Chapter 5 - Protectionism and free trade

disinvestment

withdrawal of capital investment from a company or country

embargo

an official state ban on trade or other activities with a particular country

export promotion

incentives to encourage the production of goods that can be exported; it is part of South Africa's international trade policy

methods of export promotion

incentives, e.g. information and research

subsidies, can be direct or indirect

trade neutrality

direct subsidies

cash payments to exporters

indirect subsidies

refunds on import tariffs and general tax rebates

reasons for export promotion

leads to export-led growth

enlarges the production capacity of the country

export markets are larger than local markets

more workers are employed

leads to lower prices (economies of scale)

economies of scale

achieving lower average costs as a result of mass production

disadvantages of export promotion

real cost of production hidden by subsidies

can lead to lack of competition

can result in higher tariffs & quotas by foreign competitors

results in the protection of labour-intensive industries by developed countries

advantages of export promotion

no limitations on size and scale of market

production is based on cost and efficiency

increased domestic production

realistic exchange rates will prevail

import substitution

goods that were previously imported are replaced with locally produced goods; it is part of South Africa's international trade policy

reasons for import substitution

diversification

industrialisation is promoted

helps solve balance of payments problems

economic growth through increased local trade

methods of import substitution

tariffs

quotas

subsidies

exchange control

physical control

diverting trade

tariffs

customs duties or import duties which are taxes on imported goods

ad valorem tariff

tariff levied as a percentage of the value of the goods being taxed

specific tariff

a tax that is a set amount per unit of imported goods

exchange control

government is able to reduce imports by limiting the amount of foreign exchange available to pay for imports

physical control

a complete ban or embargo imposed on the import of certain goods from a particular country

methods to divert trade

monetary deposits

time-consuming customs procedures

imposing high-quality standards

advantages of import substitution

increased employment

stimulates economic growth, increase in GDP

more choice for consumers

diversification makes a country less vulnerable

disadvantages of import substitution

diversion of capital and entrepreneurial talent

foreign technology may not be suitable

competitiveness of certain sectors decreases

leads to demand for protection

quota

a limit that is put on the import of a particular good, which decreases the supply of the good

protection

a trade policy whereby the state discourages the importing of certain goods or services in order to protect local industries against unequal competition from abroad

arguments in favour of protection

promotes industrial development

helps infant industries become established

stable wage levels and standard of living

protection of job opportunities

economic self-sufficiency & strategic industries

eliminates dumping

protection of natural resources

stabilises exchange rates and B.o.P

free trade

when producers and consumers are free to buy goods and services from anywhere in the world without the interference of government

arguments in favour of free trade

specialisation leads to increased global output

economies of scale lead to lower prices

greater choice for consumers

encourages innovation in processes and goods

improves global efficiency

greater output leads to higher economic welfare

leads to mutual gains for all countries

protocol

the established code of procedure or behaviour in any group or organisation, the official procedure governing affairs of state, eg cultural activities and international affairs

trade protocols for economic integration

free trade areas

customs unions

common markets

economic unions

free trade areas

member countries agree to the removal of all tariffs, but each member is still allowed to maintain its own level of trade protection against non-member countries

customs unions

member countries agree to the removal of all tariffs, but all member set and maintain the same external restrictions on non-member countries

common markets

a form of economic integration that satisfies all the requirements of a customs union but also allows for the free movement of factors of production between member countries

economic unions

meet all the requirements of a common market and also includes a single authority for joint economic policy making, single monetary system, one central bank, unified fiscal system and a common foreign economic policy

Mercosur

an organisation to promote free trade amongst Argentina, Brazil, Paraguay and Uruguay

New Partnership for African Development (nepad)

provides for regional cooperation and integration among African states

Southern African Development Community (SADC)

an economic and monetary union comprising Angola, Botswana, the Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, SA, Swaziland, Tanzania, Zambia and Zimbabwe, which allows imports from member states to qualify for duty-free access to other member states

sanctions

a penalty applied by one or more countries on another country

trade liberalisation

the abolition of government intervention in trade flows on both the import and the export side

World Trade Organisation (WTO)

the international organisation that was created to monitor and liberalise international trade

BRICS

an association of emerging economies consisting of Brazil, Russia, India, China and South Africa set up to promote co-operation, policy coordination and political dialogue in international, economic and financial matters