Economics global

Trade in the Global Economy

Free tradeDefined as a situation where there are:

“ no artificial barriers to trade imposed by governments for the purpose of shielding domestic producers from foreign competitors”

Globalisation

“(Economic) globalisation is the growing interdependence and integration of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free movement of international capital flows, and more rapid and widespread diffusion of technology”.

Free trade

Economists assume trade is beneficial and that free trade is the best way to foster trade

Although there are still many barriers to trade, often unofficial, in recent years there has been a decline in official barriers and progress in free trade

Free trade based on theory of comparative advantage

The argument for free trade is based on the concept of “Comparative Advantage”The principle is that nations should specialise in the production in which they have the lowest opportunity cost ie the real cost), to maximise their standard of livingEg if the cost of producing wine is lower in Australia than in the US, then we have a comparative advantage in wine production.The US may have a comparative advantage in the production of electronic goods or some other manufactured item.


Absolute advantage


Comparative advantage

What can cause the comparative advantage to change?


Advantages of Free TradeTrade allows G and S which cannot be produced in one country to be available to allFree trade allows countries to specialise in production in which they are most efficientFree trade encourages the efficient allocation of resourcesSpecialisation leads to economies of scaleFree trade encourages innovation and new technology

Disadvantages of Free TradeDomestic businesses may find it hard to compete with imports - therefore unemploymentNew industries may find it hard to “ start up” without protectionProduction surpluses from a country may be dumped on another, leading to distortion of market

Recent cases and issuesDe regulation of book industry. http://www.abc.net.au/rn/latenightlive/stories/2009/2611604.htmGood idea?We continue to subsidise the car industry in Australia. Why?Weapons development?We specialise in education exports. What are the risks? What are the impacts of free trade in education?

Recent cases and issuesParent interview:Do you want to eat Australian meat and fish? Why? European and US food production is heavily protected. Why?Do we need to protect any cultural elements of our society?How would the development of the internet have affected comparative advantage for small firms?Who are the winners, who are the losers from free trade?

Pedro

International OrganisationsWorld Trade Organisation (WTO)

Formed 1995 to implement and advance global trade agreementsCurrent round of negotiations (Doha) which aims to abolish agricultural export subsidies by 2013 - currently stalledpreferential agt focus

International Monetary Fund (IMF)Role to maintain international financial security, particularly in relation to forex market

World BankRole to help poorer countries with their economic development, esp reducing global poverty by 2015

OtherG8 group of 8 largest industrialised countriesG20 now taking over

United Nations - overseas several agencies that have a focus on developing countries

International OrganisationsWhy do we need them?

Task:Expand on these words to develop reasons:1. Avoid financial instability, collapse2. Crisis assistance3. Resource security- water ….4. Environmental protection –how5. Dispute resolution- trade

United Nations192 member nations

(WTO has 139 member nations)

Est 1945

30 affiliated organisations known as the UN system

Is funded by member nations

Does not make laws

Who pays?

The UN family

There are more UN organisations than these too

Functions

Maintain international peace and security

Develop friendly relations among nations

Cooperate in solving international problems and promote human rights

Be a centre for harmonising the actions of nations

United Nations

UNCTADUNCTADUnited Nations Conference on United Nations Conference on Trade and Development ideasTrade and Development ideas

Is a UN organisation established in 1964

3 roles: • Forum for consensus based intergovernmental discussions on

sustainable development• Research agency• Technical assistance to developing nations

Focused on unfair and asymmetric international economic relations

Need for international policies and rules to address these asymmetries: Special and differential treatment (trade preferences, exceptions, longer periods of adjustment…)

Positive agenda in trade negotiations

No one size fits all

23

Millennium Development GoalsEradicate extreme poverty and hunger

Achieve universal primary education

Promote gender equality and empower women

Reduce child mortality

Improve maternal health

Combat HIV/AIDS, malaria and other deceases

Ensure environmental sustainability

Develop a Global partnership for Development

24

Millennium Development GoalsPush forward world trade talks to reduce agricultural protectionism (WTO)

Finance debt relief properly (WB)

Step-up delivery of the ”education for all” targets (WB)

Make available substantial extra resources for TB, malaria and HIV/AIDS to eliminate preventable diseases (WB)

