Economics IGCSE Edexcel - International Trade

Trade in goods and services is important for choice and competition which in turn decrease prices. It is also need for economic growth.

Free trade: trade between nations that is completely without government restrictions.

Advantages:

1. Consumers get more choice.
2. Firms can sell to larger markets which allows them to exploit economies of scale.
3. Companies can minimise cost by getting materials from around the world. This increase efficiency.

Disadvantages:

1. Overspecialisation- a country may become too reliant on certain goods which means that if demand for that product falls then they will suffer significantly.
2. Environmental damage- as economies growth increase with free trade, the environment also suffers. For example, as nations become richer, their demand for cars and air travel will rise.

Protectionism: an approach used by governments to protect domestic industries.

Methods:

1. Tariffs- this is where a special tax is imposed on imports. On a supply and curve, this is represented by a shift to the left of the supply curve. This means that prices of imports rise and therefore decreases demand
2. Quotas- a physical limit is placed on the amount of a certain good allowed into the country. Once again, this causes a shift to the left of the supply curve and so causes the price to rise and demand to fall/
3. Subsidies- a grant or tax break is given to domestic suppliers. This causes a shift to the right of the supply curve and therefore a lower price. This allows domestic suppliers to compete with international imports.
4. Administrative barriers- imports are forced to meet strict standards.

Why?:

1. Jobs are protected.
2. Infant industries that are yet to be established are protected.
3. Dumping, where a foreign firm sells large quantities of a product below cost can be stopped.
4. A government can raise revenue by imposing tariffs on imports.
5. Prevents the entry of harmful or undesirable goods.
6. Can be used to improve the current account deficit.

Problems:

1. Free trade benefits such as more choice, cheaper prices and lower quality products will be reduced. Global growth will also slow and people's living standards around the world will suffer.
2. Retaliation- when one country erects barriers, those that are affected might do exactly the same in retaliation. Trade wars therefore develop.
3. There are better ways to protect domestic industries then to erect trade barriers. Examples include the use of supply side policies.

Trade Blocks: 

Trade blocks such as the EU and NAFTA are free trade areas. The advantages of belonging to a trade block means goods will be cheaper and firms can exploit the larger markets and therefore economies of scale. It also increase FDI as foreign firms want to invest in locations within a trade block so that they can gain access to the larger and barrier free markets. Trade blocks should also create more co-operation between members and sharing of resources is possible.

However, the disadvantages are that trade blocks are merely regional areas of free trade which is less preferable to global free trade. Members may also become too reliant on trade within the trade block, making them vulnerable to changes in price and demand in the block. Trade blocks also pose a large financial cost to members. To non-members, trade blocks normally impose a common trade barrier which may be disadvantageous as they have to find newer markets.

The World Trade Organisation (WTO):

The WTO was established in 1995 and has over 150 members. Its main aim is to solve trade disagreements and disputes between governments and to encourage free trade by persuading members to lower trade barriers. Furthermore, it seeks to make trade transparent and has the power to levy fines on any country that breaks trade agreements.