Trade, financial flows and foreign investment Flashcards
* basis of free trade
What is free trade?
Free trade is a situation where there are no artificial barriers to trade imposed by governments for th purpose of shielding domestic producers from foreign competition
➤ aims to promote efficiency, economic growth & access to wider variety of products
Comparative advantage
Economic principle that nations should specialise in the areas of production in which they have the lowest opportunity cost
➤entities can collectively achieve a more efficient allocation of resources & higher overall level of output
* the basis of free trade
Advantages of free trade
- Enables specialisation where countries allocate their resources to produce exports in which they have a higher comparative advantage → more efficient allocation of resources (economies of scale)
- With increased international competitiveness → domestic businesses face competitive pressures from foreign producers → spurring greater innovation and domestic industrial efficiency, spread of technological advancements globally
* the basis of free trade
Disadvantages of free trade
- Inefficient industries experience increasing unemployment. Harder for new businesses to gain market share → developing countries are unable to compete
- With specialisation → may result in surplus production of goods → potentially be dumped (sold at a drastically lower price) thus hurting domestic industries (domestic consumers result to buy foreign products)
- Environmentally irresponsible production methods → developing countries (due
to lack of resources) resort to lowering labour costs and cheaper methods to undercut
competitor prices
* role of international organisations
Role of WTO and IMF
WTO = resolve trade conflicts between economies by enforcing and implementing global trade agreements
IMF = Maintain international financial stability through lending funds to countries who experience problems such as balance of payment or exchange rate crises
* role of international organisations
Role of World Bank and United Nations
WB = Promote economic development in developing countries through providing grants, loans and aid
UN = promotes economic growth and development along with free trade
* role of international organisations
Role of OECD
Achieve sustainable economic growth and employment, rising standard of living
while maintain fiscal stability economic prosperity throughout the world
- Promotes coordination of macroeconomic policies among members
* influence of government economic forums
G20 and G7/8
G20 (19 worlds largest economies + EU) = key role in coordinating global response to GFC such as the expansionary fiscal policy. 2019 forum – trade and protectionism (response to trade war)
G7/8 (economic council of world’s wealthiest nations) = Meet annually to discuss global economy conditions e.g. political issues + current priorities of climate change, poverty,
security
* trading blocs, monetary unions and free trade agreements
What is a trading bloc?
A trade bloc occurs when a number of countries join together in a formal preferential trading agreement, to the exclusion of other countries e.g EU
* trading blocs, monetary unions and free trade agreements
Free trade agreements
Formal agreements between countries designed to break down trade barriers.
1. Can make it hard for nations outside the preferential trade agreement to trade → may not create better conditions for free trade especially for developing economies that struggle to access global markets
* trading blocs, monetary unions and free trade agreements
Advantages - multilateral trade agreements
➤ Sell more exports and leads to trade creation (engage In greater trade at reduced costs and increased output)
➤ Provide degree of commitment to lowering barriers opening for free trade encourages other countries
➤ Degree of regulatory and policy alignment - Increased economic activity between participating countries
➤ Increased economic activity between participating countries
* trading blocs, monetary unions and free trade agreements
Disadvantages - multilateral trade agreements
➤ more preferential and exclusive : Trade diversion (trade imports move from lower cost to higher cost producer )
➤ decreases efficiency (purchasing from member countries which aren’t necessarily the most economically efficient)
➤ global economy becomes divided along regional lines (trade blocs give preferential access to markets within an area)
* trading blocs, monetary unions and free trade agreements
Australian bilateral trade agreements
-
ANZCERTA (Australia New Zealand Closer Economic Relation Trade Agreement) 1993
OBJECTIVES = Strengthen economic relationship between AUS and NZ
➤Growth in two way trade of 6.6%
BENEFITS: prohibitions of tariffs or export restrictions on trade
➤Measures to minimise market distortions in trade goods
➤Mutual recognition of goods and occupations
- **ChAFTA **(China – Australia Free Trade Agreement)
China is largest importing market for resources and energy products on full implementation of chAFTA in 2029 – virtually all Australia’s resources, energy, manufacturing exports have duty free access into China
- Lead to Australia being one of China’s largest sources of natural gas
* trading blocs, monetary unions and free trade agreements
EU multilateral trade agreement
EU (European Union) Largest preferential trading bloc consisting of members across European continent.
➤ Established to dismantle trade barriers – stimulate trade growth between members
Criticism:
➤ Conflict between EU and US. Common Agricultural Policy : high rates of protection to agricultural products + direct subsidies (absorbed just under 40% of the EU’s budget)
➤ Oversupply of commodities from EU and countries specialising in agriculture
(unable to sell) promoting dumping
APEC multilateral trade agreement
APEC (Asian Pacific Economic Cooperation forum) Established in response to other trading blocs like EU and NAFTA – 21 members