Strengths of UN ContributionsStrengths of UN Contributions1.1. Promotes human rights for allPromotes human rights for all2.2. Provides an international framework for national Provides an international framework for national

development policiesdevelopment policies3.3. Sets global goals Sets global goals 4.4. Provides data about global issues and trendsProvides data about global issues and trends5.5. Has a good understanding of region and country Has a good understanding of region and country

perspectivesperspectives6.6. Has changed debate about trade and developmentHas changed debate about trade and development7.7. Proposes development policies that combine Proposes development policies that combine

economic growth with poverty reductioneconomic growth with poverty reduction8.8. Brings issues of environment and development to Brings issues of environment and development to

global attention, especially global warmingglobal attention, especially global warming

A Summary of the UN’s A Summary of the UN’s Contributions(*)Contributions(*)

1.1. Promotes preventive diplomacy & human securityPromotes preventive diplomacy & human security2.2. Promotes the human development approach – a good Promotes the human development approach – a good

frameworkframework

The balance sheet shows a small surplus

The UN has led the way with many fundamental ideas, more than is often realized

The UN has often been ahead of the World Bank and the IMF – though these have received most donor support and most finance

Ideas may be among the UN’s most important contributions

Some criticismsSome criticisms

1.1. Weak response to the special needs of the least Weak response to the special needs of the least developed countriesdeveloped countries

2.2. Too little done to introduce cultural aspects into the Too little done to introduce cultural aspects into the development equationdevelopment equation

3.3. Tardy and weak reaction to HIV/AIDSTardy and weak reaction to HIV/AIDS

4.4. Inadequate attention inequalities of income and wealth, Inadequate attention inequalities of income and wealth, nationally & internationallynationally & internationally

Intellectual Challenges for UN

Growing divide between the Islamic world the West

Measures of human security

New measures to support the LDCs and countries in transition

Cultural aspects in the development equation

Responding to the long-run challenges of environment and sustainability

Global economic inequalities – the gap is growing

Mechanisms to ensure genuine international competition and free markets are fostered

UN Economic Ideas Have Often Differed from the UN Economic Ideas Have Often Differed from the World Bank’s and the IMF’s(*)World Bank’s and the IMF’s(*)

Fairer international economic relationsFairer international economic relations

National development strategiesNational development strategies

Development goalsDevelopment goals

Social developmentSocial development

Dag HammarskjöldDag Hammarskjöldformer head UNformer head UN

“ “THE UN WASN’T SET UP TO BRING MANKIND THE UN WASN’T SET UP TO BRING MANKIND TO HEAVEN BUT TO SAVE IT FROM HELL”TO HEAVEN BUT TO SAVE IT FROM HELL”

World Trade OrganisationEstablished 1995

Created by Uruguay Round of GATT negotiations (1986-94)

153 countries – members

Goal: to help trade flow smoothly and freely without barriers, to resolve trade disputes between economies

Multilateral agreements set ground rules for international commerce – have been effective in getting compliance since Uruguay round of GATT in 1993 formed the WTO with enforcement powers.

Uruguay round

Reduced protection for agricultural products

Global trade agreements extended to insurance and banking, and intellectual property- important as services fastest growing area

World Trade OrganisationResponsible for;

Administering WTO trade agreements

Forum for trade organisations

Handling trade disputes by consensus

Monitoring national trade policies

Technical assistance and training for LDCs

Cooperation with other international organisations

Latest round: Doha October 2010

World Trade OrganisationSuccessful in:

Dispute resolution – (if countries do not comply with decision, then trade sanctions may be applied on goods from the offending nation)

Between smaller countries

Not between EU and US

DOHA round bogged down over reductions in agricultural protection. India and Brazil, producers of manufactured goods and services, will not open up unless they get access to US, EU agricultural markets

WTO contAlso criticised for:

Time consuming and complex negotiation of multilateral agreements – leading to more bilateral agreements

Falling share of world trade taken by developing countries

– A legitimate criticism of the WTO may be that it has helped to construct the world trade system that is ”complicated, cumbersome and rigid”.

– Source: Dr D Sala, Bank of Finland 2006

World Trade Organisation• Main rules of WTO re trade:

– Non-discrimination– Reciprocity– General prohibition of quotas– Fair competition– Binding tariff reductions

Task:– Visit WTO website: what has been achieved recently?– Outline the key features of one dispute in which the WTO

has been involved.

