International Trade

International Trade

• “The Basics”

International Trade

• International trade is the exchange of goods and services between countries.
• An import is the purchase of a good or service made from another country.
• An export is the sale of a good or service to another country.
• A nation trades because it lacks the raw materials, climate, specialist labour, capital or technology needed to manufacture a particular good. Trade allows a greater variety of goods and services.

Comparative Advantage

• The principle of comparative advantage states that countries will benefit by concentrating on the production of those goods in which they have a relative advantage.
• For instance, France has the climate and the expertise to produce better wine than Brazil. Brazil is better able to produce coffee than France. Each country benefits by specializing in the good it is most suited to making.
• France then creates a surplus of wine which it can trade for surplus Brazilian coffee.

Protectionism

• Protectionism occurs when one country reduces the level of its imports due to economic circumstances within their own country or as a result of disputes between nations.
• This can lead to unfavourable relations between nations and even spread to their allies.

• Advantages of Protectionism

• Protectionism occurs when one country reduces the level of its imports because of:
• Infant industries. If new businesses producing new-technology goods (eg computers) are to survive against established foreign producers then temporary tariffs or quotas may be needed.
• Unfair competition. Foreign firms may receive subsidies or other government benefits. They may be dumping (selling goods abroad at below cost price to capture a market).
• Strategic industries. To protect the manufacture of essential goods within the country.
• Declining industries. To protect declining industries from creating further structural unemployment.

Disadvantages of Protectionism

• Prevents countries enjoying the full benefits of international specialization and trade.
• Invites retaliation from foreign governments.
• Protects inefficient home industries from foreign competition. Consumers pay more for inferior produce.

Protection Methods

• Tariffs:
• Tariffs (import duties) are surcharges on the price of imports.
• Quotas:
• Quotas restrict the actual quantity of an import allowed into a country.

Other Protectionist Methods

• Administrative practices can discriminate against imports through customs delays or setting specifications met by domestic, but not foreign, producers.
• Exchange controls (currency restrictions) prevent domestic residents from acquiring sufficient foreign currency to pay for imports.

Conclusion

• Those who trade often have a higher standard of living because they will have more and better products to choose from.
• The living standards of people in all regions will be higher when each region specializes in producing goods in which it has some natural or acquired advantage and obtains other products by trade.
• Most nations employ some means of protecting their economies against competition from foreign commodities.
• There are three ways in which countries can reduce its imports:
• They can place a tax known as a "tariff" on imported commodities in order to raise their price to the consumer.
• They can impose an "import quota" which places limits on the amount of a particular commodity that can be imported into the country.
• They can impose domestic policies that reduce the demand for an imported commodity.