endowments of factors of production, so specialisation allows a country to take full advantage of the strengths of their particular endowments.
Specialisation may also mean that firms benefit from economies of scale.
A nation should specialise in those goods in which it has a comparative advantage.

Question 8

Explain five other reasons why countries gain from international trade

Answer 8

1. Decreasing costs due to economies of scale
2. Differences in demand
3. Increased competition
4. Trade as an “engine of growth”
5. Non-economic advantages

Question 9

Absolute advantage

Answer 9

A country has an absolute advantage over another in the production of a good if it can produce it with less resources than the other country

Question 10

Comparative advantage

Answer 10

A country has a comparative advantage over another in the production of a good if it can produce it with a lower opportunity cost. ie. if it has to forgo less of other goods in order to produce it.

Question 11

The law of comparative advantage

Answer 11

Trade can benefit all countries if they specialise in the goods in which they have a comparative advantage.

Question 12

Terms of trade index

Answer 12

The price index of exports divided by the price index of imports and then expressed as a percentage. This means that the terms of trade will be 100 in the base year.

Question 13

State six ways that governments can restrict trade

Answer 13

1. Custom duties (or tariffs) on imports
2. Import quotas
3. Subsidies on domestic products
4. Administrative regulations
5. Procurement procedures favouring domestic suppliers for government purchases
6. Dumping

Question 14

Discuss eight generally valid arguments for restricting trade

Answer 14

1. The infant industry argument
2. To reduce reliance on goods with little dynamic potential
3. To prevent “dumping” and other unfair trade practices
4. To prevent the establishment of a foreign-based monopoly
5. To spread the risks of fluctuating markets
6. To reduce the influence of trade on consumer tastes
7. To prevent the importation of harmful goods
8. To take account of externalities

Question 15

Discuss two country-specific arguments for restricting trade

Benefits to certain countries at the expense of others

Answer 15

1. To take advantage of market power in world trade (monopoly and monopsony powers)
2. To protect declining industries. (Contracts slowly enough to avoid structural unemployment)

Question 16

Discuss four non-economic arguments for restricting trade

Answer 16

1. Maintaining self-sufficiency in case trade is denied in the future
2. Imposing trade sanctions on countries with which it disagrees politically
3. Maintaining traditional ways of life
4. Maintaining a diverse society based on a range of industries.

Question 17

Discuss six problems with protection

Answer 17

1. The costs of protection
2. Reduced choice
3. Protection as “second-best”
4. Retaliation
5. Protection may allow firms to remain inefficient
6. Bureaucracy.

Question 18

Dumping

Answer 18

Where exports are sold at prices below marginal cost - often as a result of government subsidy.

Question 19

Infant industry

Answer 19

An industry which has a potential comparative advantage, but which is as yet too underdeveloped to be able to realise this potential.

Question 20

Strategic trade theory

Answer 20

The theory that protecting/supporting certain industries can enable them to compete more effectively with large monopolistic rivals abroad. The effect of the protection is to increase long-run competition and may enable the protected firms to exploit a comparative advantage that they could not have done otherwise.

Question 21

Explain the role of WTO

Answer 21

Following the Wall Street Crash of 1929 many countries found that their exports were dropping rapidly. To protect their balance of payments they imposed tariffs on imports. This resulted in further tariffs being imposed in retaliation and a considerable decline in world trade.
In an attempt to reduce trade restrictions and increase the benefits of world trade the General Agreement on Tariffs and Trade (GATT) was signed in 1947. GATT was replaced by the World Trade Organisation (WTO) in 1995. GATT was originally signed by 23 countries and by November 2015 the WTO had 162 members representing nearly 98% of world trade.

The WTO has the power to impose sanctions on countries breaking trade agreements.

Question 22

State five rules of the WTO

Answer 22

1. Non-discrimination - if a trade concession is made to one WTO member it must be given to all members (but concessions made within free-trade areas are excluded)
2. Reciprocy - if a nation benefits from a tariff reduction it should reduce its own tariffs
3. The prohibition of quotas
4. Fair competition - a country can ask for permission to retaliate against any trade barriers erected against it
5. Binding tariffs - a country cannot raise existing tariffs without negotiatios with their trading partners.

Question 23

Explain the purpose of trade rounds

Answer 23

Members of the WTO meet to negotiate reductions in trade restrictions. These “trade rounds” can take several years.

The Doha Round began in 2001 and is yet to be completed. The Doha Development Agenda aims to:

• liberalise trade
• encourage the development of poorer countries
• consider the environmental impact of trade.

Question 24

Describe the 4 arguments which support a strategic approach to trade

Answer 24

1. The infant industry argument
2. To reduce reliance on goods with little dynamic potential
3. To prevent “dumping” and other unfair trade practises
4. To prevent the establishment of a foreign-based monopoly