Showing posts with label International Trade. Show all posts
Showing posts with label International Trade. Show all posts
Advantages/Disadvantages Trade Blocs
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The advantages of trading blocs include easy access to each other's markets, protection of individual markets from cheap imports and increased trade between member countries. Disadvantages of trading blocs include limited trade with producers outside the trading bloc, distortion of world trade and retaliation by other countries.
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A significant advantage of a free trade bloc, such as NAFTA, is that consumers in all member countries benefit from higher quality goods and services at lower prices. This happens because of the elimination of barriers to trade, such as tariffs and quotas, which allows companies from different countries to compete equally with local companies. These companies benefit from increased access to resources, which lowers the cost of production of goods and services significantly.
Disadvantages of free trade blocs include the displacement of jobs because of increased competition from companies in member countries. Workers are usually displaced as companies are closed and they may remain unemployed for extended periods of time; workers usually get jobs later, but at a lower wage. National economies within a free trade bloc are susceptible to events such as recessions in other member countries, which affect them directly. This is because free trade blocs encourage specialization among member countries, which increases their dependency on each other.
The different types of trading blocs include: Preferential Trade Areas, Free Trade Areas, customs unions and common markets
Trade Blocs
In recent years there has been a flurry of bi-lateral trade deals between countries and the emergence of regional trading blocs. For example, the European Union now has over 30 separate international trade agreements including those with countries such as Colombia and South Korea.
Some of these deals are free-trade agreements that involve a reduction in tariff and non-tariff import controls to liberalise trade in goods and services between countries.
The most sophisticated RTAs include rules on flows of investment, co-ordination of competition policies, agreements on environmental policies and the free movement of labour.
Examples of Regional Trade Agreements (RTAs):
The number of RTAs has risen from around 70 in 1990 to over 300 now – this both reflects and reinforces a switch towards greater intra-regional trade most notably between many of the world's fast-growing emerging market economies. No regional trade agreement is the same!
The WTO permits the existence of trade blocs, provided that they result in lower protection against outside countries than existed before the creation of the trade bloc
- European Union (EU) – a customs union, a single market and now with a single currency
- European Free Trade Area (EFTA)
- North American Free Trade Agreement (NAFTA) between the USA, Canada and Mexico
- Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay and Venezuela
- Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)
- Common Market of Eastern and Southern Africa (COMESA)
- South Asian Free Trade Area (SAFTA) created in 2006 with countries such as India and Pakistan
- Pacific Alliance – 2013 – a regional trade agreement between Chile, Colombia, Mexico and Peru
- Trans-Pacific Partnership (TPP) - a proposed free trade agreement being negotiated during 2013 between Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam
General notes on regional trade blocs
Trade blocs are usually groups of countries in specific regions that manage and promote trade activities. Trade blocs lead to trade liberalisation (the freeing of trade from protectionist measures) and trade creation between members, since they are treated favourably in comparison to non-members. However, trade diversion away from non-members is also likely to occur, especially if protectionist measures are imposed against non-members. Trade diversion contradicts the aims of the WTO and distorts comparative advantage
Advantages/disadvantages Trade Blocs
The main advantages for members of trading blocs
Free trade within the bloc
Knowing that they have free access to each other's markets, members are encouraged to specialise. This means that, at the regional level, there is a wider application of the principle of comparative advantage.
Market access and trade creation
Easier access to each other’s markets means that trade between members is likely to increase. Trade creation exists when free trade enables high cost domestic producers to be replaced by lower cost, and more efficient imports. Because low cost imports lead to lower priced imports, there is a 'consumption effect', with increased demand resulting from lower prices.
Economies of scale
Producers can benefit from the application of scale economies, which will lead to lower costs and lower prices for consumers.
Jobs
Jobs may be created as a consequence of increased trade between member economies.
Protection
Firms inside the bloc are protected from cheaper imports from outside, such as the protection of the EU shoe industry from cheap imports from China and Vietnam.
The main disadvantages of trading blocs
Loss of benefits
The benefits of free trade between countries in different blocs is lost.
Distortion of trade
Trading blocs are likely to distort world trade, and reduce the beneficial effects of specialisation and the exploitation of comparative advantage.
