Trade policies and negotiations

Evaluation - response to these criticisms

- Failure of countries to agree tariff reduction in agriculture is not the fault of WTO, but countries themselves. - Free trade and growth of exports have been an important factor in raising living standards, especially in south-east Asia, which has benefitted from the remarkable growth of world trade. - The growth of world trade has helped reduce absolute poverty. - In recent years, the WTO has made more efforts to consider the situation of developing economies. Recent rounds have put pressure on developed countries to accelerate removing restrictions on imports from the least-developing countries. - The WTO has over 160 members representing 98 percent of world trade. Over 20 countries are seeking to join the WTO. - WTO has been given credit for helping to avoid trade disputes

Stages of economic integration (most to least incorporated)

- Free trade area - customs union - monetary union - economic union

Quotas vs Tariffs

- Quotas tend to cause a bigger fall in economic welfare because the government don't gain any tax revenue, that you get with tariffs. - Quotas allow the country to be certain on the number of imports coming in. Tariffs is more unknown because it depends on the elasticity of demand and how consumers and suppliers react to the tariff. - Quotas may be harder to enforce if it is difficult to count the amount of the good coming into the country. - Quotas could be more unfair. Some export firms may do well, if they get the quota allowance, but others may lose out. It becomes a political issue on how to distribute the quotas. Firms may also dislike the uncertainty of not knowing how many quotes to gain

Costs of a Single Market

- Structural Change due to increased specialisation - Adverse Regional multiplier effects. The creation of a single market tends to attract capital and jobs away from the periphery areas to the centre. - Development of Monopoly/ Oligopoly power - Trade Diversion. If external barriers remain high countries could lose out

Benefits of a Single Market

- Trade Creation. Exploitation of comparative advantage allows lower prices and costs. Leading to higher output and more employment - Reduction in the direct costs of barriers - Economies of scale from specialisation - Greater competition - Free movement of labour increases labour market flexibility and opportunities

Disadvantages of customs union

- administrative cost of running the union - A country can't negotiate separate deals because there is a common external tariff. This reduces economic and national sovereignty. Critics of the EU argue it has meant the UK has experienced higher food prices and reduced the welfare of low-income consumers who face higher prices. - A country cannot give preferential tariffs to a declining industry. For example, if UK steel industry was having difficulty the government might like to put tariffs on imports to protect domestic sales, however, in a customs union you can't choose to have this separate tariff. - Trade diversion. A common external tariff can lead to trade diversion. For example, when UK joined EEC, it had to raise tariffs on imports from the Commonwealth. This means higher prices for imports of butter and lamb.

economic and monetary union characteristics

- combines the common market arrangements with a shared currency - if common monetary policy is followed and it is desirable to harmonise other macroeconomic policies across the union -monetary policy is no longer able to be used for domestic purposes - there could be problems id countries are at different stages of the economic cycle

Argument against Protectionism Part 1

- countries which have plentiful cheap labour are often accused of unfair competition → high labour countries can find it difficult to compete → however, cheap labour is a source of CA for a country and it is a misallocation of resources if domestic consumers are forced to buy from higher wage domestic consumers are forced to buy from high wage domestic producers rather than low wage foreign producers countries may be better focusing on producers → countries may be better focusing on products in which they have a CA instead → LR producing CA global output rises - If protectionism is used, then other countries could retaliate, if they do, then all the countries in the ready war will suffer → production switches from lower to higher COP → resulting in a loss of welfare for consumers → the gains from trade resulting from CA will be lost → trade war → ↓ specialisation → ↓ global output

The cost of economic integration

- geographical concentration of industries → has advantages but may risk having the emergence of regions that attract lots of investment and jobs and other regions lag behind → result in significant structural and regional unemployment - allow for pattern of production to change → to benefit from specialisation and trade → industries will become exposed to competition and some areas and industries may suffer - Trade diversion → represent loss in income → from countries outride the integrated area → have serious effects on the countries in terms of lose export revenue, output and jobs → poor countries

