macro global context (chap 34-36)

international trade, globalisation, trade policies and negotiations

open economy

one nation is free to trade openly with another

what process has allowed for easier and increased international trade

globalisation

what does successful international trade provide an economy with

source of foreign exchange and more GDP, more capital equipment and technology, injection of demand into CFI, increased employment due to new industries surrounding exports, increased consumer choice, more availability for goods and services

how can international trade benefit emerging economies

raise their GDP as there is a larger market for their export of goods, provision of capital goods, more information and expertise, economies of scale

how can international trade benefit developing countries

foreign markets provide ability to exploit economies of scale (higher production leads to less cost per unit), usually very high demand due to lower prices, capital goods and machinery to boost production, fair trade agreements increasing income for primary sector workers

how do developing and emerging countries suffer when it comes to international trade

limited spending power as home incomes are small, unable to exploit economies of scale, lack of expertise to build capital goods, primary production domination (low productivity and volatile)

what are the issues with high exports in international trade

reliance on exports is not sustainable in the long run as financial crashes (e.g 2000s financial crisis) could lead to less trade

how does international trade link to poverty

trade can reduce extreme poverty as more exports raises the income for countries, provides jobs too

terms of trade

ratio of export prices too import prices

how are the terms of trade measured

index of export prices/ index of import prices x100

how does a change in the terms of trade index describe an economy

index goes up then terms of trade have improved, index goes down them terms of trade have deteriorated

comparative advantage

an economy can produce a good or service more efficiently and economically competitive than peers due to there being a lower opportunity cost

what is the law of comparative advantage

there will be gains in terms of trade when countries choose to specialise in production

absolute advantage

economies have more technology or better conditions that give them a better chance in production

how does the exchange rate affect terms of trade

appreciated rate means more imports and depreciated rate means more exports and tourism

globalisation

closer integration of global economies

what are the four main causes of globalisation

transport and communication improvements, reduction in trade barriers, deregulation of financial markets, migration

what are some consequences of globalisation

standard of living can vary as some lower income countries don’t have the income to access imported goods, structural. economic changes such as deindustrialization, emerging economies can move intoxicated production sectors to generate income

what are the three types of motives for FDI from MNCs

market seeking (selling), resource seeking (natural and labour), efficiency seeking (procurement, distribution etc)

what are the benefits from MNC FDI

provides countries with technology and infrastructure, employment, tax revenue

what are the drawbacks of MNC FDI

profits go overseas so cant enter the domestic economy, technology may not the relevant and not be used

what are some issues with global economic interdependency

oil prices cause a lot of volatility for global economies, spread of financial crisis such as the 2008 financial crisis, can jeopardise environmental progress

outline the economic activities that lead to the China and US trade war

China had rapid economic growth and US had a BOP deficit due to less exports, china had a fixed pegged exchange rate to the USD and bough government securities to maintain exchange rate, purchase of securities meant US interest rates were low and people could continue borrowing and spending, lead to an increase in the BOP deficit leading to Trump tariffs

trump tariffs

tariffs imposed on chinese imports to the US by donald trump due to the current account deficit their cheap imports fuelled

how did china respond to trump tariffs

imposed their own tariffs for US exports which reduced US demand

protectionism

measures taken by a country to reduce and restrict international trade

tariff

tax imposed on imported goods

why are tariffs important for productivity

they cant reduce demand internationally and encourage domestic producers to increase productive capacity

what is a government benefit from a tariff and how is this shown on a graph

tax revenue and increased productive potential, shown between q3 and q4

what happens to consumer surplus when tariffs are imposed

reduced consumer surplus as they are charged more as a result of higher import costs

how do tariffs affect a countries incentive to specialise

reduces the incentive as its likely to mean countries cant export to as many regions and generate more revenue therefore they may resort to diversifying their product portfolio

how can specialisation affect trade policies

as countries create surplus through specialisation and have comparatively cheaper exports, they may be able to reach trade negotiations and deals to benefit them and trading partners

who are the GATT

general agreements on tariffs and trade, organisation that promoted free trade, predecessors to the WTO

who are the WTO

world trade organisation, formally oversee international trade activities and govern them, enforce short term costs for long term gains

what is a trade war

when countries put tariffs up in response to other high tariffs, thus reducing the access to trade and spiking prices which can lead to a spike in inflation

what is a VER

voluntary export restraint- signed by countries and not enforced

quota

agreement between two countries to limit the quantity of exports to each other

what does a quota diagram look like and what does it show

demand shifts outwards slightly but not too much that domestic demand is reduced, producer gain is represented by the green rectangle and the welfare loss is the triangles on the sides as the country must import

how do domestic producers gain in the event of a quota

they are able to sell at a higher price and generate more revenue as the imported goods raise the overall market price

how can domestic producers suffer in the event of a quota

they may develop poor attitudes to expanding productive potential as competition is low (less imports) which can lead to x-inefficiency

x-inefficiency

a lack of competition in a market leads to producers operate with a higher average cost of production than necessary as there is no incentive to reduce costs

non-tariff barrier with examples

barrier other than tariffs that is used to limit trade such as quality control or licensing requirements

sunset industry

industry that is in decline resulting in displaced workers

examples of sunset industries

steel industry, coal industry, oil and gas extraction

infant industry

growing industries that require protection in the short run as international competition can dismantle them

examples of infant industries

domestic automotive industries, steel industries

what is the international threat for infant industries

global exporters can have cheaper goods so placing barriers in place leads to domestic trade, as production expands prices fall and the infant industry can enter the global market

what are some pros of protectionism

countries can improve domestic industries, reduces global reliance especially in economic shocks such as war, reduces high unemployment from sunset industries, helps infant industries

