e.g Japan is highly inefficient in producing its own food supplies it retains enormously high tariffs on rice imports because it want to retain its own food supply.
Other arguments in favour of protection
- Unions in advanced economies argue producers should be protected from competition with countries that produce goods using low cost labour. It’s unethical to buy products from countries that may may using prison or child labour. This encourages the exploitation of these people.
- Countries sometimes block trade because the production causes environmental damage
- Methods of protection and the effects of protectionist policies on the domestic and global economy
- voluntary export restraints
- tariffs
- subsidies
- quotas
- local content rules
- export incentives
Methods of protection
Tariff:
Government imposed tax on imports. It has the effect of raising the price of the imported goods, making the domestic producer more competitive.
Quotas:
Controls the volume of a good that is allowed to be imported over a given period of time. It guarantees domestic producers a share of the market.
Subsidies
Involve financial assistance to domestic producers which enables them to reduce their selling price and compete more easily with imported goods.
- Subsidies are an expenditure by Gov and are more likely to be reviewed regularly and removed when necessary
- Subsidies reduce prices & lower inflation which benefits consumers
Voluntary Export restraints:
When countries agree to restrict the no. of exports to another country in exchange for a similar concession from the other nation. Usually used for short time.
Local Content rules:
Goods must contain a minimum percentage of locally made parts. In return for guaranteeing a certain % of a good will be locally made the imported goods will not attract a tariff.
Export Incentives:
Give domestic producers assistance such as grants, loans or technical advice & encourage businesses to penetrate global markets or expand their market share.
Trade Agreements
Trade liberalisation: Any measures or agreements that reduce barriers to trade.
Trading Bloc: When a no. of countries join together in a formal preferential trading arrangement to the exclusion of other countries. E.g EU & NAFTA
Free Trade Agreements: Formal agreements between countries designed to break down protection barriers. When the agreement is between two countries it is bilateral.
* 60% of European trade occurs within the European Union
* Between 1990 & 2002 economies of NAFTA & ASEAN increased the level of trade amongst themselves
* Regional trade blocs could result in global trade fragmenting into self contained regions hindering spread of global free trade.
Asia Pacific Economic Cooperation (APEC)
- 21 members
- Accounts for over half world GDP and 46% of world trade
- Includes all major Asian economies
- More then three quarters of Aust merchandise exports go to countries that are members of APEC
- APEC countries have a target to achieve free trade by 2020
- APEC agreed not to become a secluded trading bloc such as EU
- APEC free trade group that supports WTO
- It has non – discriminatory grouping – trade with countries outside the grouping on the same basis as members if they are prepared to give equal access to their markets
- Tariffs of APEC members have been in decline
- Encouraged openness to Globalisation, advocated trade liberalism
European Union
- Most important trading bloc in the world economy
- EU covers population of 450 million people
- Formation of EU dismantled trade barriers
- EU raised tariff barriers to non-member countries
- High protection of agricultural products in EU prompted US to retaliate with similar protectionist policies
North American Free Trade Agreement (NAFTA)
- Established 1994
- Agricultural protection being completely eliminated other tariffs being phased out
- Access to US markets lead to increase in exports for member countries
- US benefited from being able to shifty production to Mexico where the cost of labour is lower
Bilateral Trade Agreements
- Example: CERTA (Closer economic relations trade agreement)
- CERTA – led to elimination of trade restrictions between New Zealand & Aust
- CERTA – established 1983
- CERTA – led to increase in trade between Aust & New Zealand
- Aust pursued bilateral agreements with several nations including
- Singapore
- Thailand
- US
- US FT agreement would boost Aust economy by $60 billion & create 40 000 new jobs
Association of South East Asian Nations (ASEAN)
- Covers newly industrialising economies in South East Asia
- Does not include any advanced economies
- ASEAN free trade area established in 1992
- Contemporary trading blocs and agreements
- the role, importance and influence in the global economy of blocs and agreements
- EU, NAFTA, APEC, ASEAN, CERTA
The role, importance and influence in the global economy of trading blocs and agreements
Trading alliances and formal agreements have occurred between countries as a result of economic integration, which refers to the liberalisation of trade between 2 or more countries. Economic integration has increased significantly in the last 20 years and has led to the formation of:
- Which often leads to trade diversion, where trade is promoted within a region at the expense of trade development with non-member countries.
- Recent resurgence due to slower WTO negotiations and concern that AUSTRALIA is being excluded from trading blocs
The role of trading blocs is to:
- Expand the benefits of specialisation of production beyond national boundaries by eliminating barriers of trade. The economic benefits are:
- Wider choice of products for consumers
- Factors of production used more efficiently
- Easy access to export market
- Raised cooperation and understanding
- Greater interdependence between nation, < war
- Factors of production more freely between economic making it possible to:
- Access economic growth opportunities
- Limit restriction on the best use of resources in the region
- Increase in employment as result of trade
Concern over the extent to which FTA’s assist or hinder progress toward global free trade. Notion that trading blocs are dividing the world into separate trading areas.
