International Trade

Why do countries trade?

Why do countries trade?

Wider consumer choice and lower prices

due to increased

competition

Firms have access to larger markets , can

gain economies of scale, and

have access to cheaper raw

materials

Access to resources and products they may not have available in their own

country eg. oil

Specialisation and trade

increases world output and raises the

standard of living

Political Reasons- historical links or

strategic reasons

Free Trade

• Trade without barriers

Costs of international trade?

Costs of Trade

Overdependence

Environment

Distribution of

income

Unemployment

(structural)

Loss of culture

Loss of Sovereignty

Risk

• Venezuela and Coke

Trade Protection

TRADE PROTECTION

Arguments for protection /restricting trade

• To combat foreign trade monopoly

• To protect the way of life

• To suppress the consumption of luxuries

• Maintaining a domestic defence supply industry

• Protection of infant industries

• Raising government revenue

• Strategic trade policy

• To combat the threat of dumping

• To combat cheap foreign labour

Second best

Strategic reasons

Poor reason – not sustainable if a genuine cost advantage.

Best argument for protection ?

Forms of trade protection (barriers to trade)

Tariff – A charge imposed to inflate the price of imports relative to domestically produced goods. Eg. US tariffs on steel 2002

Export subsidy – subsidising product sales of domestic producers, when competing in the world market, to encourage exports. Eg. CAP, dairy subsidies

Quota – restriction on quantity of goods imported to maintain domestic production eg. EU imposing textile/ clothing quotas on Chinese imports 2005. 2006 EU placed import quota on Thai chicken

Non tariff barriers - administrative regulations that discriminate against foreign goods in favour of home produced goods.

Embargo – Total ban of trade on specific goods or in certain cases total ban on trade. Eg. Cuba- 50 year trade embargo on US goods, 2006 Thailand banned EU chicken imports fear of H5N1 bird flu virus

Why use a tariff?• Does not need to be supported by gov. spending (unlike a

subsidy) • Can provide revenue for a gov, enabling possible domestic

tax cuts. • Politicians have often tended to respond to high imports

by imposing a tariff as a way of reducing imports from foreign producers. A tariff can be seen, politically, as an easier option.

• Note: Membership of the WTO (formerly GATT) has significantly reduced the use of tariffs. Non-tariff barriers (NTBs) are now more common, however many are also against WTO rules.

Tariff protection

SworldPw

Q1 Q2

Sw + tariffPt

Q3 Q4

b hc i

Quantity of good x

Price of good x

Sdomestic

Duk

Tariff Rate

a f g j

Outcomes of using a tariff• Domestic consumers lose consumer surplus (b+c+h+i)• Domestic producers supported (higher market price) Increased

domestic producer surplus of b• Rise in domestic producer revenue from a to abcf• Reduction in foreign producer revenue from fgj to g• Gov revenue raised (h)• Q1 to Q3 now produced by domestic firms for c+f revenue,

foreign producers supplied same amount for f (c represent inefficiency)

• Q4 to Q2 is now not demanded, j is kept by consumers, but i is lost consumer surplus not transferred elsewhere

• A tariff results in deadweight welfare loss of areas c and i• there is a loss of economic efficiency as less efficient domestic

producers are able to produce and consumers are restricted from accessing imports from more efficient world producers

• The effect will be dependent on the size of the tariff, the PES and PED in the domestic market. The wider effect will be determined by the impact on trade relationships and the responses by other governments and markets

Activity

• List the winners and losers of the EU imposing a tariff on bananas from Latin American countries

• What factors will affect the impact of the tariff?

• Why are tariffs popular with governments?

Quantity of good x

Price of good x

Sdomestic

Duk

Subsidy protection

Q1 Q2

SwPw

Q3

Pw + Subsidy

Sdomestic + subsidy

a b c

gf

Activity

• Winners and losers from the US subsidising cotton

• What factors will affect the impact of a subsidy?

Quick Quiz

• Illustrate and explain the impact of a subsidy used as protectionism (4 marks)

• Using the diagram explain how domestic producers gain and foreign producers lose out (4 marks)

Quota protection

SwPw

Q1 Q2

Pq

Q4Q3 Quantity of good x

Price of good x

Sdomestic

Duk

Sdomestic + quota

a

g j

cb f

h i lk

Outcome of Quotas• Domestic producers supply Q1 plus Q3 to Q4 at price

pq• Domestic producer revenue rises from a to a+g+c+j+k• Foreign producers supply less now Q1 to Q3, previously

Q1 to Q2, at a price of pq. • Producer revenue changes from bcf to bhi (usually a fall

in income)• Q4 to Q2 is no longer demanded, f is kept by

consumers but l is a deadweight welfare loss as it is the loss of consumer surplus which does not get transferred to any other stakeholder

• Q3 toQ4 is now produced by domestic firms. Foreign producers would have supplied this amount for c revenue, but domestic firms require min ck, therefore k represents inefficiency of domestic producers and loss of world efficiency. Another deadweight welfare loss.

Activity

• Winners and Losers- EU imposing a quota on chicken from Thailand (2006)

• What factors affect the outcome of the quota?

Article

• Protectionism