Global Economics

Arguments for Trade Protection

1. Infant industry argument

2. National Security

3. Health, safety and environmental standards

4. The efforts of a developing country to diversify

5. Anti-dumping

6. Unfair competition

7. *Correcting a balance of payments deficit

8. Tariffs as a source of government revenue

9. Protection of domestic jobs

Arguments Against Trade Protection

1. Domestic Producers and workers gain from all types of trade protectionism, but it harms foreign producers and workers

2. Higher Production costs and reduced efficiency

3. Consumers lose in most cases

4. Income distribution, in most cases, worsens: Tariffs and Quotas

5. Foreign producers are worse off in all cases

6. Domestic and global resource allocation loss

7. Negative effects on the price level, real GDP and employment

8. Negative effects on a country’s export competitiveness

9. Trade Protection may give rise to trade wars through retaliation

10. Trade protection creates a potential for corruption

Economic Integration

Economic Interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade and other barriers between them.

Degrees of Integration

1. Preferential Trade Agreement

2. Free Trade Area

3. Customs Union

4. Common Market

5. Economic and Monetary Union

6. Complete Economic Integration

Preferential Trade Agreement: Trade Liberalization

The policy of liberalizing (freeing up) international trade by eliminating trade protection and barriers to trade (tariffs, quotas, etc.)

Preferential Trade Agreement (PTA)

An agreement between two or more countries to lower trade barriers between them on particular products.

• Trade barriers may remain on the rest of the products, and on imports from non-member countries.

• Results in easier access to the markets of other members for the selected products, compared with the access of countries that are not members.

• PTAs sometimes involve co-operation between members on other issues, such as labour standards, environmental issues or intellectual property laws.

Preferential Trade Agreement (PTA): Bilateral Trade Agreement

Any agreement to lower internal trade barriers involving two trading partners usually two countries.

• could also be between one country and another group of countries when this groups acts as a single unit (European Union)

Preferential Trade Agreement (PTA): Multilateral Trade Agreement

A trade agreement to lower international trade barriers between many countries.

• Mainly Carried out within the framework of the World Trade Organization (WTO), and involve agreements between WTO member countries.

Preferential Trade Agreement (PTA): Regional Trade Agreements

A trade agreement (or agreement to lower international trade barriers) between several countries between several countries that are located within a geographical region.

Trading Bloc

A group of countries that have agreed to reduce tariffs and other barriers to trade for the purpose of encouraging free trade or freer trade and cooperation between them.

Trading Bloc: Free Trade Area (agreement)

Consisting of a group of countries that agree to eliminate trade barriers between themselves.

• There may be free trade in some products, and some protection in other products.

• Each country maintains its own trade policy towards non-member countries (to impose its own trade barriers).

• One problem that arises in free trade areas is that a product may be imported into an FTA by the country that has the lowest external trade barriers, and then sold to countries within the FTA that have higher external trade barriers.

Trading Bloc: Customs Union

Consisting of a group of countries that fulfil the requirements of a free trade area (elimination of trade barriers between members) and, in addition, adopt a common policy towards all non-member countries.

• Act as a group in all trade negotiations and agreements.

• Avoid creating complication “rules of origin” for imports, same common external barriers.

• Must face the problem together and coordinate their policies toward non-members

Trading Bloc: Common Market

A type of trading bloc in which countries that have formed a customs union proceed to eliminate any remaining tariffs in trade between them.

• Have the same external policy, and agree to eliminate all restrictions on movements of any production within them; factors affected are mainly labour and capital.

• Workers are free to move and work in any member country without restrictions, and capital (physical and financial) can also flow from country to country without restrictions.

• Requires member of the bloc to give up some of their policy-making authority to an organization with power over all member governments.

Trading Bloc: Monetary Union

A high form of economic integration, involving the adoption y a group of countries of a single currency.

• involves the adoption of a common monetary policy carried out by a single central bank, which is necessitated by the use of a single currency.

Trading Bloc: Advantages

1. Trade Creation - replace higher cost products

2. Increased Competition - increased competition between producers within member countries

3. Expansion into larger markets - sell beyond national barriers, increasing exports.

4. Economic of Scale - Increase in exports and the size of the market expands.

5. Lower Prices for consumers & greater consumer choice

6. Increased Investment - more incentive for outsider firms to set up production unit within the bloc.

7. Improved resource allocation & greater economic growth

8. Improved Efficiency & Greater Economic Growth

9. Stronger bargaining power

10. Political advantages - reduced tensions with surrounding countries, more interdependent through increased trade, investment, labour, and financial flows.

Trading Bloc: Disadvantages

1. Trade diversion - the replacement of lower-cost products (imported or domestically produced) by higher cost imports that results when a trading bloc is formed and trade barriers are removed.

2. Challenges multilateral Trading Negotiations

3. Unequal distribution of gains

4. Economic Integration involves loss of sovereignty.