The Open Economy - Trade Policy

Question 1

Ways to stop current account deficits by limiting imports or promoting exports: (4)

Answer 1

Aside - ‘free’ trade

• The classical argument for unrestricted trade was that different countries will have different relative productivities in producing goods.
• For example, England might be able to produce a ton of wool for half a hundredweight of grapes, whereas Italy might be able to produce a ton of wool for three hundredweight of grapes. If England trades a ton of wool for two hundredweight of grapes from Italy then both countries have acquired the good received more cheaply (in relative terms) than they could have by self-production.

Import prohibition

• A government could outlaw imports of a particular good. For example the ‘Corn Laws’ prohibited imports of grains in Britain in the late Eighteenth and early Nineteenth centuries.

Quotas

• Rather than an outright ban, a quota allows some fixed quantity of a good to be imported.

Tariffs

• Rather than restricting the quantity, tariffs can be used to alter the price of imports to domestic consumers.
• A tariff can be a fixed monetary amount or proportional to the
  value of the good (similar to VAT).

Question 2

The World Trade Organization

Countries which are members of the WTO agree to minimum standards of ______ ‘___________’ (i.e. maximum tariffs, quota rules) as well as … and …

Answer 2

Countries which are members of the WTO agree to minimum standards of trade ‘openness’ (i.e. maximum tariffs, quota rules) as well as common intellectual property standards and
dispute resolution rules.

Question 3

Bilateral trade agreements

What is this?

Answer 3

The WTO terms set the rules for trade between all members, but pairs or groups of countries can agree to go beyond these rules - for example, the European Union single market means
that there are no trade restrictions between France and Germany, as well as common product standards and legal requirements.

Question 4

Policy I

A government that was just interested in an overall current account surplus could apply large tariffs generally to imports. However, other countries are unlikely to welcome this…

What would happen as a result?

Policy II

Some goods and services are not produced in the UK and so…

Answer 4

Policy I
A government that was just interested in an overall current account surplus could apply large tariffs generally to imports.
However, other countries are unlikely to welcome this - a ‘trade war’ in which all countries impose large tariffs might lead to lower incomes and consumption everywhere. (N.B. by definition not every country can have a current account surplus.)

Some goods and services are not produced in the UK and so any import tariffs will only serve to harm domestic consumers (supposing that there are not domestic substitutes).

Question 5

Policy III

Some goods might not be produced in the UK yet, what could they do?

What are the strategies called and who are examples of users of these strategies?

Similarly….

Answer 5

Some goods might not be produced in the UK yet, but a government might wish to promote the development of a productive sector. The strategies of ‘infant industry protection’ and ‘import substitution industrialization’ have been used by various countries (e.g. U.S.A., Japan, Brazil)

Similarly, a sector might exist in the UK but be losing market share to foreign competition - if the sector is strategically important (e.g. agriculture or steel) then a government might wish to support continued domestic production.

Question 6

Policy IV

In some cases a government might limit exports for _______ _________.

Policy V

In the era of ‘globalization’ and the economies of scale that come with many industries, it is possible that the _________ _____________of the world is now set. There might be some
relocation of production according to seeking ______ _____ ____, but ‘advanced’ production seems to be more about ______________ and _____-______ ____________- e.g. people in any
country can train in computing or finance, yet Silicon Valley and the City of London are still ____________ _________.

Answer 6

Policy IV

In some cases a government might limit exports for strategic reasons.

Policy V

In the era of ‘globalization’ and the economies of scale that come with many industries, it is possible that the industrial geography of the world is now set. There might be some
relocation of production according to seeking lower wage costs, but ‘advanced’ production seems to be more about agglomeration and first-mover advantages - e.g. people in any
country can train in computing or finance, yet Silicon Valley and the City of London are still prominent clusters.

Question 7

Partial conclusion

The basic argument in favour of unrestricted trade based on comparative advantages is logical, but does not consider _________ _____ ______(i.e. productivities and incomes are not
fixed) nor does it consider the _________ ______ of a _________.

Answer 7

The basic argument in favour of unrestricted trade based on comparative advantages is logical, but does not consider changes over time (i.e. productivities and incomes are not
fixed) nor does it consider the strategic needs of a country.