Unit 3.B - Intro to trade Flashcards
What is free trade?
Free trade is the removal of barriers to trade
What is protectionism?
Protectionism is when trade is restricted (by laws, import taxes, subsidies, quotas) to protect local businesses and industries from foreign competition.
What is trade?
Trade involves the sale of goods and services (imports and exports) between nations.
What are the benefits of trade/arguments for free trade?
- Specialisation
- Economies of scale
- Comparative advantage
- Avoids problems associated with tariffs and subsidies
- Exposing markets to foreign competition forces them to be more efficient to survive.
- Smarter distribution of resources
- Greater access to goods and services for consumers
- Larger markets for producers
*ALSO: trade is swapping something you have for something your value more, fair trade means both parties are better off.
What are the benefits of/arguments for protectionism?
- Protection of domestic employment
- Infant industry argument
- Defense
- Self-sufficiency
- Prevention of dumping
- Differences in wages
- Protection of local culture
- Environmental concerns
*Some may just be rationales for other reasons e.g. fear of foreigners/racism
What are the benefits of tariffs?
- Saves some jobs
- Stops some businesses failing
- Generates govt revenue
What are the costs of tariffs?
- Make goods services more expensive
- -> Hits consumers!
- Encourage inefficient industries
- Impact other industries: divert resources from efficient industries
- Reduce spending on unprotected industries
- Greater cost than benefit
- May result in retaliatory tariffs (harms exports)
- Raises business costs (possible cost-push inflation)
- See U.S. tire industry
What is comparative advantage?
The principle that in the event of trade between countries, gains occur - total output is maximised - when each specialise in/focus on producing whatever goods/services for which they have the lowest opp cost (lowest real cost): everyone benefits when you avoid wasting resources on the things you’re worst at.
When a country does this, it is maximising production from its scarce resources because the real cost (foregone production) is low.
What is a subsidy?
A subsidy is a payment from the govt to businesses to help lower costs (e.g. paying for shipping, some other contribution to per unit production costs)
It works as a form of protectionism by making local businesses more profitable at Pw so that they may supply a higher quantity to become more competitive with imports at Pw (note: no change in price to consumer! Does not affect demand) which leads in an increase in supply, and so either a reduction in the volume of imports required for net quantity supplied to equal net quantity demanded, or to further increase the amount by which quantity supplied excees quantity demanded (volume of exports). Subsidies are expensive and are ultimately paid for by the taxpayer.
What is a tariff?
A tariff is a tax on imports.
It works as a form of protectionism by disadvantaging imports by making them more expensive so that local suppliers can become comparatively more competitive, and at a higher price fewer imported goods will remain profitable leading to a contraction in their supply, at the same time as an expansion in domestic supply as domestic firms fill the gap. Given that prices increase, this leads to a contraction in demand, and so given that less is demanded and more is supplied domestically, the volume of imports required is reduced. The size of the tariff represents the per-unit revenue for the government.
Difference between tariffs and subsidies?
Consumer prices:
tariffs raise from Pw to Pt
Subsidies: no change
Govt revenue:
Tariffs: generate govt revenue
Subsidies: use up govt revenue
Domestic supply:
Tariffs: expansion of supply
Subsidy: increase in supply
Domestic demand:
Tariffs: contraction of demand
Subsidy: no change
How the volume of imports is reduced:
Tariffs: by decreasing profitably of imports AND by incentivising local businesses by increasing consumer prices, while demand contracts.
Subsidies: by increasing the ability of domestic suppliers to respond to existing consumer demand at the same price thus reducing additional imports required to satisfy this demand.
What are the two key types of free trade agreement?
- Bilateral: between two countries only (e.g. Aus + NZ)
- Multilateral: between multiple parties (WTO, ASEAN, TPP, EU)
Multilateral agreements may also be known as regional trade blocks.
What are the aims of a free trade agreement?
FTAs aim to mutually reduce protectionist measures and other factors hindering the flow of trade.
(e.g. standardising labelling conventions, reducing communication barriers, establishing common regulations (so products don’t have to jump through two sets of hoops: increases supply), building infrastructure, switching to the same unit system, protecting intellectual property + names (what is champagne, what is Brie du Normandie: not creating confusion in the mind of the consumer).
How are neighbouring countries affected by the formation of a new FTA?
Neighbouring countries often miss out as a result of new trade agreements being formed: it will mean that old trading partners will be now less willing to trade with them if their protectionary measures are comparatively stricter, and so there are greater gains to be made by trading within the FTA.
How might FTAs contribute to unequal global wealth distribution?
Early trade negotiations focussed on agreements between richer, industrialised countries who could afford the lawyers, accountants, economists negotiators etc to get the most value from trade deals. This basically means that an enclave was created that discouraged these countries from trading with smaller, developing, more protected countries, who then missed out on some benefits of free trade. At the same time, many of these smaller countries may have found themselves on edges of large trade blocks, which also results in a reduction of trading opportunities.
