IB Free Trade and Protectionism

Customs Union

A Customs Union is formed when two or more countries abolish tariff (and other barriers) between them and establish a common external barrier to non-members

Absolute Advantage

A country is said to have an absolute advantage in the production of X if it can produce more of it with the same resources (or, if it can produce a certain amount with fewer resources) compared to another country.

Comparative Advantage

A country is said to have an absolute advantage in the production of good X if it can produce it at a lower opportunity cost i.e. by sacrificing fewer units of good Y (in the 2 country, 2 good case) compared to another country.

Trading Blocks

A form of economic integration whereby a group of countries decreases trade barriers amongst them while maintaining barriers with non-members. My take the form of a free trade agreement, a customs union, a common market or an economic union

Export Subsidy

A payment granted by a government to domestic firms to strengthen their competitiveness against foreign producers.

Diversification of Exports

A policy initiative to move away from commodity concentration of exports; instead of relying on only one or two exports to broaden the range of exported goods and services so that various risks are reduced.

Quota

A quantitative restriction of imports. As a result of the restriction on supply, the price of the product will rise in the domestic market. A quota also results in increased levels of domestic production as well as in 'quota rents' (profits resulting merely from the right to import the given quantity)

Tariff

A tax on imports (goods and services produced abroad) as a result of which the domestic price of the product rises, the level of domestic production rises, the level of domestic consumption drops and the volume of imports is restricted. A tariff also generates revenues for a government. In the 'small' country case the world price is unaffected. The effect of a tariff on the volume of imports is not certain as it depends on the price elasticity of demand for the good / service

Free Trade Agreement

An FTA is formed when two or more countries abolish tariff (and other barriers) between them while maintaining existing barriers to non-members

World Trade Organization

An international organization which aims at further liberalizing trade through conducting multilateral trade negotiations and which is the arbitrator on trade related disputes. It was established in 1995 and grew out of the GATT.

Economies of Scale

Cost/unit goes down as production numbers increase.

Administrative Obstacles (Regulatory Barriers)

Government or administrative regulations / requirements that result in lower levels of imports; a most famous example is the case of French video imports from Japan that were required to pass inspection at the city of Poitiers. Often they purportedly aim to protect public health or the environment or workers' welfare while the true aim is to protect domestic businesses from foreign competition

Trade Creation

It is not a possible to judge whether a preferential trading agreement, such as a customs union, will increase or decrease efficiency. Trade creation is a result of the elimination of the internal trade barriers that leads members to import from one another goods and services that were previously not imported because of their tariffs. Trade creation is thus efficient since it means that production has shifted from a higher cost domestic producer to a lower cost foreign producer.

Free Trade

Refers to international trade (exporting and importing of goods and services) that is not subject to any form of protectionism (to any type of trade barriers). In terms of volume, trade has become more free as a result of the success of the GATT and its successor the WTO. World trade volume has increased by about 17 times since the early in the past 50 years. Also, world exports as a proportion of world output (GDP) had more than doubled since 1950.

Protectionism

Refers to the set of government policies that aim at restricting, or even eliminating, the flow of imports into a country and/or creating an artificial advantage to exporting firms.

Dumping

Selling goods below cost. This might be done to destroy the industry in another country in the short terms to create a monopoly in the long term.

Infant Industry Argument

The argument that the only way a developing country can create a competitive domestic industrial sector is if it blocks all competing imports with prohibitive tariffs until it becomes sufficiently efficient for trade barriers to be eliminated.

Factor Endowments

The land, labor, human capital, physical capital and entrepreneurship a country has at its disposal

Trade Diversion

The remaining though external tariff for non-members may lead one member (say A) to now import from another member (say B) what used to be imported from a non-member (say C) who had supplied the good at the lowest cost including the tariffs then levied to both (B and C) countries. Trade diversion is thus inefficient as it implies that production has been diverted to a higher country only because it is a member of the PTA.

Globalization

The widening, intensifying, speeding up, and growing impact of world-wide interconnectedness encompassing trade, finance and investments, production, ideas and culture etc. Driven by technological and political changes beginning in 1980s.

Anti-Dumping Duties

These refer to duties (taxes) that purportedly aim to create a 'level playing field'.

Specialization

When a factor of production is employed in the production of only one good or even a part of a good; results in increased levels of output.

Regional Economic Integration

When countries become members of limited, local trading blocks; more generally, the dismantling of trade and investment barriers coupled with the advances in communications, the internet and the lower cost of transport have accelerated the process of economic integration

Economic Union

When members of a customs union decide to integrate further, perhaps by harmonizing laws, taxation systems or even establishing a common currency

Common Market

When members of a customs union move forward to establish not only free trade in goods and services but also free movement of factors of production