INTERNATIONAL TRADE

Reasons for Trade

Domestic Non-availability

International trade is the exchange of goods and services between countries. An import is the UK purchase of a good or service made overseas. An export is the sale of a UK-made good or service overseas.

A nation trades because it lacks the raw materials, climate, specialist labour, capital or technology needed to manufacture a particular good. Trade allows a greater variety of goods and services.

Principle of Comparative Advantage

The principle of comparative advantage states that countries will benefit by concentrating on the production of those goods in which they have a relative advantage.

For instance, France has the climate and the expertise to produce better wine than Brazil. Brazil is better able to produce coffee than France. Each country benefits by specialising in the good it is most suited to making.

France then creates a surplus of wine which it can trade for surplus Brazilian coffee.

Protectionism

Advantages of Protectionism

Protectionism occurs when one country reduces the level of its imports because of:

• Infant industries. If sunrise firms producing new-technology goods (eg computers) are to survive against established foreign producers then temporary tariffs or quotas may be needed.

• Unfair competition. Foreign firms may receive subsidies or other government benefits. They may be dumping (selling goods abroad at below cost price to capture a market).

• Balance of payments. Reducing imports improves the balance of trade.

• Strategic industries. To protect the manufacture of essential goods.

• Declining industries. To protect declining industries from creating further structural unemployment.

Disadvantages of Protectionism

• Prevents countries enjoying the full benefits of international specialisation and trade.

• Invites retaliation from foreign governments.

• Protects inefficient home industries from foreign competition. Consumers pay more for inferior produce.

Protection Methods

Tariffs

Tariffs (import duties) are surcharges on the price of imports. The diagram below uses a supply-and-demand graph to illustrate the effect of a tariff.

Note that the tariff

• raises the price of the import;

• reduces the demand for imports;

• encourages demand for home-produced substitutes;

• raises revenue for the government.

Quotas

Quotas restrict the actual quantity of an import allowed into a country. Note that a quota:

• raises the price of imports;

• reduces the volume of imports;

• encourages demand for domestically made substitutes.

Other Protection Techniques

• Administrative practices can discriminate against imports through customs delays or setting specifications met by domestic, but not foreign, producers.

• Exchange controls (currency restrictions) prevent domestic residents from acquiring sufficient foreign currency to pay for imports.

International Institutions

The European Community (EU)

The European Community was established by the Treaty of Rome (1957) and is also called the European Union (EU). The fifteen members of the EU (Belgium, Denmark, France, Greece, Irish Republic, Italy, Luxembourg, Netherlands, Portugal, Spain, West Germany and the United Kingdom ........) form a customs union which aims for eventual economic and political unity. The EU has:

• free movement of capital and labour within member countries;

• free trade between member countries;

• common tariffs against non-members;

• a Common Agricultural Policy (CAP) which guarantees minimum prices for farmers' output;

• standardised trade and customs procedures, eg metric measurements;

• some members who are part of the European Monetary System (EMS) which aims to maintain exchange rate stability by concerted government intervention. In January 1999 many of the members will adopt a single european currency - the EURO. Britain has elected to stay outside this until at least after the next election - 2002.

The International Monetary Fund (IMF)

Established in 1944 at Bretton Woods, the main aim of the IMF is to stabilise exchange rates and to lend money to countries needing foreign currency. Over 140 member countries pay a sum of their own currency into a pool. The amount paid in depends on the size of their economy. Each country can then borrow foreign currency from the pool according to their contribution to settle temporary balance-of-payments problems. Countries can draw up to 25 per cent of their quota before the IMF begins to set conditions on the loan. In 1967 the IMF created a new international currency called special drawing rights (SDRs) which governments use to settle debts with other countries.

The International Bank for Reconstruction and Development (IBRD)

Known as the World Bank. IBRD lends money to developing countries for capital projects such as power stations or roads. Loans are for about thirty years and carry a low rate of interest.

The World Trade Organisation (WTO)

The World Trade Organisation was set up in 1995 and succeeded the General agreement on Tariffs and Trade (GATT). The aim of the WTO is to help trade flow smoothly, freely, fairly and predictably. It;

• administrates trade agreements

• acts as a forum for trade negotiations

• settles trade disputes

• reviews national trade policies

• assists developing countries in trade policy issues

The Organisation for Economic Co-operation and Development (OECD)

The OECD is made up of member countries who send a representative to a council. This offers an opportunity to discuss common policies to help stabilise exchange rates and encourage growth. The OECD also publishes surveys of individual economies.

The Organisation of Petroleum Exporting Countries (OPEC)

This is an international group of many of the largest oil-producing nations which tries to limit world production and so maintain the price of oil. In 1985 the price of a barrel of oil stood at over $30. By mid-1986 members had exceeded set production levels and the price of oil had fallen below $10 for the first time in a decade. Since then it has recovered, but never to the previous levels.

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