EU (European Union)
Role:
- Formed in 1959 as a free trade area
- Initial aim was to base a common market between the countries and to breakdown the barriers that existed at the time
- Moved from being a common market place to a complete economic union with its own parliament and currency
Influence in liberalising trade:
- Trade between EU nation significantly easier, lower tariffs and common policies
-
Single currency, monetary policy co-ordination via ECB greater economic stability and improved economic performance
- Increased global competitiveness with US and East Asia
- Increased protectionism has led to trade diversion
NAFTA (North American Free Trade agreement)
Role:
- Trading bloc stablished in 1994 between the US, Canada and Mexico
- Retaliation to EU and Japan
- Created to integrate the North American market by eliminating barriers to trade and investment and to improve competitiveness of member nations
Influence in liberalising trade:
- Increase in trade among its members
- Increased competitiveness through increased productive efficiency for USA and Canada as they have been able to exploit lower production costs in Mexico
- Greater access to large markets for Mexico
- Argument against NAFTA is that it diverts rather than creates trade
- Incentive for industries and firms to relocate to Mexico where labour is cheaper and employment and environmental regulations are less stringent
- Concerns non-member countries might locate to Mexico to access Canadian and US markets to avoid tariffs and other barriers known as trade diversion
- Rules of Origin established to avoid the problem of trade diversion
APEC (Asia Pacific Economic Co-operation)
Role:
- Not trade agreement but an association looking toward strengthening the open multilateral trading system for the Asia-Pacific as well as all economies
- 21 members – extensive grouping and significant forum
- Important to Australia as ¾ Australia imports go to APEC members
Influence in liberalising trade:
- Intended to be a free trade group that supports WTO and is non-discriminatory
- Goal is free trade by 2020
- Successful in reducing tariffs
- 2/3 since 1980’s but is due to WTO not APEC
- Failed to make substantial gains towards goals
ASEAN (Association of South East Asian Nations)
Role:
- Est. 1967 to promote economic, social and cultural growth and development in region
- Regional forum of 10 newly industrialised nations
- Important to AUSTRALIA as major market for exports and major source of imports
Influence in liberalising trade:
- 6 nations formed ASEAN FTA (AFTA) in 2003
- enhanced global competitiveness by promoting intra-regional trade ties amongst members
- tariffs between these countries reduced to no more than 5%
CERTA (Closer economics trade agreement)
Role:
-
AUSTRALIA 1st bilateral FTA, made in 1983 with NZ
- Elimination of trade restrictions
- Strengthen and developed economic, social and cultural relations
- Hailed by WTO as the most comprehensive and effective FTA
Influence in liberalising trade:
- 563% increase in trade between AUSTRALIA and NZ from 1983-99
- Working collaboratively means we have much greater change of success
- unilateral action reduction in protection on manufactured goods from rest of world
- supporting trade liberalisation initiatives of WTO, APEC and Cairns group
- International organisations
- the role, importance and influence in the global economy of international organisations
- WTO, IMF, World Bank
World Trade Organisation (WTO)
- WTO was est in 1995
- It replaced the General Agreement on Tariffs and Trade
- It is an example of a multilateral agreement
ROLE of WTO
- WTO oversees the implementation of the latest agreement on protection reduction this is the Doha round
- It hears and rules on disputes between member nations in relation to the interpretation of the agreement
- A country that believes another country is not complying with its WTO obligations can lodge a complaint to the WTO
- It promotes the extension of free trade by encouraging more nations to join
E.G. China became a member in Dec 2001
- WTO has proved effective in resolving disputes between smaller nations but less effective in resolving disputes between the US and Europe
- Major focus of the WTO is the Doha round of trade liberalisation talks launched in 2001
- Main aim of this round is trading concessions for developing nations
- Doha round is expected the deliver reductions in protection for agricultural commodities, lower tariffs on manufactured goods and impose higher standards on trade
- It is working towards abolishing over $US 700 bill worth of tariffs and subsidies on food, G/S
- Doha Round was supposed to have concluded in Jan 2005 but nations failed to reach an agreement
E.G. Group of 20 developing nations threatening to walk out of negotiations.
International Monetary Fund (IMF)
- Arguably the most important institution in the global economy
- It has 184 members
- It’s role is to maintain international financial stability particularly in relation to foreign exchange markets
- The roles of the IMF are to provide loans, technical assistance and to monitor economic and financial developments.
- The IMF is important as it promotes global prosperity.
- The IMF is influential through the economic advice it offers countries
- When a crisis occurs in an individual country the IMF will often develop a “rescue package” to help stabilize the country’s economy
- 2004 – it had $US 107 billion in loans to 87 developing countries
- It supports free trade and the free movement of capital between world markets
- If often demands that a country change it’s economic policies and open up their capital markets before the receive assistance
- Such policies are referred to as structural adjustment policies
- Structural adjustment policies include a reduction in the size of gov, privatising gov businesses, deregulating markets & balancing gov budgets.
- IMF has been criticised particularly during the 1997 Asian Financial Crisis where it’s management of the crisis appeared to make matters worse
- It required countries to adopt contractionary policies like reducing spending and raising interest rates.
World Bank (WB)
- Primary role of the world bank is helping poorer countries with their economic development
- It does this by
- Funding investment & investment & infrastructure
- Reducing poverty
- Helping countries adjust to the demands of globalisation
- It is funded from contributors from member countries and from its own borrowings
It has a number of organisations that provide specific assistance including the –
- International Development Association which provides “soft loans” to developing nations which has little or no interest
- International Financer Corporation whose role is to attract private sector investment in the World Bank’s projects
- Multilateral Insurance Guarantee Agency which provides risk insurance to private investors
- WB makes loans to developing nations at rates below commercial rates to fund projects like dams, roads, schools & power plants
- In recent yrs WB major aim has been to reduce the proportion of people living on less then $1 a day to half the 1990 level by 2015
- By 2015 it also hopes to achieve universal primary education, reduce child mortality, improve maternal health and treatment of serious health epidemics like HIV/AIDS, improve the natural environment & improve the status of women
- 2003 – WB made $US 18.5 billion in mew loans to developing countries
- This represents only 7% of all capital flows to developing nations
- Because of the growth of FDI flows to the developing nations the role of the WB has been diminished
- It’s most important action in recent yrs has been its support of the Heavily Indebted Poor Countries Initiative in which it aims to reduce debt by 2/3s in 46 of the world’s poorest countries