Common or Single Market Characteristics

- harmonising some aspects if the economic environment eg tax rates and free movement of factors of production and labour - creates single borderless market to increase competition → ↑ flow of factors of production - there is more need to co-ordinate policies between member states - price differences between stated narrow → flow of goods, services, labour and capital

Arguments for Protectionism

- infant industries (no Eos) - face higher COP than foreign competition → lack Eos → can't compete with price → growth then the protectionist policy can be removed → help developing counties to diversify → however industries protected by trade barriers lack the competitive pressure needed to be efficient and may become x-inefficient and unable to compete - Preserve jobs - makes imported goods less attractive compared to domestic goods → ↑ AD if exports rise + imports ↓ → ↑ GDP → high employment has many benefits → ↓ consumer surplus → ↓ choice + ↑ P → less incentive to be competitive and develop more innovative or cheaper products → if can't produce goods at competitive price then country shouldn't produce if its not CA or AA

Argument against Protectionism Part 2

- protectionism will be less effective if the PED for import & exports are price inelastic → this is likely to occur in the short-term → as it takes time for producers and consumers to change in their buying habits - protectionism may delay structural change for an economy to develop new specialisations → there needs to be a transitional process this is painful in the short-run but essential in the long-run - BOP improved through SSP rather than protectionism

Advantages of a customs union

- reduction in monopoly power - integration erodes the power of domestic monopolies because they can no longer exploit their market position → price transparency improves → leading to increased consumer choice → ↓ P are greater allocative efficiency → businesses have to deal with increased competition not only from other firms domestically, but also from firms in the integrated areas → also from firms outside the area who have been attracted to locate in the integrated area → the competitive environment is beneficial for economic efficiency → but may prevent a country from developing infant industries - Greater innovation (R&D) → competition between producers in a an economically integrated area can mean that more products and process innovation occurs → benefits consumers, but will also mean that the economies in the integrated area will also grow in the long term → more non-price competition well as the price competition discussed earlier → ↓ P → ↑ choice → productive, allocative and x-efficiency - larger market and Eos → scale of production raised → firms can benefit from internal and external EOS → regional concentration of industry, which will bring cost advantages, in terms of access to specialist suppliers → skilled labour and the sharing of knowledge → EOS will also lead to there being more competitive trade with countries outside of the integrated area → due to the EOS, some firms have had to join together so they can compete more efficiently

Free trade area characteristics

- removal of tariffs and quotas between members - members have their own restrictions on products from non-members - weakest form of integration - non-tariff berries still exist ( eg difference safety regulation) - FTA limited range of goods - Trade deflected as imports from non-members enter FTA via country with lowest tariff and are re-exported tariff free → rules needed to prevent this

Customs union characteristics

- removes tariffs and quotas between members - common policy against non-members - countries sacrifice some of their economic sovereignty due to external trade policy - avoid trade deflection - non-trade barriers still used

Disadvantages of EU membership Part 1

1. Cost. The costs of EU membership to the UK is £15bn gross (0.06% of GDP) - or £6.883 billion net. 2. Inefficient policies. A large percentage (40%) of EU spending goes on the Common Agricultural Policy. For many years this distorted agricultural markets by placing minimum prices on food. This lead to higher prices for consumers and encouraging over-supply. Reforms to CAP have reduced, but not eliminated this wastage. A significant existing problem with CAP is that it has rewarded large land-owners, with little reflection of social benefit. 3. Problems of the Euro. Membership of the EU doesn't necessarily mean membership of the Euro. But, the EU has placed great emphasis on the single currency. However, it has proved to have many problems and contributed to low rates of economic growth and high unemployment across the EU.

Benefits of improving international competitiveness

1. Exports relatively cheaper leading to higher demand for exports. Export-led growth has been a significant factor in Chinese economic growth. 2. Higher exports will help increase aggregate demand and economic growth 3. Improved competitiveness will help improve a country's current account deficit. 4. Create jobs in the export sector 5. Help to reduce inflation in the economy.

