eco - trade & protectionism

what is the definition of international trade?

involves buying and selling of goods/services across national borders

what are some examples of goods nz exports and imports

exports: meat, dairy products, wool, honey etc

imports: clothing, tech, cars, tropical fruit

why do countries trade with each other? (benefits to the country exchanging)

trade leads to an improvement in the economic welfare of consumers
- countries specialise in what they are good at making and then exchange the goods

often the goods are cheaper when made in bulk and consumers have better prices

why do countries trade with each other? (benefits to consumers)

trade enhances consumer choice

trade leads to a faster rate of technological diffusion

trade can improve a coountries rate of economic growth - if we export more than we import than a country earns revenue which is beneficial to the economy

what are some advantages of trade to firms

trade allows firms to exploit economies of scale by operating in much larger markets

economies of scale means that firms can buy raw materials in bulk from other countries

this lowers cost of production which leads to higher profits for firms and cheaper consumer prices

• international competition stimulates higher productive effieciency

what are some disadvantages of international trade

• increased competition from overseas may lead to local firms closing down

• multi-national companies often shift production to low wage countries domestic workers lose their jobs

• powerful firms in developed countries control the world supply of raw materials, makes it difficult for developing countries to gain good prices for their materials

• international transport of goods increase gas emmisions

what is free trade

free trade or an open economy is a country that trades with other countries without any trade barriers such as taxes on goods

what is protectionism

where a country protects the local economy against overseas competition by using certain barriers

what are the four main types of trade barriers

tarrifs

quota

embargo

subsidies

exchange control

export tariff

voluntary export restrictions

administrative burdens

what is an import tarriff

tax imposed on the price of the imported good. Adds cost of production - makes overseas goods more expensive

• it can be a specific tax per unit - e.g) 50cents per unit

• it can be ad valorem - % of the price- e.g) 5%

• increased govt revenue by creating local jobs

what is a quota

restriction on the quantity of the good that can be imported into a country

• helps to reduce supply of imported goods

• price of imported goods rise

• but govt doesnt gain revenue from a quota

• higher price means that foreign firms gain higher profits

what is an embargo

total ban on certain goods

what is an export subsidy

subsidies are given to local firms to lower their cost of production and to export the goods

• this is used to encourage exports rather than discourage imports

• local firms can gain a larger share of the foreign market share

what is exchange control

restriction on the purchase of foreign currency

• set legal limit on the dealings in foreign currency that a countrys citizens and businesses can make

• if importers cannot convert to local currency to foreign currency then they cannot buy imports

• prices rise because supply reduces - consumers lose

what is a voluntary export

• agreement by and exporting country to restrict the amount of goods it exports to another country

• the country may be pressured into signing such an agreement or the other country may agree to restrict their exports as well

what are administrative burdens

discourage imports by requiring importers to fill out time consuming forms

what are some arguments in favour of protectionism

to safeguard employment in the local economy

earns a country revenue

to prevent the exploitation of labour in developing countries

to prevent dumping

to protect infant industries

how does protectionism safeguard employment in the local economy

protectionism is the use of various barriers to stop the importance of goods

• some industries are important for economic growth e.g) Agriculture in NZ

• without these industries economic growth will be slow

• if imports are allowed then people in the local industries will lose their jobs

• they become more reliant on the govt

• it we import goods then we are creating jobs in other countries - not ours

how does protectionism earn a countries revenue

Balance of payments is a record of the countries trade with other countries

• it records trade in goods, services, finances etc.

• if exports are greater than imports then the country has a trade surplus

• if imports are greater than exports then the country has a trade deficit

• a trade deficit means that we are spending NZ dollars overseas and we lose our local currency

• if nz has a surplus we are earning foreign currency

• govt could use subsidies, tariffs, quotas etc to encourage a trade surplus

how does protectionism prevent the exploitation of labour in developing countries

in developing countries with large pop’s the supply of labour is huge therefor the wages are very low compared with other countries that have minimum wage.

• products from developing countries are cheaper because wages are cheaper - lower cost of production- developing countries have a comparative advantage

• from a moral POV its not acceptable so they (developed) call for developed countries to protect their economies from such goods by putting tariffs, etc against these developing countries

• on the other hand, by not buying the good it lowers demand and this will further drive the wage rates down.

how does protectionism prevent dumping

dumping is a term used when goods are sold in overseas markets at below cost of production

• amounts to price discrimination bc local customers in china will pay higher prices than those overseas

• Investigation: The government investigates whether a foreign company is selling goods below its production cost or home market price.

• Proof of Harm: The industry must prove that these cheap imports cause material harm or threaten local businesses.

• Tariff Application: If dumping is proven, the government adds an extra tax (duty) to the import.

• Price Leveling: This specific tariff cancels out the artificial price advantage of the dumped goods.

• Fair Competition: Local companies can then compete on a level playing field without facing bankruptcy from below-cost rivals

how does protectionism protect infant industries

young industries in a country that has potential for growth and can create future job dont get to enjoy large economies of scale which bigger firms from foreign countries do.

if the economy is left unprotected then the infant industry will be driven out of the marlet

once the industry is established then the protectionist barriers must be removed or it will lead to inefficiency

what are some arguments against protectionism

they restrict consumer choice

they could end up protecting inefficient firms in the domestic industry

other countries will respond by placing tariffs against our goods exported to their country

what is absolute advantage

a situation where one country has an outright advantage in the production of both goods in international trade

what is comparative advantage

a situation where one country has a slight advantage over the other production of one good.

what factors determine comparative advantage

the quality and quantity of factors of production

a country may invest in research and development

movements in exchange rates

rates of inflation

import controls

non price factors

how does the quality and quantity of factors of production determine comparative advantage

a country that is well endowed with natural resources and has a large labour force will enjoy an advantage over another that doesn’t have this

how does a country that invests in research and development determine comparative advantage

this means that they develop new production techniques that lowers cost of production

how does movements in exchange rates determine comparative advantage

when the NZ dollar is lower against the US dollar then we export more since its cheaper for overseas buying

how does rate of inflation determine comparative advantage

if inflation rate in NZ then the price will be lower. overseas buyers will buy our exports because they are cheaper

how does import controls determine comparative advantage

if govt places high tarrifs on imported goods it gives a comparative advantage bc local firms are protected from overseas competition

how does non price factors determine comparative advantage

people buy local products not overseas because local quality is better, local design is better, no backup services and warranty from overseas

what are some criticisms of the theory of absolute and comparative advantage

two country, two products model is not realistic example in today international trade

production costs are unlikely to be constant between countries, as countries specialise they enjoy a lower cost of production but if they take it too far they will see costs start to rise

transport costs are not taken into account