In this assignment I will be answering it in two parts. The first part will be on why the policies are brought about and how they are implemented. In the second part I will discuss whether it is a benefit or not to international trade.
Policies are introduced by governments, and are designed to limit competition from foreign products or services. These are made up of mostly duties, tariffs and quotas designed to limit the amount of foreign products in the domestic market, in addition governments subsidise their own exports in order to give their own industries a boost. An examples of a trade barrier is import tax duties, these are imposed to increase the price of a foreign product so it is priced out of the market as the costs involved are driven up and no longer can it stay competitive in the market, other trade policies are shown below.
Another example is that the government, if it wishes can refuse to grant the exporter a import licence. This would then prevent foreign products from entering the UK market and thus the domestic products will be bought instead. This helps businesses to grow and would help secure jobs. Along with these are custom duties, these put an extra charge on importing, which profits the government and can be used in subsides, described later. Anti-dumping duties can be put in place to stop suspiciously low priced products from entering the market. This is regarded as unfair competition as these are either surpluses which cannot be sold in the host country, or there is an excess of production. This is usually sold as a loss to the manufacturer, this is done because it can boost awareness of the product in the market so bought again when the prices return. It also prevents the sale of domestic products.
Tariffs fall into two categories these are: Specific tariffs which are fixed charges on products, and the Ad valorem tariffs which are tariffs that are a proportion of the value of the imported good. Tariffs are designed to increase the costs involved in importing the good which puts off the importers from entering the market, promoting sales of domestic goods and also taking away the reliance on cheaper goods. The government also wants the country to being self sufficient, for times in crisis. If the exporters of foreign goods do enter the market then the tariffs would increase costs which would help push up prices, so the domestic goods can stay competitive even with the higher cost of wages, and higher running costs, etc. It may also help the domestic businesses because they could sell products cheaper and still receive more profits than a foreign competitor.
This protection from competition helps the government, by way of more revenues, but does not help consumers who buy the products as limited competition increases prices. This is down to not having free trade, the competition for pricing of a market is not as high, thus it causes inefficiency from the domestic producers and a smaller growth of the domestic economy. This point of free trade and limited competition can be highlighted, using Ghana and South Korea, which in 1970 the GNP (gross national product) of Ghana was $250 per head and south Korea was $260 per head which is fairly similar.
Due to the encouragement of international trade and not using government interventions, South Korea began to prosper, whilst Ghana, with government policies was left behind . In 1998 the difference is clear which was the best policy. Ghana’s GNP was $390 per head and South Korea’s had leapt up to $8,6001. This shows just how important international trade is. Ghana was against having international trade and opted for trading intra country and placed high tariffs on imports and implemented an import substitution policy. This example has shown that trade policies were not the best way of growth, and that international trade can boost the economy of world, this may be done also by cheap foreign imports as well.
This can be explained by using Adam Smiths theory of absolute advantage. It states that some countries are better than others at producing certain products with the same amount of raw materials. There are many reasons, an example of this is location in the world i.e. it could be down to climate. Britain does not have an ideal climate for producing bananas but Jamaica does, so they have the absolute advantage. Britain was very efficient textile maker as we started the industrial revolution, this meant that we had the technology to be the best.
Britain had “an absolute advantage in the production of textiles, whilst the French had an absolute advantage in the production of wine. Thus a country has an absolute advantage in the production of a product when it is most efficient than any other country producing it.”2 Now it would make sense to trade in what we had an absolute advantage in with a country who had an absolute advantage in something else. This specializing of product manufacturing keeps costs down and it works out more expensive to try and manufacture the product yourself rather than importing it from a foreign country. In this case it is not worth worrying about cheaper imports as the foreign country would buy products that we have the absolute advantage in.
Another policy designed to limit competition is subsides. Subsides are paid by the government to a domestic producer to aid them in lowering production costs and help them break into a foreign market or compete against cheap foreign imports. This subsides can be paid for by the tariffs so no money has really been loss but a massive help to businesses have been gained, this promotes greater business for domestic companies, and in turn more GDP and growth to the nation.
Import quotas is another way of controlling foreign imports, Restricting the amount of imports, by way of an import licence the government can control how much foreign product is imported. This can be done by predicting out how much of that particular product is needed and how much of that product can be produced domestically, the difference can then be imported and so maximum amount products are produced at home creating less unemployment. The trade strategy of many nations is designed to simultaneously boost exports and limit imports3
As with this and many of the other policies the closing of the economy to the global market can have negative effects.
This can be shown by the Sachs and Warner study over a twenty year period from 1970 to 1990. The study has shown “free trade boosts growth. With good reason: trade allows countries to import others’ technology, and foreign competition spurs domestic companies to become more productive. For good measure, study after study has found a positive correlation between freer trade and growth. The report then goes on to say:
The study found that developing countries with open economies grew by 4.5% a year in the 1970s and 1980s, but those with closed economies grew by only 0.7% a year. Rich open economies grew by 2.3% a year, closed ones by 0.7%.Open economies are ones which allow freer trade, closed economies have policies in place to restrict trade. 4
The study is a good indicator of how foreign import policies can damage the economy, Sachs and Warner argue for free trade.
