Topic 4.4 - Trade Policies and Negotiations Flashcards
Explain Protectionism
The act of guarding a country’s industries from foreign competition.
In the form of:
- Tariffs
- Quotas
- Regulation
- Embargoes
Explain Tariffs and their effects
Taxes on imports into a country.
Decrease in demand for imports
Increase in demand for domestic goods
Leads to increase in government revenue
Leads to exporting countries retaliating and imposing their own tariffs.
Therefore could lead to exports decreasing.
Explain Quotas and their effects
Limits the quantity of a foreign produced good that can be sold domestically.
Leads to an increase in price for domestic consumers.
So more likely to consume domestic goods
Explain Export Subsidies and their effects
Government may provide tax relief or just direct payments in an effort to incentivise firms to export goods to foreign countries.
Increases exports
Explain Embargoes and their effects
A complete ban of trade with another country. Usually politically motivated.
Reduces exports and increases domestic demand
Explain Excessive Administration (Red Tape) and its effects
Increases the cost of trading and makes it a more complex process.
Reduces imports.
Very harmful to developing countries as they are unable to trade in these markets
Define Economic Integration
A process where countries agree to reduce trade barriers (protectionism) and co-ordinate their economic policies.
Aim is to increase trade and lower costs for consumers and producers
Explain Free Trade Areas as a stage of Economic Integration
Where countries agree to trade without protectionist barriers.
They allow members to exploit comparative advantages, thus increasing efficiency.
NAFTA (North-American Free Trade Agreement)
EFTA (European Free Trade Association)
Explain a Customs Union as a stage of Economic Integration
Countries in a customs union have a common trade policy with the rest of the world.
E.G. The same tariff.
The EU is a customs union
Features:
Free trade with other members
Safety measures for imported goods, like food
What is a Common Market
A more integrated arrangement than a customs union.
Both reduce trade barriers
Common Market allow for the free movement of Resources & Labour.
The EU was originally a common market
EU citizens can work in any country in the EU
Explain Monetary Unions as a stage of Economic Integration
AKA a Currency Union
Members all share the same currency.
E.G. The Eurozone (EU members who use the Euro)
Euro Conditions:
-> Budget Deficit cannot exceed 3% of GDP
-> Gross National Debt must be below 6% of GDP
-> Inflation must be below 1.5% of the three lowest inflationary countries
There has to be flexibility in markets & labour markets in order to deal with shocks.
Achieved through:
-> Geographical Mobility of Labour
-> Wage flexibility in the Labour Market
-> Price flexibility in the Labour Market
Explain Economic Unions as a stage of Economic Integration
Made up of a common market with a customs union.
Members have:
-> Freedom of movement of goods
-> Freedom of movement of services,
-> Freedom of movement of capital
-> Freedom of movement of labour
-> A common external trade policy
The EU is an Economic Union.
Explain Trade Creation
Trade Creation occurs when a country imports more from a low cost producer, and fewer from a high cost producer.
When a trading bloc is formed, countries may be forced to import from a high cost producer inside the bloc, as oppose to a low cost producer outside the bloc, due to tariffs
Explain Trade Diversion
Trade Diversion occurs when a country decides to trade more with a less efficient exporter instead of a more efficient one due to lower costs created by tariffs and quotas
Internal Advantages of Economic Integration
-> Increase in trade between members
-> Cheaper and easier to trade
-> Wider market
-> Firms can take advantage of comparative advantages and improve efficiencies
-> More competition
-> Higher quality good
-> Higher supply of Labour
-> Better Production Knowledge
Internal Disadvantages of Economic Integration
-> Decrease in trade between non-members
-> Structural unemployment -> cheaper labour markets available
-> Vulnerable to shocks between member nations
-> Less variety of goods available
-> Increase in black market activity
External Advantages of Economic Integration
- Globally Stable Economy
- Strong currency that other countries can float their currency against
- More investment opportunities into the integrated countries
- Other countries will be desperate to trade more with each other, since their will be high costs of trading with integrated nations, so trade costs will lower
External Disadvantages of Economic Integration
-> Decrease in trade between non-members
-> Increase in black market activity
-> Less variety of goods available
-> Developing countries struggle to become members so continue to struggle
Advantages of Protectionism
-> Trade Deficit Reduced -> Less Imports
-> Protect society from Demerit Goods
-> Protects domestic jobs
-> Increase GDP -> Increase Net Exports
-> Increase Current Account
Disadvantages of Protectionism
-> Loss of Allocative Efficiency
-> Less Competition -> Higher Prices, Worser Products, Less Variety, Less Prod. Efficiency
-> Tariffs are Regressive -> Most damaging to lower incomes
-> Hostility from other countries
-> Government Failure
Advantages of Free Trade
-> Countries can exploit their comparitive advantages -> Higher output, Less waste
-> Improves Living Standards
-> Trade Creation
-> Increase in GDP
-> Increase in Current Account
-> Economies of Scale
Disadvantages of Free Trade
-> Structural Unemployment
-> Environmental Issues -> Increase in manufacturing
Explain the role of the World Trade Organisation (WTO) in promoting free trade
- Reduces Trade Barriers
- Secures and maintains existing agreements
- Settles Trade Disputes
- Organises Trade Negotiations
Every member of the WTO must follow the rules or they face trade sanctions
Explain Difficulties faced by the WTO
Trading Blocs are a big issue since the rules of the WTO say that ALL members must be treated equally.
Trading Blocs break this rule by setting up external tariffs for countries not members of their bloc.
So the WTO has a hard time ensuring non-members can trade fairly and easily with members.
Developed countries do not trade freely with developing countries which is breaking the WTOs rules of every country being treated equally
