Economics [Trade-1]

GREASE THOSE WHEELS (ECONOMICS)

#2 INTERNATIONAL TRADE ISN'T THAT EASY AFTERALL!!

• Describe and explain arguments for free trade and motives for its protection.
• Describe the types of such protections and their effects.
• Economic integration in the form of free trade regions, economic unions and custom unions.

------------------------------------------------------------------------------------------------------------------------

Free International Trade for all is a good thing when seen from our point of you as it depicts freedom and easy mobility but for some wicked entrepreneurs and countries as a whole, this is not the case as free trade might result in displacement of a single industry from the international market or even a single group of workers. Thus to protect such interests some restrictions to prevent free trade are imposed by countries.

Two major ways to reduce free trade between countries are tariffs and quotas. Lets take a look at their effects individually.

TARIFFS

Tariffs are a type of tax that is levied on imported good to raise their price in the national market. Their are two main types of tariffs, protective and revenue tariffs. A protective tariff is imposed to protect less efficient domestic industries with their production woes. For example if a can of paint can be imported and sold in the domestic market for $25 but a domestically produced can of the same type of paint costs $28. In this scenario government doesn't want its owns products to be dominated by foreign ones so it levies a protective tariff of $5 on the imported can of paint to protect the well being of the domestic industry. (After imposition of tariff the imported can of paint will cost $30 while the domestically manufactured one would cost $28).
A revenue tariff is put up by the government, as the name suggests, to build up revenue without putting a complete stop to imports. Historically, tariffs were mostly imposed  by governments to generate revenue, from Civil War till 1913, tariffs made up about 1/2 of the total US revenue generated!!
Lets talk about some graphs now...

• $10 is the equilibrium price, i.e the price without trade, with full domestic production.
• $6 is world price of this specific type of clothing.
• $8 is the price of that clothing in that specific country after imposition of $2 tariff.
• S is the domestic supply curve.
• D is the domestic demand curve.
• W-S is the world supply curve of this type of clothing.
• After imposition of tariff these changes occur;
• Imports decrease from 400 units (700-300) to 200 units (600-400).
• Domestic production increases from 300 units to 400 units.
• Area E is the increased profit to domestic producers (400x2-Area of Triangle A= $700)
• Area A is the cost of below optimal production, it depicts the increased price an average consumer is paying in this country after increased production by domestic industries. (1/2x100x2 = $100). It can also be said as the loss in consumer surplus which is the amount a consumer is willing to pay above the original price of the product.
• Area B is the amount of revenue collected by the government after the imposition of tariff. (200x2 = $400).
• Area C is the loss in consumer surplus which is the amount a consumer is willing to pay above the original price of the product. It falls because of the fall in demand form 700 units to 600 units. (1/2x100x2 = $100)
• Area A+B+C+E is the loss to consumers after the imposition of tariff, i.e, $1300.
• Area B+E is the benefit to producers and government respectively, i.e, $1100.
• Area A+C is the deadweight loss as no one benefits from this. Total Loss - Total Benefit, $1300-$1100 = $200.

So basically the outcome of tariff imposition is, reduced consumption, minimization of imports and increased domestic production of that good.

QUOTAS
Some times a foreign made good is so dirt cheap that even an imposition of tariff would not affect its demand in the domestic market and the local industries would suffer. In such a case the government imposes a quota on such goods to limit their entry into the country. A quota can even be set to zero so as to completely bar a good's entry into that country.
A very good example of quota imposition can be the one imposed on the imports of cheaper Japanese Automobiles into the US market by President Reagen in 1981. This limited the diversity of choice for an average American in the automobile section and the prices got higher with decreased number of cars. The Japanese firms involved 'voluntary' reduced exports in this case after negotiations with the US Government, why? Read ahead to see...
A quota, if imposed properly, serves the same purpose as of a tariff. Reduction of imports, increased production by local firms and decreased demand after increased prices. So in the above mention graphed lets replace this tariff thingy with the quota one. With a play of words we say that the government has fixed the quota of imported clothing to 200 units and as a result the price shot up to $8, all of the areas and stuff remains the same as for the tariff one, the only change being in the Area B. Now this extra money isn't going in the pockets of the government but the importers!! For example the importers bought the clothing for $6 a unit and they are now selling it at $8 a unit!! This means they are getting a profit of $2 per unit so this revenue is paid back to the international firms for 'voluntarily' lowering their exports. See!!


These are not the only things a government can do in order to curtail imports. It can rigorously inspect the goods for health, start a condition for licences importing of that good or ban the entry of some goods on cultural or religious bases. Examples are given below...

• Argentinian beef not allowed to enter in the U.S on health grounds for many years.
• Many European countries like Albania, Belarus etc don't import genetically modified food crops from U.S and Canada on cultural grounds.
• Quite a few European countries have banned the imports of Pakistani canned fish on the basis of poor hygiene of factory workers.
• Pork and other food products related to it are banned forever in Islamic countries on religious bases.

