Free trade and protection Flashcards
(78 cards)
1
Q
Australia’s imports and exports
A
Australia is an exporter of primary commodities (minerals and agricultural products) and an importer of manufactured goods as well as financial capital
2
Q
What is Australia’s GDP
A
Around $1.6 trillion
We are also now the 12th largest economy
3
Q
Why is trade important? (IMPORTS)
A
- It can expand a nation’S consumption possibilities by providing access to other countries production through imports.
- Increase standard of living
- importing allows Australian households to consume goods and services that are either not produced in Australia or are too costly to produce
4
Q
Why is trade important (EXPORTS)
A
- A country gains when it exports good it can produce at a relatively low cost and import goods it produces at a relatively high cost
- exporting pays for the imports a country needs to enjoy a high standard of living
- Exporting enables Australian firms to produce for the world market
5
Q
What does engaging in trade permit
A
increased specialisation, economies of scale, increased productivity and higher real incomes
6
Q
Stats for trade in Australia
A
- In 1970, exports and imports each accounted for around 13% of Australia’s GDP. By 2014, exports and imports had increased to over 20% of GDP
- One in five jobs are directly linked to trade
- Australia accounts for just 1.3% of global exports, compared to China who accounts for 11%
7
Q
A countries level of exports are determined by
A
- The size and structure of the economy
- Its relative competitiveness
- Its location
8
Q
What is the trade openness ratio
A
measures the average value of exports and imports as a percentage of GDP
9
Q
Formula for trade openness
A
{½ (X+M)/GDP} × 100
10
Q
How has Australia’s trade intensity increased?
A
from 13% in 1970 to 21% by 2013
11
Q
Why is our trade intensity relatively low compared to European countries
A
European countries have a relatively high trade intensity due to the ease of trading within the euro zone
12
Q
Why do the USA and Japan have lower trade to GDP ratios
A
- This is due to the enormous size of their economies, as they do not need to rely on trade as much as smaller economies, such as Australia
- Australia’s domestic competition is so strong that we need to produce for the world market in order to gain the same benefits of competition
13
Q
What is the purpose of economic growth
A
To enable a high level of consumption and high standard of living
14
Q
What are the main parts to international trade?
A
Specialization and exchange
15
Q
What makes international specialisation possible?
A
The uneven distribution and quality of resources between countries
16
Q
What happens if production costs differ?
how do countries benefit?
A
Then countries will benefit by specialising in the good and service in which they are most efficient, exporting the surplus and importing those goods in which they are least efficient
17
Q
What is absolute advantage?
A
A country has an absolute advantage in the production of a good over another country if it can produce that good more efficiently than the other country
18
Q
What does more efficiently refer to?
A
Using less resources to produce a given quantity of output; or to produce more output from a given quantity of resources
19
Q
What are the assumptions of the model
A
- The world consists of two countries
- Each country produces and consumes two goods
- Resources are perfectly mobile
- If trade takes place, there are no transportation costs
20
Q
What is comparative advantage?
A
A country is said to have a comparative advantage in the production of one good over another country, if the opportunity cost of producing that good is lower than the other country.
21
Q
What is opportunity cost?
A
The value of the alternative product foregone
22
Q
How do countries gain based on comparative advantage?
A
If they specialise based on their comparative advantage and then trade their surplus production
23
Q
What happens when the domestic price is lower than the world price?
A
- The country is more efficient at producing the good than the rest of the world
- Has a comparative advantage
- Should therefore export it
24
Q
What happens when the domestic price of a good is higher than the world price?
A
- The country does not have a comparative advantage
- They are not very efficient at producing the good
- This means that the rest of the world is relatively more cost efficient at producing the good
- Therefore, the country should import it
25
What is protection?
Refers to any action by the government designed to give the domestic producer an artificial advantage over a foreign producer
26
Three types of protection?
- Tariffs: increase the domestic price of the foreign product
- Subsidies: provide domestic producers with a cost advantage
- Quotas: quantitative restrictions on imports
27
What is the goal of protection?
To increase domestic production in the protected industries and decrease consumption of imported goods and services
28
Who benefits from protection?
- The owners and workers in the protected industries.
| - The government occasionally benefits in the case of a tariff
29
How does protection impose a cost burden on society?
- Industries given protection will expand and consume resources that other industries could have used
- These industries who are unprotected are disadvantaged, as they may also have to pay higher prices for imported capital.
- This therefore, reduces their competitiveness
- Decreases exports, as imported capital becomes more expensive
- consumers pay more but receive less
ALL FORMS OF PROTECTION RESULT IN A NET WELFARE LOSS FOR THE ECONOMY
- the losses outweigh the gains
30
What is a tariff?
- A tax placed on an import
- Tariffs are designed to increase the price of a foreign good or service so that the competing domestic good receives a price benefit
- Tariffs are also important in creating government revenue
31
What happens when an tariff is put in place?
- Less imports will be sold on the domestic market, and they will be sold at a higher price
- Higher prices= benefit domestic producer as they are abler to compete more favourably against the imports
- Domestic production expands (Q1 to Q3) as producers are now able to supply more at a higher price.
