trade policy - a2 economics

Trade Policy:

Trade Policy

Slide 2:

The benefits of trade Economists tend to favour free trade for these reasons Specialisation Theory of comparative advantage shows that world output can be increased if countries specialise in what they are relatively best at producing Economies of scale EoS can be maximised and costs reduced Source of comparative advantage Choice More than just domestic choice Innovation Lack of free trade often leads to domestic markets being dominated by a few firms who may avoid competition and not innovate as much as they would if there was competition Free Trade : International trade conducted without the existence of barriers to trade, such as tariffs or quotas

Slide 3:

Costs of trade Trade can be beneficial but it can also have costs Overdependence Small countries can become dependent on exports of one or two commodities If prices fall they will experience a large fall in GDP Imports may be cut due to political reasons Jobs Changes in demand can lead to unemployment The less mobile the workforce the more likely there will be unemployment Risk Demand can fall Prices can fall Supplies may be cut Finance may be cut off

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Costs of trade Distribution of income Trade can lead to a less equal distribution if benefits go to the rich elite within a country The environment Environmental degradation and unsustainable development e.g. timber Loss of sovereignty Lose the ability to make decisions e.g. UK joining the EU Loss of culture Brings foreign ideas and products to countries

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Methods of protection If government decides that the costs of free trade outweigh the benefits there is a large number of ways in which it can erect Trade Barriers Tariffs Sometimes called an import duty or a customs duty Used by government to raise revenue and restrict imports Raises the final price leading to a fall in demand which helps domestic producers Consumers switch to domestically produced substitutes Trade Barriers : any measure that artificially restricts international trade Tariff : a tax on imported goods

Slide 7:

Methods of protection Quotas An example of a physical control Restricting the amount imported increases market share for domestic providers Also raises the price of the protected product This is explained on the next slide Other restrictions Voluntary export agreements Non-competitive purchasing Safety standards Lengthy delays at customs Quota : a physical limit on the quantity of a good imported.

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Methods of protection

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Arguments used to justify protection The infant industry argument Industries starting up face much higher costs than foreign competitors How can they compete? Once it has got sufficiently large tariff barriers can be removed Also a learning curve Need time to establish efficient operational and working practices Japan has successfully developed infant industries with high trade barriers In general they have not been successful Governments have to pick the winners and they are not good at doing that Industries that are not competitive are not competitive and often don’t become efficient Usually more efficient to use other policy weapons to develop new industry e.g. subsidies, training grants, tax concessions etc

Slide 10:

Arguments used to justify protection Job protection argument Protectionism can create or preserve jobs Although the policy may benefit manufacturers and their workers consumers are likely to have less choice and pay more Foreign countries could retaliate and all participating in the trade war will suffer If production switches from lower cost to higher cost there will be a loss of welfare for consumers

Slide 11:

Arguments used to justify protection Dumping Foreign firms may sell products at a loss for a variety of reasons Failed to find a market Short run excess capacity Low prices used as a threat to the domestic industry Difficult to say if short term distress dumping leads to a loss of domestic welfare Cheap labour Countries with cheap labour often accused of unfair competition Source of comparative advantage Misallocation of resources if domestic consumers are forced to buy from high wage domestic industries Dumping : the sale of goods at less than cost price by foreign producers in the domestic market.

Slide 12:

Arguments used to justify protection Other arguments A country needs a particular domestic industry for defence purposes A country may wish to preserve a particular way of living Maybe it feels that some imports are too dangerous It may feel it is too dependent When arguing it is always important to question whether trade barriers are the best means of achieving the desired objective Other policies such as subsidising are likely to be more efficient than trade protection

Slide 18:

Trade exam question (June 2010) Failure to get a new trade deal would put another dark cloud over the world economy. Source: PETER MANDELSON, EU Trade Commissioner, July 2008 a) Explain the main economic determinants of a country’s demand for imports. (15 marks) b) Evaluate the significance for the UK balance of payments on current account of increased use of protectionist policies around the world. (25 marks)