------------------------------------------------------------------------------------------------------------------------


As described earlier many producer don't want free trade to occur because it might lead to unemployment and other economic vices.
For example trade causes India to shift production from textiles to agricultural products. This might result in frictional employment between jobs for workers displaced from the textile industry into the agricultural one but in the end they get better off by earning higher wages form such movement. But the case is not that simple, workers are usually specialized in what they do for example a textile machine operator would have little knowledge about the functioning of a combine harvester. So such a scenario results in an unemployment for many of the textile industry workers or them working at much lower wages.
So here is this great argument b/w people who advocate free trade with little or no restrictions (free traders) and those who are on the side of tariffs and other trade barriers to protect domestic industries from foreign competition (protectionists)...
This argument is centered on these six points. (we will give you the takes of both protectionists and free traders)

• The first point that protectionists take up is the matter of National Security, they say that following a free trade route a country becomes too specialized and becomes dependent on other countries and during crisis situations like wartime the country doesn't have its owns resources to fulfill needs for critical goods such as oil and weapons. Free traders admit this point but they state that the quality and efficiency of these goods might be lower when produced domestically then when imported with free trade. They also state the hassle of determining which industries and critical and which are not.
• The most strong argument of the protectionists is the infant industry argument they take up the stance that newly 'born' industries need some time to settle down before they can be subjected to international competition. So imposition of Tariffs on goods imported by a country that are also starting to get produced in that country is viable for the domestic success in production. Free traders also agree on this point of the protectionists if only the tariff imposed on the import of such goods is removed after their domestic producers have settled. They also give the example of Latin automobile industries for whom the government had imposed tariff of several hundred percent on competitive foreign automobiles companies. The result? These Latin countries have grown accustomed to zero competition and so have the government officials to huge amount of revenue and so these industries have never produced a globally competitive car.
• Protectionists also argue that trade barriers should be there to protect domestic jobs. Cheaper goods form foreign industries puts the future of more expensive domestically produced goods in jeopardy. The profits of such domestic industries go down and unemployment and low wages results. While free traders argue that while inefficient industries are supported the prices go up and the standard of living go down. Such results force people to look for substitutes and the essence of tariff imposition is lost. Free traders also state that the profit-and-loss system is an integral part of the economic system; the efficient should be rewarded and the inefficient should be eliminated.
• A weak point of the protectionists is Keeping the Money at Home, they argue that for e.g, The pound sterling should remain in the UK rather than flow out in the international market. The free traders counter this point by saying that eventually the pound will return to home, for e.g if these pounds are used to buy oil from the Middle East, and the currency flows out, but when the same middle east companies import capital goods or agricultural products form the UK the pound will go back to where it came from. Moreover such transfer of currency will also help overseas UK workers.
• Trade Barriers help the balance of payment by reducing deficit, is what the protectionists say. Free traders argue that the protectionists overlook the fact that the money that flows into the country upon exports and in the form of investment that simulate employment and economic well being.
• A final argument given by the protectionists is a nation's pride and dignity. France for example is proud of its wine and cheese and serves to protect such industries. Free traders catch this point but still they do not budge from their stance that permanent protection should not be there, even for industries that constitute a nation's pride.

Which side are you on? Hmm...well most of us will chose the right side to be on, because tariffs harm more than they benefit. For e.g, in 1930 the U.S Government passed a Tariff act that would impose a 70% tariff on most goods that are imported into the States, as a result imports dropped drastically along with retaliation from other countries and international trade b/w the U.S and the rest of the world almost came to a stand still.

So organizations like the World Trade Organization (WTO) helped member countries to sign trade agreements under the GATT (General Agreement on Tariff and Trade), solve trade disputes and finding markets for newbies. As a result free trade is now flourishing.
------------------------------------------------------------------------------------------------------------------------

Regional economic cooperation is always helpful to member nations by aiding trade agreements and the economics well being of their people. Below are three of the most common ways to promote regional economic cooperation.

• In a free trade area two more countries abolish all tariffs and quotas between each other to promote trade between them. The two countries doesn't necessarily have similar trade barriers for non-member countries.
• A custom union is a more developed from of the free trade region. In it two or more countries annihilate all trade barriers between them and adopt uniform tariff plans for other non-member countries.
• An economic union is a far more developed form of the custom union in it countries belonging to a certain geographical region form a trade bloc with a single market and a common currency. Examples are European Union (Euro), East African CFA (Franc), West African CFA (Franc), Eastern Caribbean Currency Union (Dollar).

An important point to notice here is that OPEC (Organization of Petroleum Exporting Companies) is not a trade union but a cartel, which is a group of producers that increase the price of the product they produce by restricting its availability.

Thats all....whewwww!!