- Consumption of foreign goods contracts (Q2 to Q4) and imports are reduced to between Q3 and Q4
- Areas e + f reflect a dead weight loss as this is the lost consumer surplus
- The total surplus as a whole is reduced whenever a tariff is imposed
32
Effect of tariff on unprotected domestic producers?
- Will have to pay higher prices for imported capital goods
- Ripple through the economy, lowering production and employment
- Results in lower exports
33
What are subsidies?
Are grants or payments made by the government to domestic producers
- Paid out of general taxation revenue
- Directly lover a producer’s cost of production
E.G.. Have been used to support the motor vehicle industry
34
What do subsidies enable?
The domestic producer to sell their product at a lower price in order to compete against imports
- Inefficient producers are also rewarded at the expense of efficient producers
35
No direct effect on the consumer
Consumers still pay the same price for the good
36
Indirect burden
- The cost of the subsidy is paid from government taxation revenue
- There is therefore, an opportunity cost in subsidising domestic producers, as the revenue could have been used to spend on other goods and services such as health and education
- Net welfare loss for society
37
What are quotas?
They directly restrict the quantity of an imported good and provides domestic firms with a degree of certainty as to the exact quantity of imports they will be competing against
38
Why are quotas more restrictive than tariffs?
Because they control the absolute amount of the product imported
39
Effect of imposing a quota?
- Result in higher prices for both domestic and imported goods
- The welfare of consumers suffers because of the increased price and reduced quantity
Domestic suppliers gain from the larger market share
- There is a dead weight loss due to the decrease in total surplus
- Quotas do not raise revenue unless the quotas are auctioned off to importers
40
How can protection be politically motivated?
- It brings significant gains to a selected group of producers, but imposes cost on consumers, other producers and taxpayers
- Gain a political advantage by ‘buying’ the votes from industries that lobby protection
41
The infant industry argument
Argued
- Infant industries need protection in the early years until they mature and take advantages of economies of scale, by competing in an open market
- Infant industries will overtime become internationally competitive and develop a comparative advantage
42
Problem with the infant industry argument
- Protection tends to become long term rather than short term as it was originally designed
- The infant industry becomes accustomed to operating with little competition
- The incentive to innovate and increase efficiency is removed, as there is little competition.
43
How can the infant industry argument be justified?
Infant industry protection is justified in the short term, but it is crucial that the level of protection is frequently reviewed and progressively reduced over time
44
The diversification argument
- If a country completely applied comparative advantage, it would only specialise in a narrow range of products
- Argued that a country may benefit from diversifying its industrial base
45
How is the diversification argument justified?
in order to establish a diverse industrial base
- Overtime, the industry may increase its level of efficiency and become more competitive so that in the long run, the level of protection could be reduced
46
The problem with the diversification argument?
- No countries just have a comparative advantage in one or two industries
- Our economies are always changing, and therefore the government shouldn’t be trying to predict which industries will expand or contract in the future
47
What is dumping?
If a company exports a product at a price lower than the price it would normally charge on its home market; it is said to be ‘dumping’ the product.
48
The anti-dumping argument
It is argued that foreign firms engage in unfair competition in order to drive out domestic producers.
Dumping may also occur when firms have large surpluses they cannot sell in their own market or their product has been banned because it is injurious to health or illegal.
One difficulty with this argument is proving whether the dumping is taken place. Lower prices could be due to increased efficiency
Temporary protection may deter this type of activity
49
National defence argument
It is argued that import barriers are necessary to protect those industries that are vital to the economy in case of a war time emergency
50
The problem with the national defence argument
The problem is identifying which industries are most vital to the economy
This argument was popular in the era of global conflict
Trade fosters international cooperation, while protectionist policies reduces it
51
Increased employment argument
Asserts that buying domestic goods equates with employing domestic workers
Argued that protection will shift consumer spending from the foreign foods to the domestic goods and thus increase employment in the protected industry
52
The problem with the increased employment argument
In the short run, employment in protected industries may rise.
Although, employment in other domestic industries will suffer
- Un-protected industries that use imported capital will face higher production costs
Consumers also have less to spend on the outputs from other industries
A gain in employment in the protected industry, is a loss of employment in the other industries
53
The cheap foreign labour argument
Argued that Australian industries need to be protected from countries where wages are much lower
54
The problem with the cheap foreign labour arument
Countries that have an abundance of labour relative to other resources will have a comparative advantage in producing labour intensive goods
Countries like Australia should reap the benefits of importing these goods and producing those goods in which we are relatively more efficient
55
The favourable trade argument
It is argued that a trade deficit could be eliminated or reduced by restricting imports (in the form of trade barriers)
56
The problem with the favourable trade argument
- This assumes that there is something wrong with a trade deficit and that imports are ‘bad’ and that exports are ‘good’
- Protection raises the cost of production to other domestic industries, which reduces their competitiveness and therefore their exports.
