The developed country gains by exporting cloth and importing wheat. Again at an exchange ratio of 1:1, it now only has to give up 1 metre of cloth to obtain 1 kilo of wheat, whereas before it had to give up 2 metres of cloth. Therefore both countries have gained from trade. There are many gains from trade such as decreasing costs this is where even if there are no initial comparative cost differences between two countries, it will still benefit both to specialise in industries where economies of scale can be gained, and then to trade. Once the economies of scale begin to appear, comparative cost differences will also appear, and therefore the countries will have gained a comparative advantage in these industries.
Trade can bring benefits to all countries. But when we look around the world, we often see countries making barriers to trade and often set restrictions such as Tariffs these are taxes on imports which is usually a percentage of the price of the import.
Other restrictions involve Quotas, Exchange controls, Import licensing, Embargoes, Export taxes, subsidies and Administrative barriers.
Quotas this is where there is a limit imposed on the quantity of a good that can be imported. The quotas can be imposed by the government, or they can be negotiated with importing countries which agree voluntarily to restrict the amount of imports.
Exchange controls these include limits on the amount of foreign exchange made available to importers, or to citizens travelling abroad, or for investment. Alternatively, they can be in the form of charges made on people purchasing foreign currencies.
Import licensing. The imposition of exchange controls or quotas will often involve importers obtaining licences so that the government can better enforce its restrictions.
Embargoes this is where the government completely bans certain imports (e.g. drugs) or exports to certain countries (e.g. to enemies during war).
Export taxes these can be used to increase the price of exports when the country has monopoly power in their supply.
Subsides these can be given to domestic producers to prevent competition from otherwise lower-priced importers. They can also be given to exports in a process known as dumping. The goods are ‘dumped’ at artificially low prices in the foreign market.
Administrative barriers. Regulations may be designed in such a way as to exclude imports. For example, all lagers that do not meet certain rigid purity standards could be banned. The Germans effectively excluded foreign brands by such measures.
These restrictions could be a good thing for the infant industry (an industry which has a potential comparative advantage, but which is as yet too underdeveloped to be able to realise this potential) there may be industries in a country that are in their infancy, but which have a potential comparative advantage. This is particularly likely in developing countries. These industries are too small yet to have gained economies of scale, workers are as yet inexperienced, there is a lack of back-up facilities- communications networks, specialist research and development etc. Without protection, these infant industries will not survive competition from abroad. Protection from foreign competition, however will allow them to expand and become more efficient. Once they have achieved a comparative advantage, the protection can then be removed to enable them to compete internationally
To prevent dumping and other unfair trade practices. A country may engage in dumping by subsidising its exports. Alternatively, firms may practice price discrimination by selling at a higher price in home markets and a lower price in foreign markets in order to increase their profits. Either way, prices may no longer reflect comparative costs. Therefore the world benefit from tariffs being imposed by importers to counteract the subsidy.
It can also be argued that there is a case for retailing against countries which impose restrictions on your exports. In the short run, both countries are likely to be made worse off by a contraction in trade. But if the retaliation persuades the other country to remove its restrictions, it may have a longer-term benefit. In some cases, the mere threat of retaliation may be enough to get another country to remove its protection.
Balance of trade this is the measure of imports versus exports within any economy in monetary terms. A balance of trade surplus exists when the economy is a net exporter, a deficit when the economy is a net importer. The current account records payments for imports and exports of goods and services, plus incomes from property flowing into and out of the country, plus net transfers of money into and out of the country. The trade in goods account records imports and exports of physical goods this is also known as visibles. Exports result in an inflow of money and are therefore a credit item. Imports result in an outflow of money and are therefore a debit item. The balance of these is called the balance of trade in goods or a balance of visible trade.
After the war there was a general desire to reduce trade restrictions, so that all countries could gain the maximum benefits from trade. There was no desire to return to the beggar-my-neighbour polices of the 1930s.
In 1947, 23 countries got together and signed the General Agreement on Tariffs and Trade (GATT). Today there are some 130 members of its successor organisation, the World Trade Organisation (WTO), which was formed in 1995. Between them, the members of the WTO account for over 90 per cent of world trade. The aims of GATT, and now the WTO, have been to liberalise trade. The WTO’s objectives are to oversee the tariff cuts(averaging 40 percent) and the reduction of non tariff measures agreed at the Uruguay Round. It will be the guardian of international trade, examining on a regular basis the trade regimes of individual members. In this respect it will examine proposed trade measures and proposals by countries which could lead to trade conflicts. Members of the WTO are also required to supply a range of trade statistics which will be kept on the WTO database. It is recognised that issues will arise that could lead to trade disputes. Therefore the WTO provides a whole range of conciliation services and also a dispute mechanism for finding an amicable solution to problems. If trade disputes cannot be solved through bilateral talks, then the WTO dispute settlement ‘court’. Here panels of independent experts are established to examine disputes in the light of WTO rules and provide rulings. This tougher and streamlined procedure ensures equal treatment for all trading partners and encourages members to live up to their obligations. The whole programme of dispute settlements is far more streamlined the old GATT system and will encourage parties to seek independent jurisdiction of their case rather than resorting to individual pieces of domestic legislation. In addition, WTO is a forum in which countries can continuously negotiate exchanges of trade concessions to lower trade barriers.
The reasons for international trade are really an extension of the reasons for trade within a nation. Rather than people trying to be self sufficient and do everything for themselves, it makes sense to specialise. Firms specialise in producing certain types of goods. This allows them to gain economies of scale and to exploit their entrepreneurial and management skills and the skills of their labour force. It also allows them to benefit from their particular location and from the ownership of any particular capital equipment or other assets they might possess. With the revenues that firms earn, they buy in the inputs they need from other firms and the labour they require. Firms therefore trade with each other.
Overall I believe free trade strategy is an easy and effective way of countries exporting and importing goods rather than countries trying to produce a product themselves.
Economists suggest that trade's main advantage is allowing the world to achieve greater equality between countries. Free trade would also lead to increased competition if a country trades, the competition from imports may stimulate greater efficiency at home. This extra competition may prevent domestic monopolies/oligopolies from charging high prices. It may stimulate greater research and development and more rapid adoption of new technology. It may lead to a greater variety of products being available to consumers, also in a growing world economy, the demand for a country’s exports is likely to grow over time, especially when these exports have a high income elasticity of demand. This will provide a stimulus to growth in the exporting country. Another reason why I believe free trade strategy is beneficial is that there may be a political, social and cultural advantages to be gained by fostering trading links between countries.
Bibliography _
BOOK TITLE Author
Business Economics Win hornby, Bob Gammie and Stuart
Business Economics Mark Cook and Corri Farquharson
Economics For Business Chris Mulhern and howard r.vane
Economics for Business john Sloman and Mark Sutcliffe