international trade econ

economies of scale

1. Increasing the market size for a firm from domestic markets to domestic and international markets causes the demand to increase.

2. This causes to the production level and size of production to increase as well, which leads to a fall in average costs and provides economies of scale to the firms.

3. This allows the firms to reduce their prices for consumers too.

absolute advantage

international trade benefits when countries specialize on certain g/s , less natural resource competition so increase in efficiency, ppc, labour and capital are fully employed here

able to produce g/s at lower unit cost

comparative advantage

are able to produce g/s for lower opp cost, determined by abs advantage

calculate abs advantage

.

for good x, comparative advantage is…

eg. bags of wheat max = 40, dvds max = 8 so 40/8=5, so for every dvd → 5 bags of wheat - can use to determine which country has higher abs advantage, not obvious by just looking for trade

max production Y/Max production X

tariffs

tax on imported goods

why we promote protectionism plus egs

• infant industries (national pride) eg. Chinese government's financial support for its domestic semiconductor industry

• raises gov. revenue

• health and safety eg. Kinder surprise US

• natural security - eg. subsidies to agriculture EU

• Environmental standard  eg. In 2018, the UK banned all cosmetics and personal care products containing microbeads.

• protects job markets/preserves way of life

• Anti-dumping 

PAHINGE

Against protectionism

• free trade lower costs (in protectionism, be aware of downstream industries (eg lithium ion battery needed for phone))

• free trade better for foreign producers

• Free trade leads to more choice - Yet there are almost 1000 different types of bananas. Protectionism and product standards significantly limit the choice for bananas for consumers. 

• free trade better quality (specialization)

• protectionism reduces incentives to improve quality

• risk of retaliatory tariffs eg. US initiated US-china trade war 2023

• encourages consumption

Mainly - misallocation of resources

firstly, tariffs, quotas and subsidies distort prices. Tariffs and quotas increase the price of imported goods, while subsidies decrease the price of domestic goods. Distorting prices has consequences for resource allocation, since price is an important indicator to consumers to determine the quantity demanded.

CFIRMQ

why are subsidies better, but what are drawbacks

no major difference in price or quantity, same consumer surplus but welfare decreases because tax payers have to pay

quota

physical limit on quantity of an import (physical control). Agreements by a country to limit its exports to a country to a given quantity of quota

dumping - mitigated by anti-dumping tariffs

Dumping refers to firms exporting their goods at a price below production cost. It is a type of predatory pricing behaviour. An importer may sell or ‘dump’ goods abroad in order to gain a foothold in a new market.

A Voluntary Export Restraint (VER)

A Voluntary Export Restraint (VER) is a trade policy tool where an exporting country voluntarily agrees to reduce the volume of exports.

japan automobiles to us 1980s

diagram - international trade for important and exporting nations, economies of scale

CS, PS, revenue, DWL quotas, subsidies, tariffs

Dumping - why and cons

why

• get rid of excess supply

• enter a new market quietly

• gain market share or drive out competition

cons

• domestic industries lose sales and jobs

• the market becomes distorted and unfair

• online local firms collapse, foreign firms raise prices

CONFUSE

subsidy

a payment per unit of output from the government to a specific industry to help lower production costs and boost production.

RWE tariff, quota, subsidy

Tariff - US imposed a tariff on imported steel

Quota - until 2005 Under the Multi-Fibre Arrangement (MFA), the U.S. set strict quotas on textile and clothing imports from countries like China, India, and Pakistan.

Subsidy - Eu on agriculture

administrative barriers

• Product standards - health and safety, eg. kinder surprise US

• Voluntary export restraints, eg. Japanese lowered auto exports to US

• ‘Buy National’ policies - eg. australian made

Preferential trade agreement and RTA

members reduce/remove tariffs on certain goods imported/exported throughout the region

• Regional trade agreement when they are made with geographically close members

EU

Free trade agreement (FTA)

members reduce/remove tariffs on all goods imported/exported throughout the region

Australia–Hong Kong 2020

Customs Union

members reduce/remove tariffs on all goods imported/exported throughout the region, and impose same tariffs on non-member nations

Switzerland–Liechtenstein 1924

Exchange rate

The value of one currency expressed in terms of another

Floating, managed, fixed exchange rate

floating - Value of a currency is determined by the forces of supply and domain in a forex market

managed - by government and central bank policies

fixed - against another currenct, often USD

Foreign direct investment

Speculation, buying and selling foreign currency to make a profit

Purchasing power parity theory

Exchange rate will tend towards a point where a given sum of money will buy the same amount of commodities whatever currency that amount is changed into

Appreciation

Interest rates increase

increases demand

Or decrease in supply

Exchange rate diagrams

Common markets

An area of economic integration that allows nations to trade freely with each other, set a common external policy and allow free movement of factors of production between member states.

Association of Southeast asian nations

trading blocs

A trading bloc is an agreement between nations to form a region in which trade and cooperation take place more freely. One key objective is to increase economic efficiency by increasing competition between producers in the region.

• Free trade areas

• Customs unions

• Common markets

• Monetary unions

comparison of trade agreements

Unilateral trade agreement / Free trade area (FTA) / Customs union / Common market

Explanation

In a unilateral trade agreement, one country provides preferential tariff reductions for another country without receiving the same treatment in return.

In a free trade area (FTA), the countries signing the trade agreement remove most or all barriers to trade with the other countries involved in the agreement.

A customs union is very similar to a FTA, but has one important difference. The countries participating in the agreement set a common external policy towards non-members, while still engaging in free trade among themselves.

A common market is a customs union that also allows the free movement of factors of production such as land, labour, entrepreneurial talent and capital resources.

monetary union

A monetary union (also called a currency union) is created when countries form a trading bloc in which there is free trade, a common external policy, free movement of factors of production and a shared currency. A monetary union in operation today is the Eurozone or European Monetary Union,

WTO functions and principles

According to the WTO website, the functions of the organisation are: 

• administering and monitoring the application of WTO trade agreements

• acting as a forum for trade negotiations

• settling trade disputes

• monitoring national trade policies

• providing technical assistance and training for developing countries

• cooperating with other international organisations 

The WTO is guided by the following set of principles: 

• Non-discrimination: this principle is applied to higher and lower income countries, but not to trading blocs

• Openness of trade: this should be achieved by lowering all trade barriers among nations

• Predictability and transparency: all stakeholders should trust that negotiations are not led arbitrarily

• Promotion of fair competition: this principle attempts to assess the fairness of trade transactions and guide responses

• Privileging less developed countries: this is aimed at improving equity between more developed countries (MDC) and less developed countries (LDC)

• Protecting the environment: initiatives should have the environment at heart including public health, animal health and plant health 

most favoured nation status means that any trade advantage (like lower tariffs or higher import quotas) that one WTO member gives to another must be extended to all other WTO members equally.

WTO strengths and weakenesses

Strengths

• Handle trade disputed through sanctions

• Administer WTO trade agreements

• Ensure most favoured nation status

• stable and predictable

• support developing countries

Weakenesses

• slow decision making

• favours richer countries

• many citizens feel it is not democratic for a foreign agency to dictate trade in their country (loss of sovereignty)

• Patented drugs are protected by the WTO but too expensive

• Allowing poorer countries to bypass trade protection means less money - less innovation and research

• so mixed impact on developing countries