- both imports and exports bring gains to the economy
57
What is trade liberalisation?
The opposite to protection and is achieved by removing or reducing any restrictions which limit trade in goods and services
58
The world trade organisation (WTO)
- The international body that deals with the promotion and liberalisation of world trade
- Established in 1995
- Has 160 members
- Account for 97% of world trade
59
Main activities of the WTO
- Help to lower trade barriers and discourage ‘unfair’ practices such as export subsidies
- Negotiating the reduction or elimination of obstacles to trade
- Agreeing on the rules governing the conduct of international trade
- Tries to persuade all countries to lower or remove their trade barriers all together
60
WTO since 1945
There have been a number of rounds of multilateral trade negotiations which have been successful in cutting tariffs from an average of around 40%
61
'Most favoured nation' (MFN) treatment
- Trade should be conducted free of discrimination
- All countries should be treated equally
- EG. If Australia improves the benefits that it gives to one trading partner, it has to give the same to all of the WTO members
62
'National treatment'
- Imported goods and services should be treated the same as domestic goods and services
- There should be no discrimination between foreign goods and domestic goods, once the foreign goods have entered the country
- This does not prevent a country from applying a tariff to an imported good or service before it enters the market
63
The world bank (international bank of reconstruction and development)
- Assisted countries with repairing the damages from WW2 by providing loans to rebuild infrastructure and production facilities
- They provide finance for developing projects, that will raise potential production and therefore, standards of living. This is now their main function
- NOW: is a means of increasing the loan funds available to nations
64
International monetary fund (IMF)
- Established after WW2
- Assists nations in dealing with the exchange rate problem that could develop when fixed interest rates were common
- Provide emergency access to means of payment so that the nation could continue to trade
65
Arguments for trade liberalisation
When barriers to trade fall, living standards rise
delivers a more productive, outward looking economy, with higher incomes and more job opportunities
- More appropriate use of resources, lower prices for consumers and lower input costs for producers
66
Arguments for trade liberalisation (based on the theory of comparative advantage and competitive markets)
- Countries gain when they specialise in producing those goods and services that they can produce at a lower opportunity cost than other nations
- By exporting goods and services that can be produced efficiently and importing goods and services that other nations can produce at a low opportunity cost, both production and consumption can be increased
67
benefits from trade liberalisation
Specialisation and trade results in a higher level of real income, greater consumption and higher living standards
Countries gain from both imports and exports
Free trade helps to increase both imports and exports
Industries benefit from greater output and employment
Consumers benefit from a greater variety of goods and services at lower prices, increasing standards of living
68
Trade liberalisation in Australia
Consumers have benefited from the significant falls in the real prices of many traded goods over the past 25 years (1985-2010)
69
Examples of falls in traded goods
```
Women’s shoes -44%
Men’s shoes- 54%
White goods- 47%
Consumer electronics- 51%
Motor vehicles- 37%
```
70
What do the gains from trade liberalisation amount to?
Around $4,000 per year to the average Australian family
71
Free trade agreements
Agreements between two or more countries about the terms of free trade
Are favoured because they increase trade between specific countries by removing or lowering trade barriers
72
How can regional trade agreements be discriminatory?
- Go against the ‘most favoured nation’ principle
- May be attractive for small groups of neighbouring countries
- But they also risk making it harder for countries outside the region to trade with those inside and may discourage further opening up of markets
- Removing trade barriers increases the volume of trade (trade creation), while regional trade agreements cause diversion (rather than trade creation)
73
Multilateral negotiations
- Deal with more players and sectors
| - Greater potential for mutual gain than limited bilateral or regional deals
74
Trade diversion
- Occurs when trade is diverted from a low cost producer outside the free trade agreement, to a higher cost producer within the FTA
- this is due to a tariff being placed on the imports from the country outside the FTA
- thus allowing the inefficient producer from within the FTA to export their goods into that market
- Potential disadvantage to trade agreements
75
According to the department of foreign affairs and trade (DFAT)
- There has been little trade diversion
- FTAs and regional agreements have been effective in encouraging wider trade liberalisation
- They are also quicker and easier to negotiate than multilateral agreements as fewer parties are involved
76
Australia’s free trade agreement
```
In 2014 Australia has seven FTAs
- New Zealand
- Singapore
- Thailand
- US
- Chile
- The Association of South East Asian Nations (ASEAN) and Malaysia
Account for one quarter of Australia’s trade
```
Now have agreements with Korea, Japan and China (two of Australia’s largest trading partners)
77
Agreement with Japan
- More than 97% of Australia’s exports will receive preferential access or enter duty-free
- Australian tariffs on Japanese imports have been eliminated, benefiting consumers
- Australian manufactures also benefit through cheaper access to inputs, reducing production costs
78
Australia- China FTA
- China is Australia’s largest export market for both goods and services
- Removal of Chinese tariffs on Australian dairy, beef, seafood, and wine exports, resource and energy exports
- More access into china for Australian banks, insurers, law firms and professional services, as well as health, aged care and construction companies
