4.1.5

• cost of trade liberalisation for consumers:

  • externality: can affect consumer in long term
  • could lead to exploitation of labour
• cost of trade liberalisation for producers:

  • competition
  • Reduced revenue - foreign competitor could end up with greater profits
  • Job losses
• Benefits of trade liberalisation for consumers

  • better choice
  • better quality products
  • lower prices
• benefits of trade liberalisation for producers:

  • introduced to bigger markets
  • Innovation
  • have various choices on where to buy raw materials
• subsidies act as a trade barrier because it is unfair when some firms get subsidies and others don’t - harder to compete
• unilateral - something is done by one person or one party
• trade dispute is when two or more countries disagree over trade after a barrier has been placed
• a trade war results from protectionism as one country imposes barriers on another country and that country retaliates
• how trade can be liberalised:

  • on a global scale through the WTO
  • on a regional scale through trade blocs
  • unilateral scale
• problems with international trade in first half of 20th century:

  • high degree of protectionism
  • no trade dispute mechanisms (wasn’t able to sit and talk)
• GATT - general agreement on tariffs and trade
• problems with GATT

  • its only a treaty - it can be changed when there are wars and changes in governments
• WTO:

  • permanent institution
  • provided formal mechanism to resolve trade disputes
• FTA - free trade agreement
• a trade bloc is a group of countries that agree to reduce or remove trade barriers
• FTAS can be bilateral or multilateral
• FTAs are a private institution and can reduce trade barriers below WTO levels
• pros of FTAs

  • competitive sectors benefit from economies of scale
  • more choice for consumers and firms
  • reduced admin costs for governments and firms (e.g. goods don’t have to be stopped at border control)
  • increase in FDIs as its attractive to sell to other countries because of no trade barriers
• cons of FTAs

  • decline of uncompetitive sectors
  • risk of structural unemployment
• FTAs improve choice because no tax needed to pay and so there are more cheap and high quality choices from abroad
• FTAs reduce admin costs from no paperwork needed, no administration needed, money and time saved as goods don’t need to be checked at border control
• FTAs increase structural unemployment because free trade - elastic supply - wont be able to compete at a international price - forced to shut down or reduce supply - structural unemployment
• trade diversion - trade moves from low cost producer to high cost producer
• trade creation - trade moves from high cost producer to low cost producer
• pros of FTAs:

  • trade creation
  • more efficient allocation of resources (if trade creation is greater than trade diversion)
• cons of FTAs

  • trade diversion
  • less efficient allocation of resources if trade diversion is greater than trade creation
• bargaining power makes it easier to gain trade deals
• countries that lack bargaining power will find it hard to obtain advantageous trade deals
• one problem with FTA is that other members of a trade bloc may set up trade policy in a way that improves the competitiveness of rival firms
• customs union is a free trade area that imposes uniform trade restrictions on non members
• common external tariff is a trade policy agreed by the member of a customs union that sets identical restrictions on trade to non members
• a common external tariff benefits an economy because it raises government revenue and acts as a from of protectionism because it reduces imports and helps domestic producers
• despite being in an FTA, there are still some trade restrictions:

  • firms have to modify products based on the countries standards and packaging requirements
  • checks of goods and paperwork are still required at borders
  • workers still need visas to work throughout the bloc
  • countries set different standards on collective decision making
• there is a loss of sovereignty in a single marker because there is more collective decision making
• freedom of movement for labour means they can move within the bloc with a visa
• Common standards liberalise the trade in goods as it removes the need to carry out paperwork checks at the border - movement of goods are much more efficient - which attracts FDIs
• joining a single market means a loss of sovereignty over decision making because the EU court of justice have the final word
• the formation of a currency union creates a common currency so it is easier to compare prices and exchange rates between countries
• exchange rate fluctuations are a barrier to trade as it creates uncertainty
• advantages of currency union

  • exchange rate risk is eliminated
  • greater price transparency