Criticisms of WTO Part 1

1. Free Trade benefits developed countries more than developing countries. It is argued, developing countries need some trade protection to be able to develop new industries; this is important to be able to diversify the economy. It is known as the infant industry argument. 2. Most favoured nation principle. This is a core tenant of WTO rules - countries should trade without discrimination. It means a local firm is not allowed to favour local contractors. It is argued this gives an unfair advantage to multinational companies and can have costs for local firms and the right of developing economies to favour their own emerging industries. 3. Failure to reduce tariffs on agriculture. Free trade is not equally sought across different industries. Both the US and EU retain high tariffs on agriculture, this hurts farmers in developing economies who face tariff protection

Factors influencing international competitiveness Part 1

1. Labour productivity (output per worker). If German productivity rises faster than the UK, we would expect Germany to become more competitive. Labour productivity will depend on factors such as: • Levels of education and training. • Mobility of labour. High mobility will increase overall productivity. • Motivation of workers. If workers enjoy work and feel part of the process, productivity will be higher. • Successful implementation of technology will help productivity. 2. Relative inflation rates. If the UK experiences lower inflation than our main competitors, this will reduce our relative costs and make us more competitive. Evaluation - low inflation may be offset by an appreciation in the currency. Although Japan has had the lowest inflation rate in this period, it also saw an appreciation in the value of the Yen. Therefore, the gains from lower inflation were offset by the stronger currency.

Benefits of EU membership

1. More trade and gains from comparative advantage. For the UK the EU is our main trading partner (roughly 60% of trade with EU). 2. Greater competition, increasing efficiency, and reducing prices. 3. Lower costs for firms to have common rules and regulations, e.g. acceptance of educational qualifications. 4. Increased direct investment, which helps promote better efficiency. 5. Greater clout for international trade negotiations. 6. Countries may benefit from more flexible labour markets, as workers can migrate to fill labour shortages, e.g. UK benefited from Eastern European workers filling in vacancies in the service sector. 7. By staying out of the Eurozone, the UK has avoided problems of single currency and common monetary policy.

Benefits of EU Membership for Eastern European countries Part 1

1. Political Stability and greater integration amongst European states 2. Increased Trade. This will lead to advantages such as lower prices for consumers and more exports for industries with a comparative advantage. 3. Increased competition 4. Increased Inward Investment. This will be because of greater stability in the economy, lower trade costs and greater harmonization. The benefits of this include a positive regional multiplier and greater technical assistance 5. Social Policy's and subsidies. New countries will benefit from Regional, Social and CAP.

WTO policies

1. Promote free trade through gradual reduction of tariffs 2. Provide legal framework for negotiation of trade disputes. This aims to provide greater stability and predictability in trade. 3. Trade without discrimination - avoiding preferential trade agreements. 4. WTO is not a completely free trade body. It allows tariffs and trade restrictions under certain conditions, e.g. protection against 'dumping' of cheap surplus goods. 5. WTO is committed to protecting fair competition. There are rules on subsidies, dumping 6. WTO is committed to economic development. For example, recent rounds have put pressure on developed countries to accelerate restrictions on imports from the least-developing countries.

Reasons for imposing tariffs

1. Raise revenue. If a country produces no oil, levying a tax on oil imports will raise money as people have no alternative put to pay the import tariff. 2. Environmental. A tariff could be placed on goods who may have negative externalities. e.g. 3. Protectionism. The most common reason for a tariff. Imposing import tariffs makes domestic firms more competitive.

Benefits of free trade Part 1

1. Reducing tariff barriers leads to trade creation. Trade creation occurs when consumption switches from high cost producers to low cost producers, enabling an increase in economic welfare. 2. Increased exports. If UK firms have a comparative advantage then, with lower tariffs, they will be able to export more, and create more jobs. 3. Economies of scale. If countries can specialise in certain goods, they can benefit from economies of scale and lower average costs. This is especially true in industries with high fixed costs, or those that require high levels of investment.

