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POLITICAL ECONOMY OF INTERNATONAL TRADE
What Is International Trade?
International trade is the exchange of goods and services between countries. This type of trade
gives rise to a world economy, in which prices, or supply and demand, affect and are affected
by global events. Political change in Asia, for example, could result in an increase in the cost
of labor, thereby increasing the manufacturing costs for an American sneaker company based
in Malaysia, which would then result in an increase in the price that you have to pay to buy
the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would
result in you having to pay less for your new shoes.
Trading globally gives consumers and countries the opportunity to be exposed to goods and
services not available in their own countries. Almost every kind of product can be found on
the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies and
water. Services are also traded: tourism, banking, consulting and transportation. A product
that is sold to the global market is an export, and a product that is bought from the global
market is an import. Imports and exports are accounted for in a country's current account in
the balance of payments.
Increased Efficiency of International Trading
Global trade allows wealthy countries to use their resources - whether labor, technology or
capital - more efficiently. Because countries are endowed with different assets and natural
resources (land, labor, capital and technology), some countries may produce the same good
more efficiently and therefore sell it more cheaply than other countries. If a country cannot
efficiently produce an item, it can obtain the item by trading with another country that can.
This is known as specialization in international trade.
Let's take a simple example. Country A and Country B both produce cotton sweaters and wine.
Country A produces 10 sweaters and six bottles of wine a year while Country B produces six
sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. Country A,
however, takes three hours to produce the 10 sweaters and two hours to produce the six
bottles of wine (total of five hours). Country B, on the other hand, takes one hour to
produce 10 sweaters and three hours to produce six bottles of wine (total of four hours).
But these two countries realize that they could produce more by focusing on those products
with which they have a comparative advantage. Country A then begins to produce only wine
and Country B produces only cotton sweaters. Each country can now create a specialized
output of 20 units per year and trade equal proportions of both products. As such, each
country now has access to 20 units of both products.
We can see then that for both countries, the opportunity cost of producing both products is
greater than the cost of specializing. More specifically, for each country, the opportunity cost
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of producing 16 units of both sweaters and wine is 20 units of both products (after trading).
Specialization reduces their opportunity cost and therefore maximizes their efficiency in
acquiring the goods they need. With the greater supply, the price of each product would
decrease, thus giving an advantage to the end consumer as well.
Note that, in the example above, Country B could produce both wine and cotton more
efficiently than Country A (less time). This is called an absolute advantage, and Country B
may have it because of a higher level of technology. However, according to international
trade theory, even if a country has an absolute advantage over another, it can still benefit from
specialization. (For a review of some of these economic concepts, see the Economics Basics
tutorial.)
Other Possible Benefits of International Trading
International trade not only results in increased efficiency but also allows countries to
participate in a global economy, encouraging the opportunity of foreign direct investment
(FDI), which is the amount of money that individuals invest into foreign companies and other
assets. In theory, economies can therefore grow more efficiently and can more easily become
competitive economic participants.
For the receiving government, FDI is a means by which foreign currency and expertise can
enter the country. These raise employment levels and, theoretically, lead to a growth in the
gross domestic product. For the investor, FDI offers company expansion and growth, which
means higher revenues.
Aims of International Trade Policy
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Covering Production and Resource Deficit
Providing A market to Product Surplus at Internal Economy
A Wide Market Volume
Competition
Improving Domestic Market Demand
Economic Dynamism
What is Protectionism?
Any of several political-economic doctrines that have in common advocating that government
impose political barriers to international trade (usually taxes on imports or quantitative
restrictions limiting the volume of legally allowable imports of each particular good) in order
to “protect” a domestic firm (or firms) manufacturing these same goods from foreign
competition and thereby make it (them) more profitable than would otherwise be the case
under free competition. Although difficult to justify on the basis of economic theory,
protectionist measures often enjoy considerable political support because it is usually much
easier for a tiny group of firms (and their associated labor unions) that stand to benefit greatly
from a protectionist measure to organize for political influence than it is for the much larger
group of consumers who each stand to lose smaller individual amounts by the proposed
measure — even though the total losses normally greatly exceed the total gains.
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REASONS FOR PROTECTIONISM
• Protects the country businesses from extra competition
• Helps new the country businesses to develop before they face competition
• Helps protect the country jobs
• Prevents foreign countries ‘dumping’ lots of cheap imports into the country
• Prevents imports of harmful or desirable goods
Free Trade vs. Protectionism
As with other theories, there are opposing views. International trade has two contrasting views
regarding the level of control placed on trade: free trade and protectionism. Free trade is the
simpler of the two theories: a laissez-faire approach, with no restrictions on trade. The main
idea is that supply and demand factors, operating on a global scale, will ensure that production
happens efficiently. Therefore, nothing needs to be done to protect or promote trade and
growth because market forces will do so automatically.
In contrast, protectionism holds that regulation of international trade is important to ensure
that markets function properly. Advocates of this theory believe that market inefficiencies
may hamper the benefits of international trade and they aim to guide the market accordingly.
