Trade, Free Trade and Protectionism Flashcards
Dumping
Selling large quantities of goods below 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
- Import inputs for production
- Allows countries to specialize in goods with the lowest opportunity cost.
- Take advantage of EOS
- Increase competition
- Technology transfer
Reasons for Protectionism
- Protecting domestic employment
- Protecting sunset & sunrise industry
- Promote domestic goods
- Over specialisation risks
- Strategic reasons/National security
- Prevent dumping
- To protect product standards
- To raise government revenue
Reasons againsts protectionism
- Reduces choice, competition, and efficiency.
- Protects wrong industries, raising costs for consumers and producers.
- Distorts comparative advantage, wasting resources.
- Domestic firms become inefficient and avoid innovation.
- No incentive to be technical efficient and R&D
- Hinders growth, sparks trade wars
Comparative advantage
- When a country can produce a good at a lower opportunity cost than another country.
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 tax on imports
Subsidy
A payment per unit of output from government to producer to lower cost of production
Trade diversion
Country’s entry into a customs union shifts production to a higher-cost producer
Trade creation
Country’s entry into a customs union shifts production to a lower-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 monitor further trade liberalization
- To provide a forum for negotiating and monitoring further trade liberalization
Administrative barriers
- Red Tape
- Health and safety/environment standards
- Embargoes/Sanctions
- Nationalistic campaigns
- Voluntary Export Restraints (VER)
- Import license
Red tape
Countries hinder imports with restrictions and deliberate bureaucracy (red tape)
Health and safety/environment standards
- Health & Safety & Environmental Regulations
- Preferential trade policies
- Intellectual property rights (patents and copyrights)
- Exchange controls - limiting the amount of foreign exchange that can move between countries
Embargoes/Sanctions
Embargo:
- Total ban on the import of a particular good
Sanctions:
- Type of embargo where a particular good or country is targeted
Nationalistic campaigns
Policies aimed at protecting domestic economy. e.g. job, production
E.g. “Moral suasion” - marketing by a government to encourage domestic purchases over foreign, and often linked to employment.
E.g. China’s controlled exchange of the yuan
Voluntary Export Restriction (VER)
Where one country will ‘voluntarily’ restrain its exports to another
Import license
A payment to the government for the right to import
Free Trade Diagram
Tariff Diagram
Evaluation for Tariff
- Only be effective if the import is elastic
- Help to protect the loss of relatively low skilled and low paid jobs in competitive industry
Subsidy diagram
Quota diagram
Evaluating a subsidy
(winners vs losers)
Evaluating a tariff
(winners vs losers)
Evaluating a quota
(winners vs losers)
