World Economy

International Trade

International trade is concerened with the buying and selling of goods & services across international boundries.

There are many gains from trading internationally and many countries rely on it, for example, many countries rely on imports from other countries such as raw materials and foodstuffs that they cannot produce themselves, they also rely on exporting their products. International trade allows this to happen by giving different nations access to the goods & services they cannot provide/produce themselves.

International trade also encourages specialization to take place in the market, this is where one country can produce one commodity better than another’s and therefore specializes in producing that commodity. This allows the product to be produced to a higher standard at a lower cost per unit thus allowing everyone to benefit from economies of scale.

International trade also allows consumers access to a greater variety and number of products at lower prices.

Free Trade

Free trade is a 17th century idea that all nations should be able to trade with one another without having any barriers to the market.

Although free trade has developed since the 17th century and to date has been achieved, it is only achievable inside trading blocs between certain countries, such as, the European Union. Despite all of the arguments for the advantages of free trade, governments often restrict it by imposing protective measures such as tariffs and import quotas. These barriers stop the free movement of goods & services between different countries, raise the price of imports and raise revenue for the government. However many people disagree with these barriers and trading blocs can be agreed upon to help combat import controls and develop free trade between members. For example:-

America & Republic of Korea

On the 2nd of February 2006 the U.S Trade Representative announced its intent to negotiate a Free Trade Agreement (FTA) with the Republic of Korea. On the 1st April 2007 this historic FTA was concluded.

The Korus FTA is one of the most comprehensive trade agreements ever implemented. Korea is the 7th largest trading partner with the U.S and this FTA allows tariffs and other barriers to trade between the U.S and Korea to be eliminated.

Within the first 3 years 95% of consumer & industrial products will become duty free and the remaining tariffs will be eliminated within 10 years. Farmers and ranches will also benefit immediately by eliminating duties on more than half of current U.S farm exports to Korea.

Due to this trading bloc between the U.S and Korea, foreign investment in Korea will increase, competition will be heightened and consumer prices will be lowered.

Protectionism

Governments often restrict international trade by imposing protective measures.

п‚ÑŸ To Correct a Balance of Payments deficit - if more money flows out of a country to pay for imports than flows in from reciepts of exports can be seen as undesirable and protection may be introduced to correct it as it will discourage imports.

п‚ÑŸ To Protect Infant Industries - when industries are being set up they need protection from established world competition.

п‚ÑŸ To Protect Declining Industries and Jobs - industries in decline, such as ship building in the UK, need the protection of the state or they will decline further and result in high unemployment levels.

п‚ÑŸ To Protect Key Industries - industries that are vital to the economy, such as agriculture and defence cannot be allowed to decline, it is also inadvisable to depend on other countries entirely for supplies of certain very important commodities such as coal and steal.

Barriers to Trade

The policy of protectionism is used amongst nations to protect their domestic economy through putting up barriers to trade. These barriers include:

п‚ÑŸ Tarrfifs - Import duties or custom duties are placed on imports into the country. The amount can either be a percentage based on the value of the good or a set tarriff based on the amount per unit.

п‚ÑŸ Import Quotas - A restriction on the quantity of a good that can be imported. This does not raise revenue for the government.

п‚ÑŸ Subsides - Home producers of a product are subsidized or given finance to allow them to sell at a lower price than the imported product, thus, reducing the demand for the import.

п‚ÑŸ Exchange Control - The Bank of England can control how much foreign currency is available and can therefore restrict imports

Subsidies

The Chinese government give enormous subsidies to their steel industry. A report carried out by the AAM documented that $50 billion in subsidies have been granted in recent years to Chinese steel producers making china have the most heavily subsidized steel industry in the world. These subsidies have fuelled the “unpremeditated expansion of China’s steel industry and the sharp increase in Chinese steel exports to North America and the world.” These subsidies are causing trade tensions in North America and other markets and the AISI are calling for China to end its control, direction and subsidisation of steel so that all international markets can benefit from free and fair international trade.

Import Quota’s

The EU introduced quotas this year on the quantity of textiles allowed to be imported from China. China’s huge man power and industrial capacity mean it is able to produce large volumes of cheap clothing at much lower prices than producers in Europe. The EU fear that this may harm many European producers and therefore introduced the quota. The quota agreed by the EU and China lasts until 2008. China have already exceeded the annual quota agreed in June 2007 so now over 75million items of Chinese textile goods are currently being held in Warehouses across Europe waiting to be released.

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