Government Policies to Improve International Competitiveness in the UK

1. Supply Side Policies 2. Encouraging Inward Investment. The Govt has done this through offering tax incentives and very cheap loans. However under EU law this is supposed to be illegal because it is encouraging unfair competition. 3. Devaluation. This provides a temporary boost, but is unlikely to be a long term solution as repeated devaluations can cause inflation. Note this would be impossible under the EURO. 4. Membership Of the Euro. It is argued a single currency would improve the competitiveness of the UK because it would reduce transaction costs on trade.

Reasons for removing tariffs

1. Trade liberalisation involves removing barriers to trade such as tariffs on imports. 2. Free Trade areas will have no tariffs between member states, though they may have a common external tariff if it is a customs union. 3. Lower prices for consumers 4. Increase specialisation and benefits from economies of scale. 5. Theory of comparative advantage states net welfare gain from free trade. 6. The reduction of tariffs leads to trade creation.

Arguments for restricting trade Part 1

1• Infant industry argument. If developing countries have industries that are relatively new then, at that moment, these industries would struggle against international competition. Therefore, they need tariff protection while they develop their industries to be more competitive. 2• The senile industry argument. If industries are declining and inefficient, they may require a large investment to make them efficient again. Protection for these industries could act as an incentive for firms to invest and reinvent themselves. 3• Need to diversify the economy. Many developing countries rely on producing primary products, in which they currently have a comparative advantage. However, relying on agricultural products has several disadvantages: o Prices can fluctuate due to environmental factors. o Goods have a low income elasticity of demand. Therefore, even with economic growth, demand will only increase a little.

Factors influencing international competitiveness Part 2

3. Unit labour costs. The full cost of employing workers, including wages, taxes and regulations. 4. Levels of infrastructure (e.g. transport, communication). If a country experiences transport bottlenecks, it will lead to higher costs of business and lower competitiveness. 5. Cost of business. Levels of regulation and taxes. High taxes and regulated labour markets can reduce competitiveness. 6. Exchange rate. An undervalued exchange rate will make exports more competitive. Evaluation - A depreciation may improve the competitiveness of exports. However, it will also increase the cost of importing raw materials, so firms who rely on imports will also see higher costs. Also, a country may experience a depreciation because it is uncompetitive and its goods are in less demand.

Criticisms of WTO Part 2

4. Diversification. Arguably developing countries who specialise in primary products (e.g. agricultural products) need to diversify into other sectors. To diversify they may need some tariff protection, at least in the short term. Many of the existing industrialised nations used tariff protection when they were developing. Therefore, the WTO has been criticised for being unfair and ignoring the needs of developing countries. 5. Environment. Free trade has often ignored environmental considerations. e.g. Free trade has enabled imports to be made from countries with the least environmental protection. Many criticise the WTO's philosophy that the most important economic objective is the maximisation of GDP. In an era of global warming and potential environmental disaster, increasing GDP may be the least important. Arguably the WTO should do more to promote environmental considerations. 6. Free trade ignores cultural and social factors. Arguably a reasonable argument for restricting free trade is that it enables countries to maintain cultural diversity. Some criticise the WTO for enabling the domination of multinational companies which reduce cultural diversity and tend to swamp local industries and firms. 7. The WTO is criticised for being undemocratic. It is argued that its structure enables the richer countries to win what they desire; arguably they benefit the most. 8. Slow progress. Trade rounds have been notoriously slow and difficult to reach an agreement.

Benefits of free trade Part 2

4. Increased competition. With more trade, domestic firms will face more competition from abroad and, therefore, there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices. 5. Trade is an engine of growth. World trade has increased by an average of 7% a year since 1945; it is a big contributor to global economic growth. 6. Make use of surplus raw materials. Countries with large reserves of raw materials need trade to benefit from their natural wealth.

