International trade

• Patterns of global trade


  • Developed economies
  • Developing economies
  • Liberalisation of trade barriers
  • Transition economies
  • Intra-regional trade
  • Inter and intra-industry trade
• Developed economies


  • Developed countries have a greater share of global trade than developing countries
  • Usually developed countries export valuable manufactured goods such as electronics and cars and import cheaper primary products such as tea and coffee
  • Trading blocs such as the European Union dominate world exports
  • The greatest volume of trade occurs between the developed rich countries, especially between industrial leaders such as Japan, United Kingdom, United States, Germany
• Developing economies


  • Trade is a significant percentage of national income and competitiveness in international markets has a huge bearing on their overall macroeconomic performance and development prospects e.g India, Sri Lanka
  • Successful trade provides an injection of demand into the circular flow of spending and income and creating positive export multiplier multiplier, increased employment in export industries which can raise GDP per capita and falling prices for consumer helps to increase real incomes
• Liberalisation of trade barriers


  • Reducing trade and tariff barriers allows for more trade between countries, better quality goods and cheaper transport costs
  • Cheaper good at a better quality
• Transition economies


  • Moving from a centrally planned economy to a mixed or free market economy
  • Liberalisation of markets to give price a bigger role in allocating scarce resource between competing uses
  • Reduction in tariff and other trade barriers so that the economy becomes more open
  • Legal reforms, banking reforms and interest rates liberalisation and reduction in the scale of government subsidies e.g to loss making industries
• Intra-regional trade


  • Trade in good/service happen inside a specific region of the world economy such as Sub Sahara Africa or the member nations of the European Union
• Inter-regional trade


  • Trade in goods/services happens outside a specific region of the world economy such as between trading bloc (NAFTA/EU) and countries not near each other
• Benefits of trade


  • The theory of comparative advantage
  • Reducing tariff barriers leads to trade creation
  • Increased exports
  • Increase competition
  • Economies of scales
  • Make use of surplus raw materials
  • Trade is an engine of growth
  • Tariffs may encourage inefficiency
• Comparative advantage


  By specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables those countries to specialise in those goods where they have a comparative advantage
• Trade creation


  Consumption switches from high cost producers to low cost producers. Removing tariffs leads to lower prices for consumers
• Increased exports


  • Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth
• Increase competition


  • With more trade domestic firms will face more competition from abroad. Therefore, there will be an incentive to cut costs and increase efficiency
• Economies of scale


  • If countries can specialise in certain goods they can benefit from economies of scale and lower average costs. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms
• Make use of surplus raw materials


  • Middle Eastern countries are very rich in reserves of oil but without trade, there would be not benefit in having this much oil
• Trade is an engine of growth


  • World trade has increased by an average of 7% since 1945, causing this to be one of the significant contributors to economic growth
• Tariffs may encourage inefficiency


  • If an economy protects its domestic industry by increasing tariffs, industries not have any incentives to cut costs
• Costs of trade


  • Infant industry argument
  • The Senile industry argument
  • To diversify the economy
  • Raise revenue for government
  • Helps balance of payments
  • Cultural identity
  • Protection against dumping
  • Environmental
• Infant industry argument


  If developing countries have industries that are relatively new then at the movement these industries would struggle against international competition. However if they invested in the industry then in the future they may be able to gain comparative advantage
• Senile industry argument


  If industries are declining and inefficient they may require significant investment to make them efficient again. Protection for these industries would act as an incentive for firms to invest and reinvent themselves. However, protectionism could be an excuse for protecting inefficient firms
• To diversify the economy


  • Many developing countries rely on producing primary products in which they currently have a comparative advantage in. However relying on agriculture products has several disadvantages such as prices can fluctuate due to environmental factors and goods have low income elasticity of demand so demand will only increase a little with economic growth
• Raise revenue for government


  • Import taxes can be used to raise money for the government however this will only be a relatively small amount of money
• Helps balance of payments


  • Reducing imports can help the current account as it restricts imports. However in long term could lead to retaliation and also cause lower exports so it might be counter productive
• Cultural identity


  • Many countries wish to protect their countries from what they see as an Americanisation or commercialisation of their countries
• Protection against dumping


  • Dumpling occurs when a country has excess stock so it sells below cost on global markets causing other producers to become unprofitable
• Environmental


  • It is argued that free trade can harm the environment. Countries with strict pollution policies may find consumers import the goods from other countries where pollution is allowed