Free Trade is described as international business which is not restrained by government interference or regulation, such as duties and tariffs. Free trade allows customers from a country to buy what ever they want from another country. On the other hand the absence of competition policies has often led to monopolized domestic markets by Global business. These could be of foreign origin which would then lead us back to the point of money going out of the country, no jobs created and now as no import duties imposed less money to the government.
“Free trade would mean that developing countries could sell their goods in established world markets for the best price available. In reality, this does not often happen as developed countries tend to see it as unfair that they should have to take imports from countries where the costs of production are much lower than their own.5” This is the opinion of many economically more developed countries in the E.U and does highlight the point that competition from low cost foreign countries is unfair and therefore policies to limit it are not mistaken.
Comparative advantage a theory by David Ricardo, which has been taken a step further than Adam Smiths theory of absolute advantage, helps explain why we should not worry about cheap foreign imports. It suggests that countries will specialise “in the production of a good or service that it produces at a lower opportunity cost than its trading partner… It is better for a country that is inefficient at producing good or services to specialise in the production of that good it is least inefficient at, compared with producing other goods”6
“The basic message of the theory of comparative advantage is that potential world production is greater with unrestricted free trade than it is with restricted trade”.7
From this it would be apparent that we would not have to worry about the cheap low cost foreign imports, because it does not now have produce it domestically, but bought in cheaper from abroad. Also if there is a competition for the market from both home and abroad, the efficiency of production will become greater to keep up. Rivalry will be created which will create innovation, product efficiency and therefore lower costs and higher profits. The only time products would definitely have to be produced domestically would be if they were deemed important for national security. These items are things related to defence such as aerospace, semi conductors and advance electronics. This point of absolute and comparative advantage can be highlighted in a graph below: 8
This shows that country A has an absolute advantage in the production of both maize and wheat, this may be down to more efficient techniques and more resources. Country B has an absolute disadvantage and produces less than Country A. Country A can therefore export to country B
Comparative advantage is shown here also; Country A is shown to be much better at producing maize whilst country B has fewer resources used if it concentrates in specialising in wheat and vice versa. The surplus can now be traded between the countries and the output of both maize and wheat would increase, consumers in both nations would be able to consume more and there is a net gain for both countries.
This example shows that free trade is a good policy to adopt and the EU operates it between its member nations and Europe for the most is prospering because of it. There are low cost imports from some of the poorer countries in the EU such as Greece and Portugal. Along with the products being cheaper there is also the risk of danger. China is a big manufacturer of lighters, and there was before recently a danger from these imports being dangerous. Human safety is a big issue when it comes to cheap foreign imports. Recently products have to comply with British Standards (B.S.) and there has been a legal minimum safety limit which must be met if to export to this country.
Competition Policies, usually legislative and regulatory-based, aim to increase the level of economic competition by focusing on industry structure (e.g. monopoly issues, regulated or open entry, merger and acquisition review) and company behaviour (e.g. pricing, exclusive relationships, refusal to supply) An example, is that a competition authority may decide to investigate reports of restrictive business practices by a company or group of companies that have the effect of limiting fair competition in the marketplace. 9
In conclusion to this, there are both for and against arguments for trade policies and free trade. Policies are designed to provide jobs for the domestic workforce, keep consumer spending in the country and provide extra money for the government to spend on subsides and infant industries. Dieing industries, which are important for national security are saved from undercutting from foreign manufacturers by the use of this money.
The policies are fairly similar to every country and each country will decide which if any to use as they each serve a different purpose the problem with these policies is political as well. It is possible for governments to retaliate if their country has an import ban or heavy duties to pay. They could put a ban on any import from that country, an example is the embargo on Cuba imposed by America which has lasted 42 years and, which bans anything connected to Cuba such as travel and cigars!
Growth is proved to increase with a free trade market, this is highlighted by Sachs and Warner study of open and closed markets. The world, when open to trade with little policy barriers, grows a lot faster and this benefits everyone. There is more spending power and theoretically less unemployment because of that.
Overall the only people really suffering from trade policies are the consumers who by the products. They miss out on the lower costs brought about by healthy competition. Prices would become lower as the businesses that cannot keep costs low will collapse. Also improve efficiency of the business and increase profits for those who remain would occur, creating more prosperity
I think that free trade is the way forward but it is a very long argument with a lot more factors than just economical. As a closing comment we should not worry about cheap foreign imports as they do help, it is essential though to not keep one either free trade or policies. There must be a balance or an optimum using both, and with political alliances changing all the time policy direction will change as with the UK and US.