Disadvantages of EU membership Part 2

4. Pressure towards austerity. Since 2008, many southern European countries have faced pressure from the EU to pursue austerity - spending cuts to meet budget deficit targets, but in the middle of a recession these austerity measures have contributed to prolonged economic stagnation. 5. Net migration. Free movement of labour has caused problems of overcrowding in some UK cities. The UK's population is set to rise to 70 million over the next decade, partly due to immigration (of which 50% is from EU and 50% from non-EU). Immigration has helped to push up house prices and led to congestion on roads. 6. More bureaucracy less democracy. It is argued that the EU has created extra layers of bureaucracy while taking away the decision-making process further from local communities. For example, the British Chambers of Commerce has estimated that the annual cost to the UK of EU regulation is £7.4bn. The introduction of Qualified majority voting (QMV) means that on many decisions votes can be taken against the public interest of a particular country.

Arguments for restricting trade Part 2

4• Protection against dumping. The EU sold a lot of its food surplus from the CAP at very low prices on the world market. This caused problems for world farmers because they saw a big fall in their market prices. Tariffs can protect against dumping. 5• Environmental. It is argued that free trade can harm the environment because countries with strict pollution controls may find that consumers import the goods from other countries where legislation is lax and pollution is allowed.

Benefits of EU Membership for Eastern European countries Part 2

6. These gains may be increased by the multiplier effect 7. The extent of the gains may depend upon the existing infrastructure of the economy. For example if transport links are inefficient and under developed then the gains from trade will be lower. The infrastructure of the economy will also affect the success of attracting inward investment 8. The large disparities between the East and West may require subsidies to even out the imbalance, this would make integration more successful 9. Recent economic developments have been encouraging, with many economies growing at a fast rate in the East, but with low rates of inflation 10. Some progress toward greater harmonization has been made, Tariffs on manufacturers have been cut. However because of CAP there are still high tariffs on imports from Eastern Europe

Factors Affecting UK competitiveness

Factors that effect the competitiveness of the UK economy. 1. Productivity. An increase in Labour productivity would reduce unit costs and therefore make UK goods more attractive 2. Relative Inflation Rates. If the UK inflation rate was higher than abroad, UK goods would become less competitive 3. Exchange Rates A depreciation in the value of Sterling would cause UK exports to become cheaper and more competitive. However in the long run this may cause an increase in inflation. Because 1) less incentives to cut costs 2) Imports more expensive. 4. Labour Market Flexibility If the UK has many regulations about working practices this makes it more expensive to produce goods, thereby reducing UK competitiveness. This is why initially the UK opted out of the Social Charter. 5. Tax Rates. High tax rates for individuals and firms will reduce competitiveness 6. Infrastructure. An inefficient transport system would increase costs and therefore make goods more expensive 7. Economic Development in other countries.

Quotas diagram Part 2

Imposing a quota (Q2-Q3) - fall in imports Q3-Q2 - domestic suppliers gain revenue → ↑ P to P quota+domestic suppliers, supply more Q1 to Q2 → ↑ domestic jobs - Consumers pay a higher price & also total quantity ↓ Q4 to Q3 - gov not affected directly, as there is no income. - There is a net welfare loss to society because the increase in producer surplus is outweighed by the decline in consumer surplus. - World exporters will make less revenue - unless demand is very inelastic, meaning increase in price is greater than fall in quantity.

Problems of trade creation

Often domestic job losses are more visible, than the gains from cheaper prices. If domestic producers lose out significantly, this may have a higher political impact than slightly lower prices for the majority of the population. It could lead to structural unemployment as the unemployed workers struggle to find jobs in new export industries.

monetary union

a situation in which countries adopt a common currency

Tariff diagram

Tariffs are an important barrier to free trade; they are often imposed to protect domestic industry from cheap imports. However, it often leads to retaliation with other countries placing tariffs on their exports. - In this case, the tariff is P1-P2. - The tariff leads to a decline in imports. Imports were Q4-Q1. After the tariff, imports fall to Q3-Q2. - Consumer surplus falls by 1+2+3+4 - Government raises tariff revenue of area 3 - Domestic suppliers gain an increase in producer surplus of area 1 - The net welfare loss is (1+2+3+4) - (1+3) = 2+4

International competitiveness

The UK's international competitiveness measures the relative cost of British exports. If UK goods and services become more expensive than our competitors, then we see a decline in competitiveness.

