International trade

Question 1

Define international trade

Answer 1

It is the exhanged of goods and services between countries. It relates to the process of a business or country buying and selling products to and from other countries. (i.e. importing and exporting)

Question 2

key factors behind the expansion of trade

5 key factors

Answer 2

• 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 Organisation 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)

Question 3

What is meant by a free trade area?

Answer 3

A free trade area is 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.

Question 4

What is meant by a single market?

Answer 4

A single market is 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.

Question 5

What does free trade mean?

Answer 5

Free trade means international trade conducted without the existence of barriers to trade, such as tariffs and quotas.

Question 6

Advantages of free trade

Answer 6

• 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.

Question 7

Two advantages of free trade for developing countries

Answer 7

• 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.

Question 8

What is protectionism?

Answer 8

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.

Question 9

reasons why protectionism exists

3 reasons

Answer 9

1. To protect domestic industries. Industries just starting up (infant industries) may face much higher costs than foreign competitors. They wouldn’t be able to compete on prices with established larger competitiors. Only by protecting the new industry as it grows and develops can it compete in the future.
2. To protect domestic employment. Preventing those imports which consumers are likely to purchase can create, or at least, preserve jobs.
3. 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 it can raise prices and enjoy monopoly profits.

Question 10

Three drawbacks of protectionism

Answer 10

1. 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.
2. However, consumers are likely to have less choice and pay higher prices.
   Foreign countries could retaliate by imposing trade restrictions on exports.
3. However, preventing dumping stops consumers from being able to gain from buying cheaper foreign goods.

Question 11

What are the methods of protectionism?

5 methods

Answer 11

1. Tariffs
2. Quota
3. Voluntary export restrain (VER) (type of quota)
4. Non-competitive purchasing by governments
5. Embargos

Question 12

What are tariffs?

• What are tariffs
• How do tariffs help domestic producers?

Answer 12

• 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.

Question 13

What are quotas?

Answer 13

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.

Question 14

What is meant by non-competitive purchasing by governments?

Answer 14

This involves a government only buying from domestic producers, even if this means paying higher prices.

Question 15

What are embargos?

Answer 15

This involves complete or partial prohibition of commerce and trade with a particular country in order to isolate it.

Question 16

What are the advantages of international trade?

5 Advanatages

Answer 16

• Higher earnings – margins in overseas markets may exceed those found at home.
• Spreading of risks – this especially related 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.

Question 17

Depends on factors for international trade

Answer 17

• 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.
• Culture e.g. language barriers and differences in purchasing habits
• Legal differences
• How well they know the market e.g. established brands they would be competing with