Protectionism exists in many different forms, but the most common are tariffs, subsidies and
quotas. These strategies attempt to correct any inefficiency in the international market.
The Economic Argument for Free-Trade
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The theoretical justification for free-trade resides in the concept of comparative
advantage.
Comparative advantage implies that some nations are better at producing some goods
and other countries are better at producing other goods.
Trade allows each country to specialize, and both countries’ material standards of
living improve.
Protectionist International Trade Policy
In the World Trade Organization (WTO) system, a safeguard is used to restrain international
trade in order to protect a certain home industry from foreign competition. A member may
take a “safeguard” action (i.e., restrict importation of a product temporarily) to protect a
specific domestic industry from an increase in imports of any product which is causing, or
which is threatening to cause, serious injury to the domestic industry that produces like or
directly-competitive products.
Safeguards are usually seen as responses to fair trade behaviour, as opposed to unfair trade
practices such as
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Custom tariffs
Quotas
Dumping
Subsidies
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1.Custom Tariffs
One of the oldest and most commonly tools of international trade policy is custom tax. These
taxes are taken by the government during import goods of entry from country
boundaries. ”Tariffs” means that are taxes on imports and are usually a percentage of the price
of the import, is one method of restricting trade .
Custom taxes are normally connected with laws which is required parliament activitiy. But,
as in Turkey, putting, removing of taxes and changing of tax rates with related some duties
may be given governmet with laws.
The aim of the tariffs which are designated with international aggrements is decreasing tariffs,
removing completely and, so liberalization of world trade.
2.Quotas
Quota is another way of restricting trade through physical limit on the amount of an imported
good that may be sold in a country in a given period.Quotas can be imposed by the
government , or negotiated with importing countries which agree to restrict the amounts of
imports .
In generals tariffs are preferred to quotas.
Why are tariffs preferred to quotas as a means of controlling imports?
Tariffs and quantative restrictions (commonly known as import quotas) both serve the
purpose of controlling the number of foreign products that can enter the domestic market.
There are a few reasons why tariffs are a more attractive option than import quotas.
Three Reasons Why Tariffs Are Preferable to Quotas
1. Tariffs Generate Revenue for the Government: If the U.S. government puts a 20%
tariffs on imported Indian cricket bats they will collect $10 million dollars if $50
million worth of Indian cricket bats are imported in a year. That may sound like small
change for a government, but given the millions of different goods which are imported
into a country, the numbers start to add up. The Progressive Policy Institute has found
that the United States collects 20 billion dollars a year in tariff revenue. This is
revenue that would be lost to the government unless their import quota system charged
a liscencing fee on importers.
2. Import Quotas Can Lead to Administrative Corruption: Suppose that there is
currently no restriction on importing Indian cricket bats and 30,000 are sold in the U.S.
each year. For some reason the United States decides that they only want 5,000 Indian
cricket bats sold per year. They could set an import quota at 5,000 to achieve this
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objective. The problem is: How do they decide which 5,000 bats get in and which
25,000 do not? The government now has to tell some importer that their cricket bats
will be let into the country and tell some other importer than his will not be. This gives
the customs officials a lot of power as they can now give access to favored
corporations and deny access to those who are not favored. This can cause a serious
corruption problem in countries with import quotas as the importers chosen to meet
the quota are the ones who can provide the most favors to the customs officers.
A tariff system can achieve the same objective without the possibility of corruption.
The tarriff is set at a level which causes the price of the cricket bats to rise just enough
so that the demand for cricket bats falls to 5,000 per year. Although tariffs control the
price of a good, they indirectly control the quantity sold of that good due to the
interaction of supply and demand.
3. Import Quotas Are More Likely to Cause Smuggling: Both tariffs and import
quotas will cause smuggling if they are set at unreasonable levels. If the tariff on
cricket bats is set at 95% then it's likely that people will try to sneak the bats into the
country illegally, just as they would if the import quota is only a small fraction of the
demand for the product. So governments have to set the tariff or the import quota at a
reasonable level. But what if the demand changes? Suppose cricket becomes a big fad
in the United States and everybody and their neighbour wants to buy an Indian cricket
bat? An import quota of 5,000 might be reasonable if the demand for the product
would otherwise be 6,000. Overnight, though, the demand has now jumped to 60,000.
With an import quota there will be massive shortages and smuggling in cricket bats
will become quite profitable. A tariff does not have these problems. A tariff does not
provide a firm limit on the number of products that enter. So if the demand goes up,
the number of bats sold will go up, and the government will collect more revenue. Of
course, this can also be used as an argument against tariffs as the government cannot
ensure that the number of imports will stay below a certain level.
For these three reasons, tariffs are generally considered to be preferrable to import quotas.
3.Dumping
If a company exports a product at a price (export price) lower than the price it normally
charges on its own home market (normal value), it is said to be 'dumping' the product.