Inefficiencies and trade diversion
Inefficient producers within the bloc can be protected from more efficient ones outside the bloc. For example, inefficient European farmers may be protected from low-cost imports from developing countries. Trade diversion arises when trade is diverted away from efficient producers who are based outside the trading area.
See: EU Sugar Case
Retaliation
The development of one regional trading bloc is likely to stimulate the development of others. This can lead to trade disputes, such as those between the EU and NAFTA, including the recent Boeing (US)/Airbus (EU) dispute. The EU and US have a long history of trade disputes, including the dispute over US steel tariffs, which were declared illegal by the WTO in 2005. In addition, there are the so-called beef wars with the US applying £60m tariffs on EU beef in response to the EU’s ban on US beef treated with hormones; andcomplaints to the WTO of each other’s generous agricultural support.
During the 1970s many former UK colonies formed their own trading blocs in reaction to the UK joining the European common market.
See: The EU
Trading Blocs
Trading blocs
A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. Trading blocs are a form of economic integration, and increasingly shape the pattern of world trade. There are several types of trading bloc:
Preferential Trade Area
Preferential Trade Areas (PTAs) exist when countries within a geographical region agree to reduce or eliminate tariff barriers on selected goods imported from other members of the area. This is often the first small step towards the creation of a trading bloc.
Free Trade Area
Free Trade Areas (FTAs) are created when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods coming from other members.
Customs Union
A customs union involves the removal of tariff barriers between members, plus the acceptance of a common (unified) external tariff against non-members. This means that members may negotiate as a single bloc with 3rd parties, such as with other trading blocs, or with the WTO.
Common Market
A ‘common market’ (or single market) is the first significant step towards full economic integration, and occurs when member countries trade freely in all economic resources – not just tangible goods. This means that all barriers to trade in goods, services, capital, and labour are removed. In addition, as well as removing tariffs, non-tariff barriers are also reduced and eliminated. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, and common rules regarding monopoly power and other anti-competitive practices. There may also be common policies affecting key industries, such as the Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP) of the European Single Market (ESM).
Macroeconomics and International Trade
Key indicators....
Clear evidence of trading over long distances dates back at least 9,000 years, though long distance trade probably goes back much further to the domestication of pack animals and the invention of ships. Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialised world.
Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet it is the world’s fourth largest consumer of oil, and must import all it requires.
The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18th Century (in The Wealth of Nations, 1776), these being the division of labour and specialisation.
Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries. International specialisation is increased when countries use their scarce resources to produce just a small range of products in high volume. Mass production allows a surplus of good to be produced, which can then be exported. This means that goods and resources must be imported from other countries that have also specialised, and produced surpluses of their own.
When countries specialise they are likely to become more efficient over time. This is partly because a country's producers will become larger and exploit economies of scale. Faced by large global markets, firms may be encouraged to adopt mass production, and apply new technology. This can provide a country with a price and non-price advantage over less specialised countries, making it increasingly competitive and improving its chances of exporting in the future.
International trade brings a number of valuable benefits to a
country, including:
Despite the benefits, trade can also bring some
disadvantages, including:
Specialisation and the gains from trade
ESSENTIAL VIDEO!
Why do countries trade?
Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources, countries can produce a surplus, and trade this for the resources they need.Clear evidence of trading over long distances dates back at least 9,000 years, though long distance trade probably goes back much further to the domestication of pack animals and the invention of ships. Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialised world.
Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet it is the world’s fourth largest consumer of oil, and must import all it requires.
The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18th Century (in The Wealth of Nations, 1776), these being the division of labour and specialisation.
Division of labour
In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently. When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets. For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.Specialisation
Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product. Hence, specialisation can generate further benefits in terms of efficiency and productivity.Specialisation can be applied to individuals, firms, machinery and technology, and to whole countries. International specialisation is increased when countries use their scarce resources to produce just a small range of products in high volume. Mass production allows a surplus of good to be produced, which can then be exported. This means that goods and resources must be imported from other countries that have also specialised, and produced surpluses of their own.
When countries specialise they are likely to become more efficient over time. This is partly because a country's producers will become larger and exploit economies of scale. Faced by large global markets, firms may be encouraged to adopt mass production, and apply new technology. This can provide a country with a price and non-price advantage over less specialised countries, making it increasingly competitive and improving its chances of exporting in the future.