STRENGTHS AND WEAKNESSESSTRENGTHS AND WEAKNESSES

WTOWTO

• Binding trade law• Powerful “judicial”

mechanism

BUT• Increasing complexities of

multilateral negotiations• Increasing regional and

bilateral trade agreements

WTOWTO

• Binding trade law• Powerful “judicial”

mechanism

BUT• Increasing complexities of

multilateral negotiations• Increasing regional and

bilateral trade agreements

UNCTADUNCTAD

• Wants to build trust and credibility among developing countries

• Independent research

BUT• Only a political role (no

“teeth”)• Limited human and financial

resources

UNCTADUNCTAD

• Wants to build trust and credibility among developing countries

• Independent research

BUT• Only a political role (no

“teeth”)• Limited human and financial

resources

THE MANDATETHE MANDATE

UNCTAD: UNCTAD: Integrated treatment of Integrated treatment of

trade, investment and trade, investment and related issuesrelated issues==

wide mandatewide mandate

• Research on trade and development issues

• Consensus-building through intergovernmental machinery

• Technical cooperation on all the topics of UNCTAD work

UNCTAD: UNCTAD: Integrated treatment of Integrated treatment of

trade, investment and trade, investment and related issuesrelated issues==

wide mandatewide mandate

• Research on trade and development issues

• Consensus-building through intergovernmental machinery

• Technical cooperation on all the topics of UNCTAD work

WTOWTO

•Rules-based organisation, negotiates binding multilateral trade law (“legislative” role)

•Dispute settlement mechanism with mandatory decisions, can apply sanctions (“judicial” role)

•Mandate confined to the existing trade agreements and to the scope of the negotiations

INTERNATIONAL MONETARY FUND (IMF)

• Founded 1945, Washington DC• 184 member countries• Set up to maintain stability of international monetary

and financial system• Three main functions: surveillance, technical

assistance, lending• Monetary institute, whose resources ($) are provided

by its member countries, primarily through payment of quotas which broadly reflect each country’s economic size. These are also reflected in the size of their voting power.


• Encourages countries to adopt sound economic policies through surveillance- regular reports on country progress like OECD reports. Recommendations made

• Provides technical assistance and training in several areas: fiscal policy, monetary and exchange rate policies, banking, financial system supervision and regulation, statistics

• Source of assistance when a country is in difficulty• - rescue packages


Source http://shawn1.com/wp-content/uploads/polyp_cartoon_IMF_Structural_Adjustment.jpg

Criticisms of IMF• Only lends money if countries agree to Structural Adjustment

Packages:– Correct economic policies- most often balance of payments

issues– sell their resources cheaply eg cash crops for export– cut public spending – often health and education major

victims– remove subsidies

• Many overseas lenders and investors will only lend if IMF rules followed

• Often causes poverty to increase through tough conditions for loans, eg during Asian crisis in Indonesial 1998

World Bank• Founded 1945, Washington DC• Goal: economic development: global poverty and improvement

of living standards• Source of financial and technical advice to developing countries• Not a real bank but does provide low interest loans, interest free

credit and grants for education, health, infrastructure etc.• Promotes development through advice and financial assistance

– loans• Countries encouraged to lift import and export barriers, cut

subsidies and remove price controls• Key role in Millenium Development Goals including • “develop a global partnership for development”

World Bank - criticisms• Loans often depend on countries following a strict “

Structural Adjustment Program” eg removal of protection• Leads to rapid increase in price of goods of countries

and greater poverty• Leads to lower investment and cuts in social spending

eg education• Little evidence of success

• Most recent initiative: Heavily Indebted Poor Countries Initiative – aim to reduce debt by 2/3 in 46 of world’s poorest countries by 2015

Reply to criticisms• Poor countries suffer most from failure to integrate

into the global economy• Support is needed to assist them integrate• Multilateral consensus agreements are the best

strategy available• UN, IMF, WTO, World Bank are still the best options

to achieve this.

• Task: What are the Millenium goals for economic development?

OECD• Established 1961• Based in Paris, France• 33 countries members• Our mission• OECD brings together the governments of countries committed to democracy and the

market economy from around the world to: – Support sustainable economic growth– Boost employment– Raise living standards– Maintain financial stability– Assist other countries' economic development– Contribute to growth in world trade

• The Organisation provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.

OECD• Monitoring, analysing and forecasting

– OECD is one of the world's largest and most reliable sources of comparable statistics and economic and social data.

