International Trade

Trade 
Trade means buying and selling of goods and services with the view of making profit.

Types of Trade 
The opposite diagram illustrates the types of trade.

International Trade 

International Trade refers to trade between countries. When one country purchases goods and/or services from another country, commodities flow in and money flows out as a payment for these commodities. 

Theories of International Trade

1. Absolute Advantage 

It refers to the possession of certain advantages (lower labour costs, plentiful supplies of raw materials etc) by a country which enable it to produce a product more cheaply than other countries. 

Suppose two countries, Sealand and Skyland have resources that enable them to produce either Shirts or Perfumes, or a combination of both.

As per this example; 

- Sealand has Absolute Advantage in producing Shirts 

- Skyland has Absolute Advantage in producing Perfumes 

Therfore; 

- Sealand should specialize in the production of Shirts 

- Skyland should specialize in the production of Perfumes

Effects of Specialization

Protectionism

Free Trade

It refers to the free flow of goods and services between countries without any kind of trade restrictions.

Protectionism

It refers to the imposition of trade restrictions on imports by law.

Reasons for Protectionism

1. It raises revenue for the government

2. It protects domestic infant industries

3. It reduces balance of payments deficit

4. It protects strategic industries

5. It prevents dumping

6. It promotes and secures employment at home

7. It leads to reallocation of resources in favour of the country

8. It prevents unfair competition from low-wage countries

9. It prevents the import of harmful goods

Trade Blocs

Meaning of Trade Blocs 

Trade Blocs are regional groupings of countries to promote free trade among the member countries without any kind of restrictions (such as tariff and quota). 

Advantages of forming a Trade Bloc

1. It removes trade barriers 
2. It provides each member with an extended market 
3. It promotes friendship and cooperation 
4. It reduces the prices of imports from member countries 
5. It assists economic development 
6. It fastens the mobility of factor resources 

Effects on an economy of being outside a trade bloc

1. Trade with non-member countries is restricted so that they can not take part in free trade with member countries 
2. Smaller market limits their scope for specialization and gains from international trade 
3. Restrictions on non-members reduce the volume of their trade causing unemployment 
4. Restrictions on international trade with non members breed rivalry and invites retaliation instead of friendship and cooperation

The European Union

The EU came into existence on 1st January 1958 with the Treaty of Rome signed by six countries. Now there are 28 member countries, including; France, Italy, Germany, the Netherlands, Belgium, Luxembourg, Spain, Greece, Portugal, the UK, Denmark, Ireland, Austria, Finland and Sweden. 

Aims of the European Union 

• To remove trade restrictions and to encourage free trade among the member countries 
• To apply Common External Tariff and a common commercial policy in their trade with non-member countries 
• To allow free movement of factors of production between member countries 
• To pursue common policies on agriculture and transport 
• To allow member countries to compete freely 
• To create European Economic and Monetary Union (EMU) including the creation of Euro 
• To increase trade and development of member countries 
• To develop a common foreign, security and defense policy 

Advantages of EU Membership 

1. It enables countries to enjoy the benefits of a ‘larger home market’ for their products 
2. A larger home market enables countries to specialize according to Comparative Advantage 
3. Countries enjoy economies of scale due to specialization 
4. Member countries can enjoy the advantages of competition in the form of better quality and lower prices 
5. It facilitates increased exports due to competition and large scale production 
6. It assists poor regions within the bloc 
7. It promotes friendship and cooperation among the member countries 
8. Member countries can restrict import from non-member countries 

Disadvantages of EU Membership 

1. Member countries have to use EU produced expensive foods while it could have obtained from other countries at a very lower price 
2. Member countries loose sovereignty as most of the important economic decisions are taken by the headquarters and not by the respective countries

General Agreement on Tariff and Trade

The American and British governments established the GATT in 1948 to provide a system of rules governing international trade. The greatest achievements in international trade liberalizations have come through multilateral trade negotiations or ‘trade rounds’ under the auspices of the GATT. The main aims of the GATT were to ensure that; 

• GATT members do not place tariffs on each other’s product 
• Infant industries are protected by tariff but not quota 
• GATT members inform each others of the domestic trade restrictions 
• GATT negotiates general tariff cuts between members

Most of GATT’s early trade rounds were devoted to continuing the process of reducing tariffs. 

Given its provisional nature and limited field of action, the success of the GATT in promoting and securing the liberalization of world trade over 47 years is incontestable. Continual reductions in tariffs alone encouraged a very high percentage growth in world trade in the 1950s and 1960s (around 08% annually).

World Trade Organization

The World Trade Organization established on 1st January 1995 is a legal and institutional foundation of the multilateral trade system. It is the forum in which trade relations among the countries evolve through collective debate and negotiation. GATT was replaced by World Trade Organization (WTO) and was set up by the Uruguay Round. The essential functions of WTO are;

• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international organizations

WTO is located at Geneva, Switzerland and has 144 member countries. Present Director General is Mike Moore. Its budget equals 143 million Swiss Francs for 2002 with individual contributions calculated on the basis of shares in the total trade conducted by member countries.

Post by Oscar Maldives.

International Trade: Chapter Roundup

No country has enough resources to produce goods and services required by its people. Different countries are endowed with differing levels and types of resources which make countries interdependent. It is beneficial for all countries to specialize in the product(s) that they can produce best with minimal resources and to import others from abroad. It improves the resource use in the economy and brings an enormous increase in the world output of goods and services.

Topic 01: Introduction to Economics

Content

• Definition of Economics
• How do Economists define 'Economics'?
• Some Basic Concepts: Needs and Wants
• Some Basic Concepts: Resources
• Some Basic Concepts: Economizing
• Some Basic Concepts: Scarcity
• Some Basic Concepts: Choice
• Some Basic Concepts: Opportunity Cost
• Some Basic Concepts: Production Possibility Curve
• Some Basic Concepts: Classification of Goods
• Some Basic Concepts: Wealth
• Some Basic Concepts: Income
• Chapter Roundup

Definition of Economics

How do Economists define ‘Economics’?

Some Basic Concepts: Needs and Wants

Some Basic Concepts: Resources

Some Basic Concepts: Economizing

Some Basic Concepts: Scarcity

Some Basic Concepts: Choice

Some Basic Concepts: Opportunity Cost

Some Basic Concepts: Production Possibility Curve

Some Basic Concepts: Classification of Goods

Some Basic Concepts: Wealth

Some Basic Concepts: Income

Introduction to Economics: Chapter Summary