The advantages of trade
- The exploitation of a country's comparative advantage, which means that trade encourages a country to specialise in producing only those goods and services which it can produce more effectively and efficiently, and at the lowest opportunity cost.
- Producing a narrow range of goods and services for the domestic and export market means that a country can produce in at higher volumes, which provides further cost benefits in terms of economies of scale.
- Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus.
- Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms.
- The quality of goods and services is likely to increases as competition encourages innovation, design and the application of new technologies. Trade will also encourage the transfer of technology between countries.
- Trade is also likely to increase employment, given that employment is closely related to production. Trade means that more will be employed in the export sector and, through the multiplier process, more jobs will be created across the whole economy.
The disadvantages of trade
- Trade can lead to over-specialisation, with workers at risk of losing their jobs should world demand fall or when goods for domestic consumption can be produced more cheaply abroad. Jobs lost through such changes cause severe structural unemployment. The recent credit crunch has exposed the inherent dangers in over-specialisation for the UK, with its reliance on its financial services sector.
- Certain industries do not get a chance to grow because they face competition from more established foreign firms, such as new infant industries which may find it difficult to establish themselves.
- Local producers, who may supply a unique product tailored to meet the needs of the domestic market, may suffer because cheaper imports may destroy their market. Over time, the diversity of output in an economy may diminish as local producers leave the market.
Specialisation and the gains from trade
Trump and Trade
President Donald Trump has fulfilled
a campaign pledge by signing an executive order to withdraw from the
Trans-Pacific Partnership (TPP).
"Great thing for the American worker what we just did," said Mr Trump as he dumped the pact with a stroke of a pen.
He also cut funding for international groups that provide abortions, and froze hiring of some federal workers.
Mr Trump's executive order on TPP was largely symbolic since the deal has not been ratified by a divided US Congress.
During his presidential campaign, he criticised the accord as a "potential disaster for our country", arguing it harmed US manufacturing.
What is the TPP?
- The trade deal, which covered 40% of the world's economy, was negotiated in 2015 by nations including the US, Japan, Malaysia, Australia, New Zealand, Canada and Mexico
- TPP's stated aim was to strengthen economic ties and boost growth, including by reducing tariffs
- It included measures to enforce labour and environmental standards, copyrights, patents and other legal protections
- The agreement, backed heavily by US business, was designed to potentially create a new single market likened to the EU
- Critics argued it was a not-so-secret gambit to box in China, which is not part of the agreement
TPP in a nutshell
Twelve countries that border the Pacific Ocean signed up to the TPP in February 2016, representing roughly 40% of the world's economic output.The pact aimed to deepen economic ties between these nations, slashing tariffs and fostering trade to boost growth. Members had also hoped to foster a closer relationship on economic policies and regulation.
The agreement was designed so that it could eventually create a new single market, something like that of the EU.
But all 12 nations needed to ratify it, before it could come into effect.
Once Donald Trump won last year's election, the writing was on the wall for the TPP.
US participation was the major linchpin for the deal. It may be possible for the other countries to forge a smaller scale pact in it's place, but it can't go ahead in its current form.
Those other member states are: Japan - the only country to have already ratified the pact - Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.
For and against
Former President Barack Obama treated trade deals as a priority during his tenure, and this particular deal would have bolstered America's position in the Asia-Pacific region, where China is growing in influence.But US opponents have characterised the TPP as a secretive deal that favoured big business and other countries at the expense of American jobs and national sovereignty.
On the campaign trail Donald Trump called it a "horrible deal".
Read more...
The Chinese government will rejoice
to hear Donald Trump promise that the US will quit the Trans-Pacific
Partnership (TPP) on his first day in the White House.
For years,
Beijing has listened to the Obama administration say the 12-nation
regional trade deal was a way of bolstering American leadership in Asia. China was not included in the deal, and President Barack Obama went out of his way to remind the region that this was no accident. TPP allows America - and not countries like China - to write the rules of the road in the 21st Century, which is especially important in a region as dynamic as the Asia-Pacific.
Nor was this ever just about the rules on trade. TPP was a core part of the Obama administration's strategic "pivot to Asia". US Defence Secretary Ash Carter said that alongside boosting US exports, it would strengthen Washington's key relationships in the Asia-Pacific, signal US commitment to the region and promote American values.
"Passing TPP is as important to me as another aircraft carrier," he insisted.
Read more...
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