Tariff

a tax imposed on imported goods

Trade Creation

Trade creation refers to the increase in economic welfare from joining a free trade area, such as a customs union. Trade creation will occur when there is a reduction in tariff barriers, leading to lower prices. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare. However, the diagram shows there is a net gain from removing tariff barriers. Domestic producers will sell less as consumers buy cheaper imports (decline in producer surplus is shown by area 1) Government lose tax revenue (from import tariffs) (shown by area 3) Net welfare gain. The net welfare gain is equal to area 2+4 (increase in consumer surplus - tariff revenue and producer surplus)The impact of trade creation will depend upon:The elasticity of demand and supply. If demand and supply are inelastic, the net gain will be much lower. The removal of tariffs leads to lower prices for consumers (P1 - P2) and an increase in consumer surplus (1+2+3+4). • The government will lose tax revenue of area 3. • Domestic firms will sell less and lose producer surplus of area 1. • There will be an increase in overall economic welfare of: (2+4).

Quotas diagram Part 1

Without quotas: - market = Pw - Quantity imports = Q4- Q1 - World exporters revenue = A+B+C

Customs union

a group of countries that agree to remove restrictions on trade between the member countries, and set a common set of restrictions (including tariffs) against non-member states

Free trade area

a group of countries that agree to remove tariffs, quotas and other restrictions on trade between the member countries, but have no agreement on a common barrier against non-members

Common Market or Single Market

a set of trading arrangements in which a group of countries remove barriers to trade among them, adopt a common set of barriers against external trade, establish common tax rates and laws regulating economic activity, allow free movement of factors of production between members and have common public sector procurement policies

economic and monetary union

a set of trading arrangements the same as for a common market, but in addition having a common currency (or permanently fixed exchange rates between the member countries) and a common monetary policy

Emerging Economies

countries have accelerated in terms of growth and development

Protectionism

represents any attempt to impose restrictions on trade in goods and services

Trade Diversion

the replacement of cheaper imported goods by goods from a less efficient trading partner within a bloc

Quotas

when imports of a commodity are limited to a given volume

Measures to increase competitiveness Part 2

• Devaluation in exchange rate. This gives a temporary boost to competitiveness, as exports are cheaper. However, it doesn't deal with underlying issues of competitiveness, such as productivity and wage costs. Devaluation can also lead to inflation, which undermines competitiveness in the long run. • Limiting wage growth. Lower wage costs are important for improving competitiveness in many industries. However, it can be difficult for the government to limit wages. Also, it may be better to try to increase labour productivity, rather than rely on low wages to increase competitiveness.

Measures to increase competitiveness Part 1

• Education and training. This increases labour productivity and makes labour markets more flexible. Education can take several years to have an effect but is important for increasing long-term productivity. • Investment in infrastructure e.g. better transport links. This helps reduce costs for firms and improves productivity in the economy. However, it is expensive, takes time and there is a danger of government failure, e.g. spending on the wrong kind of infrastructure. • Privatisation and deregulation. This aims to increase efficiency from the incentives of competition and the private sector profit motive.

Evaluation of EU membership

• Free movement of labour can cause friction and concerns about over- population and demands on housing. • Countries with large agricultural sectors tend to benefit from large agricultural subsidies. • Countries in south, e.g. Greece, Spain and Italy, have struggled to cope with Euro and common monetary policy. • Some fear EU makes it more difficult to reach consensus because of the large number of countries.

What are some protectionist policies

• Higher tariffs (type of tax on imports) • Non-tariff barriers, e.g. the US have charges on packages under grounds of 'aviation security', and this increases the costs of imports. Other rules and regulations can make trade more difficult. • Voluntary export restraint is effectively a type of quota where voluntary limits are placed on imports of goods. • Embargo, e.g. US embargo with Cuba. • Government subsidy. Government subsidies effectively give the firm an unfair competitive advantage. This has often occurred with national airlines. • Distorted exchange rate. Keeping your currency artificially low makes exports relatively more competitive.

How to measure international competition?

• Unit labour costs - costs of employing workers to produce goods • Relative prices of exports and imports.