ECON LAST

• Free trade


  Goods, services and financial resources move freely among nations with no restrictions on trade, both quantitative and qualitative
• Free trade


  • Free competition is a fundamental feature
  • Goods and services are free to compete with one another in international markets
  • Survival of the fittest - most efficient producers remain in the market
• The world has tremendously changed since Adam Smith's time
• In theory, free trade has several advantages or benefits
• Restricting trade with tariffs and quotas, together with other forms of trade barriers, spawns economic inefficiencies such as high cost of production, lower standard of living, and poor quality of goods
• Free trade prospered because there were abundant world markets
• Free trade has been replaced with trade barriers to promote interests of individual countries
• Henry Kissinger: 'Today's economy, by contrast, contains at least 20 significant trading nations of widely different cultural backgrounds with great variations in labor costs and standard of living. In such conditions, competition becomes more ruthless. Nearly all industrial democracies – even while they give lip service to the ideals of free trade – have sought to nudge the terms of trade in a nationalist direction. Subsidies of exports, non-tariff barriers to import, guaranteed credits, as well as the manipulation of exchange rates become the order of the day.'
• Comparative advantage


  A country's greatest advantage in exporting raw materials and primary products
• With the operations of free trade based on comparative advantages, the less developed countries (LDCs) remain exporters of raw materials and primary products and importers of finished products
• Practicing free trade, the LDCs have no chance to industrialize their economies as their finished products cannot compete with those of the highly developed countries
• It is necessary for the LDCs to protect their infant industries from foreign competition
• Forms of trade protection

  • Tariffs
  • Quotas
  • Exchange controls
  • Import prohibition
  • State trading
  • Government regulations
• Tariffs


  A tax imposed on imports as they enter a country, commonly levied as a specified ad valorem percentage of the value of imports
• Quotas


  Quantitative restriction limiting imports of a particular product to a specified number of units, or to a certain value, per period of time. Only those with import license are allowed to bring goods into the country.
• Exchange controls


  The Central Bank restricts the sale of foreign exchange (like US dollars) to importers. Only those with permission from the Central Bank to buy foreign exchange have the ability to import.
• Import prohibition


  The strongest form of import control, prohibiting the importation of certain categories of goods – usually luxuries.
• State trading


  Governments, especially those with socialist and communist economies, sometime grant monopoly importing rights to state enterprises. Thus private corporations cannot import goods.
• Government regulations


  These likewise constitute a sort of protection for the domestic products.
• At the start of the industrialization process of the United States, Germany, Canada and other European countries, they set up tariff walls and other forms of trade protection against the products of England. The main reason was to protect their infant industries from English competition.
• Such protection is certainly good for the owners of infant industries. But in the long-run it is good to protect infant industries. Once they become matured, they can compete with foreign goods.
• Arguments for tariffs


  • Protect local employment
  • Preserve local standard of living
  • Ensure military self-sufficiency
  • Improve balance of trade
  • Provide source of revenue for government
• The most popular arguments for trade protection through tariffs are the infant industry and revenue arguments.
• Protecting infant industries through tariffs is only fair. Tariffs as a source of revenue are appropriate for poor countries in great need of funds for socio-economic programs and projects.
• Tariffs vs Quotas


  Both limit the movement of goods and services among countries, but differ in their effects - quotas can guarantee a predetermined level of imports while tariffs cannot exactly control imports; quotas are more restrictive as foreign producers can only sell a specific number of goods regardless of price, while tariffs raise the price of imports making them less competitive