Dumping can harm the domestic industry by reducing its sales volume and market shares, as
well as its sales prices. This in turn can result in decline in profitability, job losses and, in the
worst case, in the domestic industry going out of business.
Often, dumping is mistaken and simplified to mean cheap or low priced imports. However, it
is a misunderstanding of the term. On the other hand, dumping, in its legal sense, means
export of goods by a country to another country at a price lower than its normal value. Thus,
dumping implies low priced imports only in the relative sense (relative to the normal value),
and not in absolute sense.
Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its
trade distortive effect. Thus, the purpose of anti dumping duty is to rectify the trade distortive
effect of dumping and re-establish fair trade. The use of anti dumping measure as an
instrument of fair competition is permitted by the WTO. In fact, anti dumping is an instrument
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for ensuring fair trade and is not a measure of protection for the domestic industry. It provides
relief to the domestic industry against the injury caused by dumping.
Anti dumping measures do not provide protection per se to the domestic industry. It only serves the
purpose of providing remedy to the domestic industry against the injury caused by the unfair trade
practice of dumping.
4.Subsidies
A subsidy (also known as a subvention) is a form of protectionism or trade barrier by making
domestic goods and services artificially competitive against imports. Subsidies may distort
markets, and can impose large economic costs. Financial assistance in the form of a subsidy
may come from one's government, but the term subsidy may also refer to assistance granted
by others, such as individuals or non-governmental institutions, although these would be more
commonly described as charity.
Types of Subsidies
1-Trade protection (import restrictions)
Measures used to limit imports from other countries may constitute another form of hidden
subsidy. The economic argument is that consumers of a given product are forced to pay
higher prices for a given good than they would pay without the trade barrier; the protected
industry has effectively received a subsidy. Such measures include import quotas, import
tariffs, import bans, and others.
2-Export subsidies (trade promotion)
Various tax or other measures may be used to promote exports that constitute subsidies to the
industries favored. In other cases, tax measures may be used to ensure that exports are treated
"fairly" under the tax system. The determination of what constitutes a subsidy (or the size of
that subsidy) may be complex. In many cases, export subsidies are justified as a means of
compensating for the subsidies or protections provided by a foreign state to its own producers.
WHAT IS WTO?
WTO is the only global international organization dealing with the rules of trade between
nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds
trading nations and ratified in their parliaments. The goal is to help producers of goods and
services, exporters and importers conduct their business.
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WTO’S GENERAL AIM
The WTO aims to provide its members and the public at large with quantitative and quality
information in relation to economic and trade policy issues. On the statistic side its”
International trade statistics” report is published annually. It provides an overview of both
short and long term developments in world trade in the two principal sectors, merchandise and
commercial services.
BACKGROUND: THE TWO GATTS
GATT 1947
The original General Agreement on Tariffs and Trade, now referred to as GATT 1947,
provide basic rules of the multilateral trading system from 1 January 1948 until the WTO
entered into force on 1 January 1995.These rules, which dealt only with trade in goods, were
supplemented and modified by many further legal instruments adopted over the 47 years
between 1948 and 1995, as a result of multilateral negotiations, protocols of accession,
waivers and other decisions.
GATT 1994
GATT 1994, which sets out the main WTO rules that bear specifically on trade in goods, is
legally distinct from GATT 1947.
The Marrakech Agreement Establishing the WTO states that the General Agreement on tariffs
and trade 1994 (GATT 1994) is on instrument legally distinct from the General Agreements
on Tariffs and Trade.
WTO/GATT Principles
WTO embodies many reciprocal rights and obligations for trading countries and its core
principle is the Most-Favoured-Nations (MFN) clause. Under this, trade must be conducted
on the basis of non-discrimination-all members are bound to accord each other treatment in
tariffs and trade as favourable as they give to any other member-country.
A second principle is that, to the maximum extend possible, trade protection
should
be given to domestic industries not through non-tariff measures such as quantitative
restrictions, arbitrary technical standards, and health regulations, etc; but only through the
customs tariff, so that the extent protection is clear and competition is still possible.
Other basic provisions are” national treatment”(non-discrimination),transparency of trade
rules, and general prohibition of quantitative restrictions or quotas.
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A final principle embodied in the WTO is ‘fair competition’. Fair competition in the GATT
context is reflected in a number of provisions. Government subsidization of exports is
prohibited and\or countervailable by importing countries.
Certain types of the behaviour pursued by exporting firms (as opposed to governments) are
also countervailable. Thus, dumping by exporters-which usually mean charging a price in the
export market that is less than what is charged in the home market –maybe offset by
importing country government’s through the imposition of an anti-dumping duty if the
dumping injures domestic competitors.
Conclusion
As it opens up the opportunity for specialization and therefore more efficient use of resources,
international trade has potential to maximize a country's capacity to produce and acquire
goods. Opponents of global free trade have argued, however, that international trade still
allows for inefficiencies that leave developing nations compromised. What is certain is that
the global economy is in a state of continual change and, as it develops, so too must all of its
participants.
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