what are some cons of protectionism

reduces specialism (EOS GAINS!!) and skill development especially in developing countries, hard to remove protectionism once in place, infant industries may fail which makes protectionist measures pointless

what are some producer impacts of protectionism

higher producer surplus as they can sell their goods for more, low incentives to produce efficiently so possibility of x-inefficiencies

what is the issue with domestic supply and protectionism measures

if protectionist measures are put in place to boost domestic supply, governments must consider the productive capacity of industries as they may not have the facilities to respond (lack of elastic demand) and prices may increase = inflation :(

what are some consumer impacts of protectionism

rise in prices due to tariffs and quotas, rise in equality as domestic jobs are protected, welfare losses from tariffs and quotas can create a drop in living standards, tax revenue from tariffs can be reinvested into society

what are some government impacts from protectionism

tariffs increase tax revenue, can increase equality and living standards, can help or put balance of payments at a disadvantage as imports fall

free trade

the practice of international trade without any barriers put in place such as tariffs or quotas

why may some countries argue against free trade

lack of ability to generate revenue from tariffs and protect domestic industries in terms of trade, especially in a recession where global prices may be up and affordability is low, governments cannot generate extra revenue to help their economic position, dependencies on international suppliers for imports is very volatile and can be bad in events of war

what is the global pattern of free trade and protectionism

increase in protectionism after the 2008 financial crisis due to local unemployment and a lack of domestic demand, still many free trade areas yet globally, trade is becoming fragmented

explain the trade policy patterns of the industrial revolution

free trade played a key role in importing materials and components that Britain used in its manufacturing such as cotton, yet Britain swiftly moved to protectionism measures to increase the revenue from exported goods and keep domestic industries in high demand by domestic consumers

what is the issue with a fragmented global trade market using both free trade and protectionist measures

protectionism heightens the barriers to international trade and increases inequality between developing and developed nations, trade wars pose significant affects on inflation and exchange rates

why is free global trade unlikely to happen

not all countries can agree on one singular policy / set of policies to follow

trading bloc

group of countries that agree to cooperate in international trade through some sort of free trade area or association, they usually reduce or remove barriers to trade

what are some examples of trading blocs

EU, USMCA

what are the benefits of trading blocs

allows countries to tap into the gains of free trade as well as specialise and integrate regional trade, has multiple benefits

free trade area

group of countries that agree to remove trade restrictions with each other but have no formal agreement on the barriers against non-members

what are some common issues with free trade areas

tariffs to non members can differ so trade can flow in and out of the FTA even though it originated from the FTA, can create some unnecessary transaction costs, doesn’t include the free flow of labour

what was one free trade area that failed and why, what was it replaced with

NAFTA (north american free trade area) caused a loss of US manufacturing jobs as production moved to Mexico, replaced with USMCA (us mexico canada trading bloc )

custom union

group of countries that agree to remove trade restrictions between each other and set a common agreement of trade policies against non-member states

what are some benefits of custom unions

smaller countries can benefit from economies of scale and protection from global markets as they grow, benefits from external economies of scale within the union such as transport links, more competition than protectionist measures allows resistance built by firms, sharing technology and innovation

what are some drawbacks of custom unions

transactional costs when setting up the union, difficulty in setting common barriers against non-members, must overcome geopolitical barriers, some industries may move to the geographical centre of the union to reduce transport costs which concentrates labour in one area and increases inequality

what is the largest custom union in the world

EU (27 states), have a common tariff rate to non members of 1.39%

what are the three types of custom unions

common market, monetary/ currency union, full economic and currency union

common market

group of countries with no trade restrictions, common barriers to non-members and a free movement of labour and capital with common procurement policies to encourage equality and so that governments don’t favour their own firms

monetary/ currency unions with example

groups of countries that share a common currency e.g eurozone that share the euro

full economic unions

common market agreements with common currencies, a blend of monetary unions and common markets

what is the fragility surrounding full economic unions

if one country enters a recession, it can affect the whole union, policies put in place must be carefully considered as it affects many unions

what is the structural issue with full economic unions

lots of structural changes when entering a full economic union as you have to move industries and retain workers e.g shift to financial services in the uk

what is trade creation

importing cheaper goods and resources from within trading blocs to exploit comparative advantages

why would trading blocs engage in trade creation

leads to more trade overseas and is cheaper to do than trade with those overseas, can use the raw materials to make more goods to export.

what was the large economic trade split that occurred in the uk and when

Brexit in 2016 from a referendum

why was brexit encouraged (from a trade perspective)

meant that the UK didn’t have to follow EU trade restrictions such as forming trade agreements with other countries

what do the UK need to do to preserve and create trade relations

make more trade deals with countries to gain from international trade

why may countries protest against the WTO

more integration and free trade can lead to a loss of jobs and a higher likelihood that recession will spread between trading blocs, transactional costs can also be very high

who can deal with trade disputes

the world trade organisation

what agenda was brought in by the WTO to improve trade conditions

the doha development agenda

outline the doha development agenda

set of initiatives set by the WTO to lower trade barriers and increase global trade, works on developing countries especially : removing non-agricultural tariffs, using anti dumping tariffs, subsidies and investment and being more transparent with procurement

what was the nairobi package including one of its effects

a set of initiatives by the WTO against LDCs trade, one policy was the elimination of export subsidies (money going to developed countries from their governments to incentivise them to export goods to improve the trade balance)

anti dumping tariff

tax that is added onto cheap imports to not interfere with competition domestically

what are some arguments against globalisation and close trade integration

loss of jobs, fragmenting production has a negative environmental effect, more transport is needed so affects the environment more, countries have incentives to lower their emission policies to attract MNCs for cheap production, rich countries benefit the most as they have the market power to ensure trade conditions work in their favour