International Trade Flashcards
(28 cards)
Define international trade
International trade consists of
buying and selling of exports and imports between countries.
Why do we trade?
- Countries do not produce all their own goods
to satisfy the needs and wants of
their population. This is because different countries have different natural, human and capital resources and employ different ways of combining these resources. These factor differences encourage countries to specialise
in those goods and services in which they are most efficient. They are then able to trade any surpluses they produce for other goods and services produced by other countries in which they are efficient.
Why do we trade?
- Increased Efficiency
in the use of resources means some countries can produce goods at a relatively cheaper cost than others – maybe because of the availability of natural resources,
the skills or cost of the workforce.
Why do we trade?
- Product differentiation
can lead to international trade. Many traded goods are similar but not identical, e.g. cars. However,
the differences mean that some consumers in one country will want to buy a product made in another country. International trade allows consumers a much wider choice in the products they buy
Key factors behind expansion of trade
- Consumer expectations – People now see what consumers in other countries have and want it for themselves. This is particularly
the case in developing nations where wage levels are increasing. - Efforts of the World Trade Organization to remove barriers to trade.
- Technological changes, such as the internet and satellite communication systems.
- The falling costs of transporting goods and the increased use of containerisation.
- Cross-border deregulation – Trading blocs create an international trading community
making trading across borders easier, e.g. European Union (EU) and the North American Free Trade Agreement (NAFTA).
Define free trade
Free trade means international
trade conducted without the existence of barriers to trade, such as tariffs and quotas.
Define free trade area
one where there are no
tariffs or taxes or quotas on goods and/or services from one country entering another. The members of a free trade area do not have a common external tariff on goods entering the area.
Define a single market
like a free trade area in that
there are no tariffs, quotas or taxes on trade but also where there is free movement of goods,
services, capital and people, and a common external tariff on goods entering the single market.
Advantages of free trade
√ Allows economies of scale to occur, reducing costs and increasing productive efficiency.
√ Increases choice for consumers.
√ Increases competition, improving quality and reducing prices.
√ Increases chances of transfer of
technology and other skills, helping with development.
√ Trading with other countries increases political stability.
√ Encourages innovation – Lack of free trade often leads to domestic markets being dominated by a few businesses who avoid competition themselves. Competition provides a powerful incentive to innovate.
√ Leads to dilution of monopoly power in domestic markets and reduces potential for exploiting customers
Advantages of international trade for developing countries
√ Brings employment and higher real wages.
√ Encourages inward investment and the move to manufacturing employment from agriculture. This, in turn, leads to up-skilling of
the workforce and the growth of local supplier businesses.
Define protectionism
Protectionism is an economic policy of restraining trade between countries through the imposition of barriers to trade, such as tariffs or quotas.
In spite of all the advantages that free trade between nations offers, some countries actively pursue a policy of protectionism for a variety of reasons
Some countries actively pursue a policy of protectionism - to protect domestic industries
Industries just starting up may face much higher costs than foreign competitors. A new low-volume domestic producer will find it impossible to compete on price against an established foreign high-volume producer. Only by protecting the new industry as it grows and develops can it compete in the future.
- However, industries protected by trade barriers lack the competitive pressure to become efficient. Specific subsidies, training grants and tax concessions are likely to be better ways of creating new industries.
Some countries actively pursue a policy of protectionism - to protect domestic employment
Preventing those imports which consumers are likely to purchase can create, or at least, preserve jobs.
- However, consumers are likely to have less choice and pay higher prices.
- Foreign countries could retaliate by imposing trade restrictions on exports.
Some countries actively pursue a policy of protectionism - to prevent dumping
This is the practice of selling goods at less than cost price by foreign producers in another country’s domestic market. A foreign producer may deliberately price at a loss to drive domestic producers out of business. Once they have achieved this, they can raise prices and enjoy monopoly profits.
- However, preventing dumping stops consumers from being able to gain from buying cheaper foreign goods.
Method of protectionism - Tariffs
These are a tax on imported goods and are sometimes referred to as customs duties. They can be used by a government to raise revenue to finance expenditure. However, most often they are used in a deliberate attempt to restrict imports. By imposing a tax on a good, it is likely that the final price to the consumer will rise. A rise in the price of the good will lead to a fall in demand and the volume of
imports will fall. A tariff should therefore help domestic producers as some consumers will switch consumption from the more expensive imported goods to domestically produced substitutes.
Methods of protectionism - quotas
A quota is a physical limit on the
quantity of a good imported. This will increase the share of the market available for domestic
producers. It will also raise the price of the protected product.
Methods of protectionism - Voluntary export restraint
This is a type of quota put in place by exporters. VERs are often created because the exporting
countries would prefer to impose their own restrictions rather than risk sustaining worse terms from tariffs or quotas.
Methods of protectionism - Non-competitive purchasing by govs
This involves a government only buying from domestic producers, even if this means paying
higher prices
Methods of protectionism - Embargos
This involves complete or partial
prohibition of commerce and trade with a particular country in order to isolate it.
Possible advantages of moving a business overseas
- Higher earnings – Margins in overseas markets may exceed those found at home.
- Spreading of risks – This especially relates to fluctuations in demand in the home market caused by the business cycle.
- New potential markets – Saturation of home market may have occurred. A business may have the finance to expand, but be unable to do so because of competition, or because of lack of new customers in the domestic existing market.
- Cashing in on the brand – New markets mean greater return on investment in expansion of a brand identity.
- Benefits of economies of scale –
Producing larger production runs helps to cut costs.
Factors that must be considered
when considering expanding internationally
- Exchange rate factors. Fluctuations can cause lost orders or pressure on pricing and therefore profits.
- Different technological and health and safety standards. These can create extra costs and prevent access to markets.
- Administrative difficulties, such as customs paperwork.
- Distribution problems. Who is going to wholesale or retail the goods?
- Cultural differences can have a significant impact on how goods are sold in different markets
Successful exporting and trading with overseas countries depends upon
an understanding that people all over the world have different needs, priorities, incomes and tastes. Businesses must acknowledge that most products will have to be adapted in some way to suit local cultures,
currencies and buying habits.
Economic Factors - Home + Overseas Market
Home Market - No currency factors, Secure economic
environment
Overseas Market - Fluctuations of currency value, affecting pricing and profitability. Costs of currency transactions. Potentially highly uncertain environment, with demand patterns changing quickly
Cultural Factors - Home + Overseas Market
Home Market - No language problems, Known social structure,
Purchasing habits understood
Overseas Market - Language barriers, costs of translation. Different social structure. Unknown purchasing habits
