Trade

Objectives

• know the advantages of international trade and the reasons why countries may restrict its flow
• be able to interpret the balance of payments
• understand how exchange rate movements affect business decisions
• appreciate the significance of multi-national firms
• know how trade and debt affect Third World nations
• Know the meaning of the following key terms: current account, visible/ invisible trade, current balance, external assets

International trade encourages countries to specialise in the production of goods and the provision of services which they have a distinct advantage in. Specialisation is a major source of increased wealth throughout the world.

Trade enables countries to concentrate on the production of goods in which they have a comparative advantage. By doing this countries can achieve the most efficient allocation of resources, and the value of every country’s output is greatly increased.

Protection

Some countries may choose to restrict the flow of trade goods for the following reasons:

• new industries (infant industries) may need to be protected while they become established. During the development phase average costs may be relatively high and firm may be susceptible to the effects of foreign competition. However, once firms have been protected they may find it very difficult to cope with full competition.

• Structural change in industry occurs through the shifting patterns of demand and competition. A declining industry may need protection while it adjusts to the changing markets and undertakes restructuring and further investment

• unemployment may be a direct consequence of foreign competition. Firms may have to shed labour or close in response to a falling market share

• dumping can occur where another country exports goods at prices at below their cost of production in order to reduce a stock surplus or, to gain market share in a foreign market. Countries facing such strategies may well impose restrictions on imports.

• balance of payments deficits may lead to short-term protection in order to reduce deficits

• strategic industries (industries important for defence) may be protected for security reasons.

In the short term protection may be justified. In the longer term protection may allow inefficient firms to prosper and deny customers the benefit of competitive world prices

Barriers to Trade

Methods of protection

• tariff – tax on imports

• quotas – limit the quantity of goods imported

• exchange controls – limit the availability of foreign currency available in order to buy imports

• subsidies – government financial support to home industries

• voluntary agreements – one country agrees to limit its exports to another country

• administrative restrictions – create technical and administrative barriers for imports

• counter-trading – a country makes certain import orders conditional on the exporter buying an equivalent value of goods

• buy-back agreements – capital equipment is bought on condition that part of its subsequent output is bought by the exporter.

Since 1940, there has been a general movement towards reducing trade barriers. The use of trade barriers encourages retaliation. If retaliation is allowed to escalate it can be damaging to both importers and exporters

Activity

The British textile industry has been very severely affected by imports of textiles from cheap labour areas in Asia. Both manufacturers and unions have lobbied Parliament to impose higher import duties on cheap imports. Draw up a case for protection of the British textile industry, and then draw up a case against it.

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………