INTERNATIONAL TRADE

Why do countries specialize

Countries have skills and resources suited to the production of certain goods and services.

So they tend to specialize in the production of goods and services.

For example: Japan is famous for her electronic industries, France for her wine, Italy for her shoes. Countries that specialize then trade their goods and services for a variety of other commodities from other countries.

Why do countries trade

Countries trade in order to get goods and services that they cannot produce themselves. For example, the UK must import zinc and copper in the UK

Countries trade for goods that they can produce themselves but which are more cheaply made elsewhere. For example, the UK could grow tropical fruits, but only at great expense. It is cheaper for the UK to buy these goods from abroad.

It can pay to specialize and trade even when two countries can produce the same good at the same cost. Through trade, each country is able to sell to a larger market and benefit from economies of scale caused by mass production.

Absolute advantage

When one country is better at producing a particular commodity compared to another it is said to have an absolute advantage.  That is where country A can produce a product using fewer resources than country B. Country B can produce a different product with fewer resources than country A .they specialize and trade.

Comparative advantage        

A country has a comparative advantage over another country in the production of a good if it can produce it at a lower opportunity cost than the other country.  That is it has a comparative advantage in producing a good if it has to forgo less of other goods than the other country does. Countries are endowed with different resources, including populations with different skills 

PROTECTIONISM

Protectionism refers to the various policies designed to prevent trade between countries.

Most countries put some restrictions on foreign trade, mainly to protect their own industries.

                           

Methods of restricting imports

Tariffs

A tariff is a tax on the price of imports Tariffs are used to raise the prices of imports to make them more expensive than home-produced goods to stop people buying them. Tariffs are imposed to protect the infant industries from foreign competitors. By raising the price of the imports, the imported goods become more expensive and may deter people from buying them. Tariffs are an important source of government revenue. (students need to draw a diagram)

Quotas

A quota is a limit on the number of imports allowed into a country per year. A quota

Reduces the quantity of imports without changing their prices. For example a country may limit the imports of foreign cars to 500,000 each year, or the import of footwear to 5 million pairs of shoes each year.

Embargo

An embargo is a complete ban on imports of certain goods to a country. An embargo may be used to stop imports of dangerous drugs or to punish a country for political reasons by refusing to buy its goods.

Exports of beef from the UK were banned in Europe and many other countries because of health fears about the ‘mad cow’ disease

Subsidies

A subsidy is a grant given to an industry by the government so that the industry can lower its prices. Subsidies are used to stop consumers from buying foreign imports by making the home goods cheaper. When an industry at home receives a subsidy, the firm reduces the price of its product thereby making the price cheaper than the foreign goods. Subsidies help to protect home producers from foreign competition. (students need to draw a diagram)

Exchange control

Imports can only be purchased with foreign currency. The government can limit imports therefore, by restricting the amount of foreign currency available to firms wishing to import goods.

Standards

Another method to restrict imports coming into a country is for that government to place standards on the imports. That is the imported goods have to satisfy and qualify the standards and expectations in terms of quality and excellence, safety standards etc set by the government.

Dumping

Selling goods below their cost price is also called dumping. Dumping is carried out in order to capture the markets overseas. In order to gain an entry overseas, In order to get rid of surplus, and to drive out competitors and to establish a monopoly.

Reasons for Protectionism

Protection of a young industry

New and small firms known as ‘infant industries’ will be unable to benefit from the economies of scale enjoyed by larger foreign competitors. These infant industries will have higher prices than foreign firms and so will be unable to sell their goods. Tariffs or other forms of protection can be used to make foreign goods dearer and so allow infant industries to grow.

To prevent unemployment

Due to cheaper imports, people may not buy the goods produced within the country and as a result of this, the home industries decrease production due to lack of demand, this further leads to workers becoming redundant and industries closing down. This leads to structural un- employment so in order to prevent unemployment, protectionist policies are carried out.

To prevent dumping

Protectionism is carried out in order to prevent dumping of goods. Dumping occurs when  one country  floods the market in another country with a product at a price far less than it costs to produce in order to force rival firms in that country out of business. Eg: Japan was accused of using  dumping  to take over  a global lead in the production of television screens and motorbikes, forcing producers of these products in many other countries out of business.

Balance of payments problem

If a country is persistently spending more on imports than it is earning from exports, it is getting into debt with the rest of the World. if it  finds difficulty in increasing its exports it may be forced to remedy the situation by placing  limits on its imports. So protectionism may be used to overcome a deficit in the balance of payments.

Strategic arguments

Some industries may be regarded as essential to secure a country’s survival in time of war. It may be necessary to protect agriculture, steel, chemicals and several types of engineering industries by tariffs and quotas to prevent firms from being driven out of business by foreign competition.

Because other countries use barriers to trade

Before any country removes barriers to trade on foreign goods it needs to be sure that foreign countries will remove barriers to trade on their goods. With many dozens of trading countries, it is very difficult to get agreement on removal of barriers to trade.

To prevent over specialization

Free trade encourages countries to specialize in the goods in which they have a comparative advantage. Yet specialization in one or two products can be dangerous in the modern World.

The demand for goods & services is always changing and if a country relies on just one or two goods it risks a huge fall in its income if demand moves away from these goods to others. Protectionism allows a country to keep a wider range of industries alive and so prevents dangers of over-specialization.

Why do economists favour free trade

Free trade is trade taking place without restrictions and free flow of goods from one country to another removing all barriers to enable mutual benefit to both countries engaged in free trade.

1. The great advantage of free trade is that consumers can buy the products that are most competitive, whether they are produced at home or abroad.

2. It helps to improve the standard of living of the people and economic well being.

3. Many economists argue that free trade rather than protectionism is the way to create jobs and prosperity.

4. Their view is that protectionism encourages protected industries to be inefficient. They have no incentive to become efficient and produce goods that consumers want to buy at the keenest prices.

5. Such industries are unlikely to develop into strong industries capable of conquering export markets. Free trade on the other hand forces firms to be efficient or else they go bankrupt.

6. If a firm can beat off imports at home, then it stands a good chance of being a successful exporter.

7. Competition brought about by free trade produces efficient industries and thus leads to jobs and prosperity.

8. What is more if countries  follow free trade policies, each country will specialize in those products in which it has a comparative advantage  and this produces gains to consumers in all countries.

Arguments against protectionism

Other countries will retaliate with trade barriers

If one country introduces trade barriers to restrict imports of goods and services from other countries, those affected may introduce barriers in retaliation. A trade war may develop. The result is higher prices and fewer goods and services will be traded. This is clearly bad for consumers but if it continues it can also mean higher unemployment and slower economic growth as firms are forced out of business.

It protects inefficient domestic firms

By protecting inefficient producers at home, consumers will face higher prices and possibly lower-quality products because they will be unable to buy from more efficient, lower- cost firms overseas. If, as a result, more efficient overseas producers are forced out of business then consumers in many more countries will suffer from the inefficient allocation of global resources. Fewer goods and services will be produced globally as a result and fewer wants

The loss of domestic jobs from overseas competition will only be temporary

Many economists argue that the loss of domestic jobs as a result of competition from lower-cost firms overseas will only be temporary anyway because other firms will develop in the economy and grow to employ more workers.

Trade barriers have increased the gap between rich and poor countries.

Subsidies paid to protect farmers and other firms in rich countries have increased the  supply of agricultural and other products on the global market. Subsidies have therefore forced down world prices of many goods and producers in less developed countries have not been able to compete. As a result, sales, incomes and jobs have been lost in their countries and increased their poverty and hardship.