– OECD monitors trends, analyses and forecasts of economic developments and researches social changes or evolving patterns in trade, environment, agriculture, technology, taxation and more.

• Shares expertise and exchanges views with more than 100 other countries Provides opportunities for governments to compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.

International Organisations Tasks1. Consult a parent or adult for a comment. Ask them which of

these organisations they think is most important and why.2. Organisation research: Use your text and online resources:

a. Justify the role of the UN.b. Select two of the international organisations listed and evaluate

their importance as global organisationsc. Visit the World Bank and find three projects it has undertaken

recently. Prepare a brief summary.d. Has the WTO been a success or a failure? Justify your answer, in

depth. Visit the site before you make your decision.e. Visit the IMF, follow the links to Country info. Have a look at what is

said about Australia. Follow the links to Member voting rights. Analyse the table and summarise your findings.

International Organisations Tasks

5. Visit the IMF. Outline what is needed to get a scholarship from the IMF.

6. Visit the OECD website and watch the video.a. State the main points made about the OECD.b. Identify four jobs which look interesting.

7. Investigate criticisms of the OECD on the web. Summarise three major comments.

Influence of government economic forums

• G7/8

• G20

• World Economic Forum

Purpose of G7/G8• The Group of Eight (G-8) is a forum for the leaders of

eight of the world’s most industrialized nations, aimed at finding common ground on key topics and solutions to global issues.

• The G-8 includes Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. While the leaders of these countries are in regular contact, they meet in summit format as the G-8 once a year.

Purpose of G7/8• Muskoka Canada 2010 G-8 Summit Concludes 26 June 2010• Prime Minister Stephen Harper today made the following remarks on the

closing of the G-8 Summit:

• “We had a very successful summit. We have refocused the G-8 on its strengths: development, peace and of course global security challenges.

• The G-8 has committed an additional $5 billion US over the next five years, and with our partners bringing the total to $7.3 billion on the Muskoka Initiative on Maternal, Newborn and Child Health.

• “We also discussed a further range of global challenges, nuclear proliferation, Iran, the implementation of sanctions foreseen by resolution, United Nations resolution 1929, also North Korea and the Cheonan incident. The governments of Iran and North Korea have chosen to acquire weapons to threaten their neighbours. The world must see to it that what they spend on these weapons will not be the only cost that they incur.

• We’ve also discussed Afghanistan, Pakistan, governance, stability in that particular region, of course the Middle East and climate change. It is essential that the G-8 keep its promises going forward. This is essential to the credibility and effectiveness of this forum as an organization.

Purpose of G20• The Republic of Korea is honored to chair the Group of Twenty in

2010.• The G20 was established in 1999, in the wake of the 1997 Asian

Financial Crisis, to bring together major advanced and emerging economies to stabilize the global financial market.

• Since its inception, the G20 has held annual Finance Ministers and Central Bank Governors' Meetings and discussed measures to promote the financial stability of the world and to achieve a sustainable economic growth and development.

• To tackle the financial and economic crisis that spread across the globe in 2008, the G20 members were called upon to further strengthen international cooperation. Accordingly, the G20 Summits have been held in Washington in 2008, and in London and Pittsburgh in 2009.

Purpose of G20• The concerted and decisive actions of the G20, with its balanced

membership of developed and developing countries, helped the world deal effectively with the current financial and economic crisis.

• The G20 has already delivered a number of significant and concrete outcomes

• coordinated expansionary macroeconomic policies, including the fiscal expansion of US$5 trillion

• coordinated unconventional monetary policy instruments• significantly enhanced the financial regulations, notably by the

establishment of the Financial Stability Board(FSB); and substantially strengthened the International Financial Institutions(IFIs), including the expansion of resources and the improvement of precautionary lending facilities of the IFIs.

G20 Toronto 2010

Source: popdefectradio.blogspot.com


• World Economic Forum: The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas.

Incorporated as a foundation in 1971, and headquartered in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. The World Economic Forum is under the supervision of the Swiss Federal Government.


• World Economic Forum:

G20 more important than G8?

Why?

