Trade, Free Trade and Protectionism Flashcards
Dumping
Selling large quantities of a good, usually commodities, at a price lower than its production cost from one country to another
Protectionism
Where a country erects barriers against trade to protect the domestic economy from the disadvantages of free trade.
Reasons for Free Trade
- Increase variety (not all countries have a spread of natural resources)
- Import inputs for production
- Allow countries to specialise in the production of the good they are best at (i.e. lowest opportunity cost/comparative advantage)
- To take advantage of economies of scale
- Increase competition
- Technology transfer
Reasons for Protectionism
- Protecting domestic firms
- Protecting sunset industry
- Protecting sunrise industry
- Promote domestic goods
- Strategic reasons/National security
- Prevent dumping
- To protect product standards: Safety, Health, or Environmental standards
- To raise government revenue
Reasons againsts protectionism
- Protectionism reduces choice and competition
- Government may protect the wrong industries
- Protectionism raises prices for consumers and for producers importing inputs
- Protectionism distorts comparative advantage and leads to inefficient use of the world’s resources (loss of economic welfare)
- Domestic firms become inefficient and lack innovation (market distortion)
- No incentive to pursue the least cost method of production or adapt to the latest technology (e.g. Syrian steel)
- Hinders economic growth and innovation
- Retaliatory actions; trade wars
Comparative advantage
- When a country can produce a good at a lower opportunity cost than another country.
- A country has to give up fewer units of other goods to produce a good in comparison to what another country would have to give up.
- How to calculate:
- Comparative advantage for a = b/a (a in denominator)
- Comprative advantage for b = a/b (b in denominator)
Absolute advantage
When a country can produce a good using fewer resources than another country
Quota
A restriction on the physical number (volume) or value of a particular import.
Tariff
A tariff is a tax on imports
Subsidy
A payment per unit to produce from the government to suppliers in order to lower the cost of production.
Trade diversion
When the entry of a country into a customs union leads to the production of a good or service transferring from a low-cost producer to a high-cost producer
Trade creation
When the entry of a country into a customs union leads to the production of a good or service transferring from a high cost producer to a low cost producer
Sunset industry
Industry where the potential comparative advantage has declined and they are not making enough profit to invest and modernise
WTO Functions
- To set and enforce rules for international trade
- To resolve trade disputes
- To provide a forum for negotiating and monitoring further trade liberalization
- To monitor further trade liberalization
Administrative barriers
- Red Tape
- Health and safety/environment standards
- Embargoes/Sanctions
- Nationalistic campaigns
- Voluntary Export Restraints (VER)
- Import license
