World Trade A2 Economics - Why trade?

HWK owing… P476 – 478 notes: What is the WTO? What are the 2 main functions? Provide a balanced view about the criticisms of the role of the WTO.

Aims of today… To know what is meant by free trade Understand the benefits and costs of specialisation and trade To be aware of trading blocs

Free trade A range of definitions… A policy in which countries exchange goods, services, and money without applying restrictions or tariffs on imports or exports a complete lack of restrictions on international trade international trade, free of government interference Free trade is a type of trade policy that allows traders to act and transact without interference from government. Thus, the policy permits trading partners mutual gains from trade, with goods and services produced according to the theory of comparative advantage.

15 minute video…. Alex Tabarrok on how ideas trump crises = globalisation

What would you consider to be the benefits of FREE TRADE? Are there any problems?

Your task…. Does FREE TRADE generate benefits or costs for a country? Using your ‘cards’…. Decide whether each is a benefit or a cost of free trade. Be prepared to explain how FREE TRADE will create this ‘factor’

Your cards….

Benefits & Costs of Free Trade Benefits Specialisation Market contestability EoS Choice Innovation (dynamic efficiency) Reduces poverty Costs Over dependence Jobs Risk Distribution of income The environment Loss of sovereignty Loss of culture Remember that you can have a balanced viewpoint for short term v long term implications

Benefits & Costs of Free Trade

Benefits of trade Specialisation – comparative advantage means that world output is greater as a result of specialisation & trade between countries. Market contestability - trade promotes increased competition particularly for those domestic monopolies that would otherwise face little real competition EoS – can be maximised and so passing lower costs onto consumers. Choice – don’t have to rely on domestic production. Greater consumer welfare. Innovation (dynamic efficiency) – competition between countries / businesses generates need to reduce costs and so develop new ideas, technology etc. (North Korea as a counter-argument) Reduces poverty - trade can be a powerful force in reducing poverty and raising living standards

Costs of Trade Over dependence – especially for small countries (think back to buffer stocks & why they were needed) Jobs – international causes of unemployment / structural problems. AND global recession issues. Risk – over reliance on imports / exports can cause consumers problems when there are ‘significant’ changes in exchange rates and economic cycle slumps. Distribution of income – countries that trade well, their households obviously benefits, but those with no comparative advantage – face wider inequalities. The environment – over use of natural resources – deforestation, global footprints! Loss of sovereignty – country’s loose the ability to make decisions about issues that affect them. Loss of culture

Free trade & Economic diagrams

The welfare loss & gain from free trade Price Output (Q) Domestic Demand Domestic Supply Q1 P1 In the absence of trade This shows the original position Where is the consumer surplus? Where is the producer surplus?

The welfare loss & gain from free trade Price Output (Q) Domestic Demand Domestic Supply World supply QdQs Pw With international trade…. Why is world supply perfectly elastic? Why are imported goods so much cheaper?

The welfare loss & gain from free trade Price Output (Q) Domestic Demand Domestic Supply World supply QdQs Pw Imports Qd =domestic demand Qs = domestic supply Qs to Qd = imported goods

The welfare loss & gain from free trade Price Output (Q) Domestic Demand Domestic Supply World supply QdQs Pw Imports Who has gained from international trade? Who has suffered a welfare loss?

The welfare loss & gain from free trade Price Output (Q) Domestic Demand Domestic Supply World supply QdQs Pw Imports Where is the NEW consumer surplus? Where is the NEW producer surplus?

Evaluation issues What is the net gain? Has the welfare gain been greater or smaller than the welfare loss? This can be used as an argument for & against free trade…. Remember that where one country suffers, another must have gained!

Barriers to Free Trade Trading blocs

International Trade ‘action’ Unilateral action – where one country acts on its own! Bilateral action – joint agreement with one other country Multi lateral action - joint agreement with a number of other countries What do these terms mean?

International Trade ‘action’ Unilateral action – where one country acts on its own! Bilateral action – joint agreement with one other country. Multi lateral action - joint agreement with a number of other countries.

Trade blocs This is a group of countries that engage in international trade, who agree to make trade between themselves easier and to maintain barriers to trade with countries outside of the bloc

Trade groupings – remember these? ASEAN MERCOSUR NAFTA EU CIS WTO

Trade Groups… Free trade areas – group of countries that agree to trade without barriers between themselves, but maintain their own individual barriers with countries outside the area. E.g. NAFTA Customs unions - group of countries that agree to trade without barriers between themselves, AND gave a common trade barrier against the rest of the world eg. EU

The end of a free trade union. The 1st of January 2010 marks an important day in global trade economics. China, and 10 South-East Asian countries formally join together from today to scrap import tariffs. Duties will be scrapped on 90pc of goods traded across China, Indonesia, Malaysia, Singapore, Thailand, Brunei and the Philippines. Over the next five years, tariffs will also be removed. This BBC news report looks at the background. There is little doubt about the potential economic significance of this development. This new free trade area will embrace 1.9 billion people with trade worth around $200 billion. According to Reuters “China sees the agreement as a way of securing supplies of raw materials, while countries in ASEAN—an eclectic grouping ranging from highly advanced Singapore to Laos, a poor landlocked communist state—see opportunities in China’s huge market.”This BBC news report looks at the background China-ASEAN trade is targeted to hit $200 billion by 2010, up from $192.6 billion in 2008 and $113 billion in This will make it the third-largest free trade zone in trade volume after the European Economic Area and the North American Free Trade Area. The free trade area incorporates China and Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam (Ref: Tutor2U)

Your go… Textbook p 472 Q 1 Complete the Q’s a &b. On next slide…

More reading stmhttp://news.bbc.co.uk/1/hi/business/ stm /global/01trade.htmlhttp:// /global/01trade.html

Homework You need to know about different trading blocs… choose two of these to do some research: ASEAN MERCOSUR NAFTA CIS Where ‘is’ the trading bloc What type of ‘lateral’ action does it take (uni, bi or multi?) Find at least two areas of ‘protectionism’ that they have set up.

Trade Blocs – further research BBC Guide to the main world trade blocs The European Union (EU) – a customs union, a single market and now with a single currencyEuropean Union The European Free Trade Area (EFTA)European Free Trade Area The North American Free Trade Agreement (NAFTA)North American Free Trade Agreement Mercosur - a customs union between Brazil, Argentina, Uruguay, Paraguay and VenezuelaMercosur The Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA)Association of Southeast Asian Nations The Common Market of Eastern and Southern Africa (COMESA)Common Market of Eastern and Southern Africa The South Asian Free Trade Area (SAFTA) created in January 2006 and containing countries such as India and PakistanSouth Asian Free Trade Area