Trade Agreements• As trade has grown and economies have

become more integrated, countries have formed trading alliances

• Two types of trade agreements:• Preferential free trade agreements - bilateral

or regional - between two countries or a region

• Multilateral free trade agreements - open to all nations

Trade Agreements• Preferential free trade agreements. Examples:

– Bilateral (important but limited)• CERTA (NZ-Aust)• SAFTA (Sing-Aust)• TAFTA (Thailand- Au)• AUSFTA (US-Au)

– Regional (increasingly important)• EU ( European Union)• NAFTA (North America)• APEC Forum ( Forum Asia Pacific)• AFTA (Asean)

• Multilateral free trade agreement examples:– Global (Key vehicle of globalisation)– WTO (World Trade Organisation)

Economic Integration

Introduction

Trading Blocs, Monetary Unions and Free Trade Agreements

Four stages (types) of economic integration

• FTA (free trade area): – no internal tariffs among members, but each country

imposes its own external tariffs to the third country.– NAFTA (North America Free Trade Agreement– AFTA (ASEAN Free Trade Area)– EFTA (European Free Trade Area)

• Customs union: – no internal tariffs and common external tariffs– Mercosur (Southern Common Market), – CACM (Central American Common Market)– CARICOM (Caribbean Community and Common Market)

Four stages (types) of economic integration

• Common market: – free movement of products and factors

(resources), which is customs union plus factor mobility

– EU (European Union – previously EEC)

• Economic union: – common market plus common currency – coordination of fiscal and monetary policy– EMU (Economic and Monetary Union)

Economic effects of economic integration

• Static effects: Short-term effects (shift of production)– Trade creation: production shifts to more efficient

member countries from inefficient domestic or outside countries.

– Trade diversion: production shift to inefficient member countries from more efficient outsiders.

• Dynamic effects: Long-term effects– Cost reduction due to economies of scale – Cost reduction due to increased competition.

History of EU

• Treaty of Paris (1951)– Formation of ECSC (European coal and

steel community) by six countries

• Treaty of Rome (1957)– Formation of EEC (European economic

community), initially free trade area, becoming a customs union in 1967.

– The Stockholm convention in 1960 created EFTA by seven countries to counteract EEC.

History of EU Continued

• Single European Act of 1987– Creation of single market (Common market)

effective on Jan. 1, 1993– Rename EEC by EU (15 members)

• Treaty of Maastricht (1992)– Creation of an economic union, EMU (11 members)– Establishment of European Central Bank on July

1998– Introduction of a common currency, euro on Jan. 1,

1999– Circulation of euro on Jan 1, 2002

Organization of EU• European Commission:

– administrative body of 20 members – Initiate proposals– Guardian of the treaties– Implementing policies

• European Parliament – 626 members elected according to population

distribution– Legislative body, but final decision by Council of

Ministers– Control over budget and supervision of the Commission

Organization of EUContinued

• European Council and Council of Ministers– European Council: summit meeting of state heads,

providing guidelines– Council of Ministers

• 25 different councils (agriculture, transport, etc.)• Final say on legislations• Different votes allocated to individual countries (according to

population)• Unanimity or qualified majority voting required depending on

issues.

• Others– Court of Justice, Court of Auditors, sub-committees

EMU (Economic & Monetary Union)• Common currency (Euro) area for 11 members

– Euro became the official currency unit on Jan. 1, 1999.– Euro will be in circulation from Jan. 1, 2001– U.K, Denmark and Sweden opted out. – Greece was not qualified. – European Monetary System in 1979 European Monetary Institute

in 1994 European Central Bank in July 1, 1998

• Convergence criteria– Inflation (no more than 1.5% above the 3 lowest ave.) – Long-term interest rate (no more than 2% above the 3 best ave.)– Budget deficit: no more than 3% of GDP– Public debt: no more than 60% of GDP

Remaining Issues of EU• Further elimination of barriers to common market

– Compatible standards and specifications– No barriers to market access– Coordination of VAT and other taxes

• Expansion – European Economic Area: extension of customs union

privileges to EFTA member countries (Norway, Iceland and Liechtenstein accepted. Switzerland voted not to join)

– Special agreements with Turkey and others– Expansion to central and eastern European countries

• Fast-track applicants• Other applicants

NAFTA• North America Free trade Agreement

– Free trade area among the U.S., Canada and Mexico

– The largest trading bloc in terms of GNP– A good example of trade diversion (production

shifted from Asia to Mexico)

• History– Automotive products Trade Agreement (1965)

between the U.S. and Canada– Canada-U.S. Free Trade Agreement (1989)– NAFTA (1994)

Provisions of NAFTA• Elimination of tariffs

– Most tariffs will be eliminated by 2004– The remaining by 2008

• Elimination of nontariff barriers• Harmonization of trade rules (subsidies,

antidumping, safety standards)• Liberalization of capital movement (FDI)• Protection of intellectual properties• Dispute settlement• Provisions on labor and environmental standards

Economic Effects of NAFTA

• Trade– Trade among members increased faster than trade

with the rest of world

• Investment– Mexico is the main beneficiary (FDI not only from the

U.S. and Canada, but also from other countries)

• Employment– Difficult to measure because of too many confounding

variables– Overall employment effect in the area including the

U.S. has been positive

Issues related to NAFTA• Rule of origin and local content

– Rule of origin: products must originate from North America to get preferential treatment.

