Trade Theory Flashcards
What is the basis of trade
Different countries have different factor endowments which allows for international specialisation
What is comparative advantage
Where the opportunity cost of producing a good is greater in country X and so it is relatively more beneficial to produce in good Y with at a lower opportunity cost
When does comparative advantage not take place
If opportunity costs are the same
When are the rules of comparative advantage more applicable in practice (3)
- When the product is more homogeneous
- In geographical zones around the world
- Consumers like variety (different countries make multiple varieties of the same product)
What is the importance of geographical zones in the practicality of the rules of comparative advantage
Shipping costs and perishability can negate the benefits of lowest cost production
Who is the economist who proposed the theory of comparative advantage
David Ricardo
What is the main form of protectionism
Tariff
Draw the tariff diagram
Notes
What is the negative effect of a tariff on domestic industry
Raises price level which allows for relatively inefficient domestic producers to remain in the market since they weren’t efficient enough to compete at the world price
How is some of the increased price in a tariff wasted
To support domestic producers inefficiencies
What type of tax on consumers is a tariff
A hidden regressive tax
Why may a subsidy be not be a better alternative to support domestic industries
Will have to be paid out of progressive tax therefore consumers will be unhappy
(yet in effect it doesn’t matter which as they both mean consumers pay more)
Give 5 reasons for using a tariff
- Protect domestic industry from foreign competition
- Infant industry argument
- Protection against dumping
- Protection of nationally important industries
- Way of life argument
How does a tariff protect domestic industry
Supports relatively less competitive domestic industries
What is the Infant industry argument
Protect new industries when they start up as they develop
What two downsides to the Infant industry argument
Tariffs are often not removed after the industry develops
Protecting the industry doesn’t allow it to develop the competitiveness required to survive in the global market
What is dumping
Unfair competition often due to a state subsidy in another country, excess supply is generated and then dumped
Give an example of trade war
EU hits China with big taxes in E.V sales battle (10% to 45%)
E.U politicians saying state subsidies means China is Dumping
China retaliated by placing a tariff on French cognac
EU said it would challenge this at WTO (WTO no legal standing)
China claims its also an anti dumping measure
How might the EU placing tariffs on E.V imports from China affect green targets
May stop EU from meeting green targets by reducing low cost EVs
Give an example of a EU member against the tariff on Chinese EVs
Germany - they export many cars to China
Give an example of the way of life argument for tariffs
Norway places tariffs on fiberglass canoes since culturally they make canoes from wood
Give 4 examples other than tariffs of protectionism
Quota
Embargo
Bureaucratic restrictions
Competitive devaluation
What is a quota
Restricting supply
What is an embargo
A ban
Give an example of a competitive devaluation
Chinas artificially low value currency
Give an example of a customs union
EU
What are the four freedoms within a custom union
Goods
Labour
Services
Capital
Give an example of a free trade area
NAFTA
USA
Canada
Mexico
What is a free trade area
Free trade with each other but each country can set its own tariffs unlike EU
What does full monetery union within a trade bloc due to a single currency mean
No currency has any control over the interest rate
Who controls the interest rate in the EU
The ECB
What is the role of the WTO
To reduce the impact of tariffs worldwide and promote free trade
Why does the WTO have minimal effect
Imperial evidence suggests they have minimal effect due to no legal standing
Give an example of the WTO being effective
Boeing/Airbus subsidy debate between the USA and EU
Give an example of the WTO being ineffective
The 2021 Doha round
Still ongoing due to lack of consensus
What may be a reason for the WTO’s ineffectiveness
WTO framework is out of date
Factors such as E-commerce and intellectual property rights don’t get taken account
Give an example of an event indicating that the UK may be struggling with trade due to brexit.
In December 2024, the UK has became the first European nation to join the indo-pacific trade block (TPP)
Officials hope membership will boost Britain’s flagging economy by as much as £2.0 billion ($2.5 billion) a year.
Draw the diagram showing the 4 effects of a tariff
