Global

• Free Trade


  When there are no trade restrictions imposed (e.g. tariffs, quotas)
• Benefits to trade


  • Lower prices for consumers
  • Greater choice for consumers
  • Producers to benefit from economies of scale
  • Ability to acquire needed resources
  • More efficient allocation of resources
  • Increased competition
  • Source of foreign exchange
• Arguments in favor of protectionism

  • Protecting domestic employment
  • Protecting the economy from low cost labor
  • International demands for US to protect the domestic clothing industry against cheap imports from Asia, where wages are much lower
  • Avoid risk of over specialization
  • Reduce dependency on only one type of export especially if it is produced on scarce factors of production
  • To prevent dumping
• As we saw in micro there are times when the government may need to buy up additional stock of surplus in supply. They are able to sell this stock or "dump" and sell internationally for lower prices (can lead to trade wars → as it takes away existing demand in international markets)
• Arguments in favor of protectionism

  • To protect product standards
  • Raise government revenue
  • To correct a balance of payment deficit
  • Correct the current account
• Arguments against protectionism


  • Protectionism may raise prices to consumers and producers of the imports that they buy (e.g. raise the cost of medicine)
  • Less choice for consumers
  • Competition would decreases as foreign firms are kept out of the country, so research and development may decreases due to a decrease in economics of scale
  • Distort comparative advantage and causes resource waste as countries are not specializing
  • Can hinder economic growth
• WTO


  Provides a forum for negotiating agreements aimed at reducing obstacles to international trade
• Currently considers of 16 multilateral agreements to which all WTO members must comply by 164 members, 117 of which are developing countries (LEDCs)
• Main activities of the WTO

  • Reduce obstacles to trade
  • Trying to ensure transparency in trade agreements (such that trade benefits both parties)
  • Conducting economic research
  • More efficient use of scarce resources
• Success and failures of the WTO

  • Success: Seen an increase in free trade = encourages economic growth within countries as they are expiring more, Exports component of aggregate demand= C+ I + G (X-M) will increase the net exports of a country and increase its GDP, Helps put a stop to trade disputes and wars
  • Failures: Is not actually as transparents as they should be in order to benefit both parties in economic agreements, Developing countries do not have the capacity to negotiate in trade agreements thus fall short
• Summary of the WTO

  • Function: Trade negotiations, Provide a forum for negotiations among members of the WTO, Dispute settlement
  • Objectives: Reducing obstacles to international trade, Providing a general playing field for all
  • Principles: Non-discrimanation- should be beneficial for LDCs, Transparency, More competition and economic growth
• When the market is open for foreign change then consumers find that they can import wheat at the world price

  Increasing the demand for wheat
• Tariff


  A tax place on imported goods
• Impacts of a tariff

  • Domestic producers: Higher revenue
  • Foreign producers: Lower revenue
  • Consumers: Higher price, demand decreases
  • Government: Possibility of trade deterioration, Gained revenue
• Quota


  A limited amount of imports allowed into the country. This is shown by a straight supply curve turning into a normal sloped one.
• Impacts of a quota

  • Domestic producers: Able to produce more and earn more revenue
  • Foreign producers: Lose revenue
  • Consumers: Increased price level
  • Government: Possibility of trade deterioration, Increase government revenue
• P world is the global import price, P quota is the resultant new quota price, Supply shifts right by the amount of the quota, P quota minus P world multiplied by Q3 is the government revenue, Demand changes from Q4 to Q3
• Subsidy


  Subsidy to domestic producers helps them lower the price of production and thus shifts domestic supply right making more quantity available under the world supply price of imports.
• Impacts of a subsidy

  • Domestic producers: Able to produce more and earn more revenue
  • Foreign producers: Lose revenue
  • Consumers: Increased price level
  • Government: Possibility of trade deterioration, Decreases government revenue (opportunity cost)
• Subsidy will increase domestic production so Sd will shift to Sd+s, Domestic production increases from Q1 to Q3, Domestic revenue increase from only a to a+b+e+f+g of which e+f+g is the subsidy, Imports decreases from (Q1Q2) to Q3Q2, Foreign revenue decreases from b+c+d to c+d, The government spending on the subsidy is represented by e+f+g, The subsidy results in a welfare loss represented by the shaded triangle g. This are represents the net loss in producer and consumer surplus
• Administrative barriers


  • Complicated paperwork in order to slow down imports, Large amount of legal work, raises the cost to the importer, Designated ports to import the specific good to make it more difficult to reach, Causing border delays and raise the costs to importers
• Health and Safety standards and Environmental Standards

  • Restrict entry based on the requirements which need to be met within the imported country, Preventing imported goods that are dangerous to society
• Embargo


  An extreme quota → a complete ban for imports and it usually put for political punishment
• US out a trade embargo on Cuba (on all products), More commonly countries put economic sanctions against the offending countries, This limits the exports of import of one of few products, Done until political objective is met
• Bilateral trade agreement


  A trade agreement takes place between two countries, Aims to remove or reduce tariffs or quotes place between the two countries
• Multilateral trade agreements


  An agreement relating to trade between multiple countries, Aims to remove or reduce tariffs or quotes place between multiple countries
• Trading bloc


  A defined group of countries that join together in some form of agreement in order to increase trade between them and to gain economic benefits from cooperation on some level
• Preferential trading areas (PTA)


  Trading bloc that gives access to certain products from certain countries, Reduces trade barriers between member states
• PTA


  • EU and the African, Caribbean and Pacific group of states (ACP), ACP is a trade agreement made up of the EU and 79 states in the ACP, EU provides regular access to raw materials and other countries provide mining markets
• Free-trade area


  An agreement made between countries where countries agree to trade freely among themselves, but are able to trade with countries outside the free trade area as they wish
• Free-trade area


  • USA, Canada and Mexico (NAFTA)
• Custom union


  An agreement made between countries, where countries agree to trade freely among themselves, and they also agree to adopt common external barriers
• Common markets


  A customs union with common policies on product regulation and free movement of goods, services, capital and labor
• Common markets


  • EU
• Monetary union


  A common market with a common currency and common central bank
• Monetary union


  • Eurozone where all countries have adopted the Euro and share the european central bank
• Advantages of monetary union membership

  • Exchange rate functions that used to exist between countries disappear with a common currency → increase cross border investment and trade, A currency that holds credibility is more stable and is against speculation → more business confidence, Transactions costs are eliminated (no need to change currency)
• Disadvantages of Monetary union membership

  • Not able to set individual interest rates → no longer able to inflcune inflation or rate of economic growth, Each country requires different fiscal policy and somtimes is unable to change it due to common laws and tax rates are harmonzied, Shared common budget does not allow to quickly adapt to the needs of the citizenry of each country, Complete economic integration: Countries have no control of economic policy
• Advantages of a trading bloc

  • Greater size of markets → allowing for economies of scale, Increase in competition leading to greater revenues for firms and potential lower prices for consumers, Greater investment due to larger market size (more foreign investment can be attracted from outside), Free movement of labor → greater employment opportunities, Greater cooperation between countries → More political stability
• Trade creation


  When economic integration moves trade deals away from more inefficient producers outside the trading bloc to lower cost producers in the trading bloc, due to the elimination of trade barriers (especially interesting for joining customs unions)