International Economics Part 3.1 - Free trade and protectionism

Free Trade - Free trade is a policy followed by some international markets in which countries' governments do not restrict imports from, or exports to, other countries. (i.e. no trade barriers)

Protectionism -  Protection is the attempt to limit imports or promote exports by putting up barriers to trade. Despite the arguments in favor of free trade and increasing trade openness, protectionism is still widely practiced. Here are a few reasons why:

1. Protecting Infant Industry
2. Protecting domestic workforce
3. Anti-dumping measure
4. To increase government revenue and improve current account deficit

1) Protecting Infant industry: Barriers to trade are used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive. Protection of domestic industries may allow they to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.

2) Protecting an industry may, in the short run, protect jobs, though in the long run it is unlikely that jobs can be protected indefinitely. If the unemployment occurs at large industries, it could lead to very high unemployment rates. However, since the protected industries will be in decline in the long run, protectionism will just prolong this process.

International Economics Part 2 - The World Trade Organization

The world trade organization (WTO), is an organization that sets the rules for global trading and resolves dispute between its members.

All WTO members are required to grant "most favored nation" status to one another, meaning that trade allowances granted by one country to another must be granted to all other members of the WTO.

The WTO attempts to promote free trade, which is a very difficult task, with varying success.

It aims to increase international trade by providing a place for negotiations and by attempting to lower trade barriers. The main functions of the WTO include:

1. be a forum for trade negotiations
2. handle trade disputes among its members
3. administer WTO agreements
4. providing technical assistance and trading for developing countries
5. coorporate with other national organizations
6. monitor national trade policies

Trade liberalization clearly brings many economic and political benefits, but many argue that the WTO has had limited success in certain areas. The main criticisms are:

1. Failure to confront ethical issues
2. Failure to confront environmental pollution
3. Favors the powerful
4. Low number of agreements
5. Takes too long to process and settle dispute etc.

International Economics Part 1 - Reasons to trade?

This series will focus on international economics. Today we will discuss the positive implications of international trade. Lets go baby!!!

1. Greater Choice - Eating fruits and vegetables off-season is a prime example of this. People not only have an access to the domestically produced goods and services, but also products from a number of different countries.

2. Lower prices - International trade gives consumers the opportunity to purchase goods and sevices at a cheaper price as they are able to buy their demanded goods and services from other countries. Producers also gain from international trade, since they can purchase raw materials and other goods from other countries at a cheaper rate. The reason why this is possible is because some countries have more access to natural resources, have better technologies or different quality of labour forces. This means that more raw materials and goods are available, which can be sold at a lower price.

3. Economies of scale - when firms operate on an international market as well as on the domestic one, they are gaining size and therefore will increase the demand. As firms get bigger they can exploit economies of sclae, which will reduce their average costs.

4. Differences in resources - Some countries have different resources than others. When a resource is not available, but a firm needs it to produce a certain product, they can import the resource from different countries. Without international trade this would not be possible and countries with limited amount of resources would not be able to develop.

5. More competition - Because of international trade, domestic producers compete with foreign firms. This results in more efficiency and a reduction in prices. Therefore, consumers will have more options and more qualitative products to choose from.

6. Better allocation of resources - If firms can compete freely without government intervention then countries that are best at producing certain goods and services will produce them. These goods and services will be produced at the lowest cost and the efficiency will be maximized.  Theoretically, if this happens in every country in the world, resources will be allocated most efficiently.