– Local content: the percentage of value of a product that must be from North America to be considered as North American origin

– Currently 50% for most products and 62.5% for autos. Political pressure to increase this percentage

• Expansion of membership– Potential entry by Chile, and some central and south

American countries– FTAA (Free Trade Area of America) proposal in 2001

Other Regional Trade Blocs

• ASEAN and AFTA – Originated in 1967– Formation of AFTA in 1993– Reduction of intrazone tariffs to a maximum

of 5% by 2008 (by 2004 for some countries)

• Mercosur (Southern Common Market)– Formed in 1991 by Brazil, Argentina,

Paraguay and Uruguay.– Aim for a customs union, but not yet

Other Regional Trade Blocs

• Others– Andean group (Andean Common Market)– ALADI (Latin American Integration

Association)– CARICOM (Caribbean Community and

Common Market)– CACM (Central American Common

Market)

APEC• Asia Pacific Economic cooperation• Formed in 1989 to promote trade and investment• 21 member countries that border the Pacific Rim• APEC is not a trading bloc• For trade liberalization and against protectionism• Prefer open regionalism over closed regionalism• Goal: Free and open trade

– by 2010 for the industrialized countries– by 2020 for the rest of the members

Protection

• Defined as: government policies which give domestic producers an artificial advantage over foreign competitors, such as tariffs, import quotas and subsidies.

• Historically imposed by most countries to assist local producers and shield them from overseas protection

Protection• Reasons for protection• Infant industries

– New industries face difficulties and risks in their early years– Therefore they may require temporary protection– They should not encourage to rely on assistance

• Prevention of dumping– Some countries attempt to sell their goods at unrealistically

low levels to dispose of a surplus or establish a market– Therefore it is in the economy’s best interest to impose

restrictions on such imports

Protection• Protection of domestic employment

– Some argue if local producers protected from competition the demand for local goods will be higher - therefore higher employment

– However if protection distorts the allocation of resources away from areas of efficient production to areas of less efficient production, therefore in the long run higher levels of unemployment will occur

• Defence and self sufficiency– Sometimes there are non economic reasons for

wanting to retain certain industries- eg the defence industry or self sufficiency of food supply

Protection• Other arguments for protection

– Trade unions argue that protection is needed to shield workers from low cost labour and to protect the living standard of workers in high income countries

– Countries sometimes block trade for environmental reasons eg to prevent destruction of natural resources eg rainforests

– Some countries argue that protection is necessary for specific cultural purposes, eg rural values, environmental or heritage values

Methods of Protection• Tariffs• A government imposed tax on imports. This

raises the price of an imported good, making the price of a local one more competitive.

• The effects of tariffs:– Can stimulate production and employment– More resources are allocated to the industry– Consumers pay a higher price for goods– Tariffs raise revenue for government– A retaliation effect can be experienced

Methods of Protection• Quotas• An import control on the volume of goods that is

allowed to be imported over a given period of time. This guarantees domestic producers a share of the market.

• Effects of quotas:– Similar to tariffs, limit numbers imported– Do not collect revenue for government– Some revenue can be obtained via sale of import licenses– Tariff quotas can also be applied.

The problem with trade assistance…

Methods of Protection• Subsidies• Government provides financial assistance to

domestic producers to assist them in reducing their selling price and compete more easily with imported goods.

• Effects of subsidies:– Most economists prefer them to tariffs– Subsidies are an expenditure by government, so tend to be

temporary– Tend to reduce prices, leading to lower inflation

Other methods of protection

• Voluntary export restraints - countries agree to restrict their exports for a similar concession

• Local content rules - goods must contain a certain % of local parts

• Export incentives - grants, loans technical advice given by government to expand exports

Economics global

Education

Transcript of Economics global