Trade policies and negotiations

• Define customs union

  The removal of all tariff barriers between members and the introduction of a common external tariff.
• Define economic union

  A common market with a customs union and free movement f goods, services, capital and labour.
• Define embargos

  Complete ban on trade with a particular country
• Define free trade

  Trade with no barriers or restrictions
• Define free trade areas

  Where countries agree to trade goods with other members without protectionist barriers.
• Define monetary union

  Two or more countries with a single currency.
• Define protectionism

  When the government enact policies to restrict the free entry of imports into their country, such as trips and quotas.
• Define quotas

  Limits placed on the level of imports allowed into a country.
• Define tariffs

  Taxes placed on imported goods in an attempt to prevent people from buying them.
• Define trade creation

  When a country moves from buying goods from a high cost to a lower cost producer
• Define trade diversion

  When a country moves from buying goods from a low cost producer to a higher cost one.
• Different methods of protectionism: 1. Tariff


  The impact of tariffs is that the Q.D of domestic goods increases whilst imports decrease. Tax revenue could be used to help finance gov expenditure.

  
• Different methods of protectionism: 2. Quotas

  It limits the quantity of a foreign produced good that is sold on the domestic market. It leads to a rise in the price of the good for domestic consumers, so they become worse off.
• Different methods of protectionism: 3. Export subsidies

  A gov. intervention used to encourage goods to be exported rather than sold on the domestic market. It could be via direct payments, tax relief or provide cheap access to credit.
• Different methods of protectionism: 4. Embargoes

  A complete ban on trade with a particular country E.g E.U on Russia
• Different methods of protectionism: 5. Excessive admin burdens (red tape)

  This increases trading costs, thus discouraging imports. It makes trading with countries imposing red tape difficult and is particularly harmful to developing countries that are unable to access these markets. It's harder to notice this type of protectionism, which is why it's favoured among some countries.
• Stages of economic integration: 1. free trade areas

  Where countries agree to trade goods with other members without protectionist barriers. It allows members to exploit their comparative advantages, which increases efficiency. E.g NAFTA
• Stages of economic integration: 2. customs union

  Members of a customs union have free trade in goods and services, a common external tariff, while a common market has the above and free capital and labour movement across borders. E.g EU
• Stages of economic integration: 3. monetary union

  Members share the same currency and interest rate. They should respond similarly to external shocks or policy changes and has to have flexibility in product markets and labour markets to deal with shocks. E.g Eurozone
• Stages of economic integration: 4. economic union

  Made up of a common market with a customs union where members have common freedom of movement of goods, services,capital and labour as well as a common external trade policy. E.g EU
• Consequences of economic integration: 1. trade creation & diversion

  Trade blocs have increased trade amongst members while diverting trade from other areas. Normally, a country would switch its imports from a cheaper producer outside of a trade bloc to a higher-cost producer within the bloc. Non-members are subjected to protectionist barriers, causing trade to be diverted from producers outside the trading bloc to those within. The U.k. primarily trades with the E.U, at the expense of former Commonwealth trade links.
• Consequences of economic integration: 2. reduced transaction costs

  Since there are no barriers to trade or no border controls, it is cheaper and simpler to trade.
• Consequences of economic integration: 3. E.O.S

  Firms can take advantage of a larger potential market in which to trade. By specialising, firms and countries can exploit their comparative advantages, and the gains of efficiency and advanced technology can be gained
• Consequences of economic integration: 4. enhanced competition

  Firms become more efficient as a result of operating in a more competitive market, and resources are better allocated. Long-term advantages of dynamic efficiency may exist, though these gains aren't always distributed fairly across members.
• Consequences of economic integration: 5. migration

  By being a member of a Customs Union, the supply of labour is increased, which could help fill labour shortages. However, this might mean some countries lose their best workers.
• Benefits of protectionism: 1. trade deficit

  If a country employed several protectionist measures, then a trade deficit would reduce as they will be importing less due to tariffs and quotas on imports.
• Benefits of protectionism: 2. infant industries

  Infant industries might need protection as they are relatively new and need support. Protectionism is usually short term until the industry develops, at which point the industry can trade freely.
• Benefits of protectionism: 3. market failure

  It can be used to correct market failure as it can deal with demerit goods and protect society from them.
• Benefits of protectionism: 4. current account

  Governments might employ protectionist measures to improve the current account deficit.
• Benefits of protectionism: 5. domestic jobs

  Governments may want to protect domestic jobs.
• Costs of protectionism: 1. disrupt the market

  It could distort the market and reduce allocative efficiency. It prevents firms from competing in a competitive market, and consumer welfare suffers as a result. Consumers face rising pricing and less choice. Firms have little or no motivation to lower their production costs if they are not operating in a competitive market.
• Costs of protectionism: 2. extra costs

  It imposes an extra cost on exporters, which could lower output and damage the economy.
• Costs of protectionism: 3. low income

  Tariffs are regressive and are most dmaging to those on low and fixed incomes.
• Costs of protectionism: 4. retaliation

  There is a risk of retaliation from other countries, so countries might become hostile.
• Free trade benefits: 1. comparative advantage

  Countries can exploit their comparative advantage, leading to a higher output using fewer resources and increasing world GDP and therefore improving living standards.
• Free trade benefits: 2. efficiency


  It increases economic efficiency by establishing a competitive market, lowering the costs of production and increasing output.
• Free trade benefits: 3. trade creation

  There's trade creation because there are fewer barriers, meaning there is more consumption and large increases in economic welfare.
• Free trade benefits: 4. economic growth

  More exports could lead to higher rates of economic growth.
• Free trade benefits: 5. E.O.S

  Specialising means countries can exploit E.O.S, which will lower their average costs.
• Free trade costs: 1. job losses

  It can result in some job losses since countries with lower labour costs have entered the market.