1. International Economics
Topic 2
Free Trade & Protectionism
Niels Brock Summer 2013
Course Advanced Diploma Management

2. Names
Write names on folded piece of paper

3. REVISION
Topic 1 Why Do Countries Trade?
Questions from readings?

4. Topic 2 Free Trade & Protectionism
International Organisations and Agreements
Free Trade
Arguments for Protectionism
Arguments against Protectionism

5. CHINA
Is CHINA a super power just because it has cheap labour?
                                     

6. CHINA China has 19% of the world’s population, but consumes
53% of the world's cement
48% of the world's iron ore
47% of the world's coal 
And the majority of just about every other major commodity.
In 2010, China produced
11 times more steel than the
United States
                                     

7. CHINA
New World Record: China made and sold 18 million vehicles in 2010.
                                     

8. CHINA
There are more pigs in China than in the next 43 pork producing nations combined.
                                     

9. CHINA
China has the world’s fastest train and the world’s largest high-speed rail network
                                     

10. CHINA They manufacture 80% of the world’s solar panels,
They install less than 5% and build a new coal fired power station every week.
In 1 year they turn on more new coal powered electricity than Australia 's total output.
                                     

11. CHINA
China currently controls more than 90% of the total global supply of rare earth elements.
                                     

12. CHINA
In the past 15 years, China has moved from 14th place to 2nd place
in the world in published scientific research  articles.
                                     

13. CHINA
China possesses the fastest supercomputer on the entire globe.
                                     

14. CHINA
Chinese consume 50,000 cigarettes every second
                                     

15. CHINA
At the end of March 2011, China accumulated US$3.04 trillion in foreign currency reserves - the largest stockpile on the entire  globe.
                                     

16. U.S. Debt
In 2011, spending in Washington, and the months-long political wrangling has almost certainly done damage to their struggling economy.
The deal passed by Congress and signed Tuesday by President Barack Obama increases the debt limit by more than $2 trillion.
It also calls for cuts in government spending of at least $2.1 trillion. But those cuts are spread out over the next 10 years. Only $25 billion will be cut next year.
The legislation also sets up a 12-member congressional panel tasked with finding an additional $1.5 trillion in savings over the next 10 years. The panel is supposed to present a report by Thanksgiving.
So how much is $1 Trillion?.....

17. $100 bill

18. $USD 10,000

19. $1 Million (100 packets of $10K)

20. $100 Million

21. $1 BILLION

22. $1 TRILLION? a million million. It's a thousand billion.$
Ladies and gentlemen. I give you $1 trillion dollars.

23. $1 TRILLION
And notice those pallets are double stacked.

24. US debt
16.6 trillion 

25. Trade Organisations and Agreements
International Economics

26. Cooperative trading arrangements

27. World Trade Organisation is the peak body for managing world-wide trade
Membership based
Sets rules
Resolves disputes
Hosts negotiation “rounds” (most recent was Doha round)
Strategically reduces global tariffs
Previously GATT (Global Agreement on Tariffs and Trade)
Is required to cooperate with other worldwide insititutions IMF and World Bank
Organisations - WTO

28. Research the most recent Doha trade negotiations at wto
Research the most recent Doha trade negotiations at wto.org and discover:
How have the negotiations progressed?
What are the problems with coming to agreement?
Some research

29. Other trade-related organisations
International Monetary Fund
International organisation that focusses on stabilising global monetary and financial systems with mandate to focus on trade, stabilising exchange and Balance of Payments
Common members (approximately 150) with WTO and has observer status in WTO
Inputs to WTO policy debates and decisions (via research)
World Bank
Provides finance to developing countries to reduce poverty
OECD
Economic Forums
G20 G8 EU
APEC (Asia Pacific Economic Cooperation)
EFTA (Euro Free Trade Association)
Others
Other trade-related organisations

30. Research – GROUP ACTIVITY
How does the WTO and IMF work together?
What does the OECD do?
Who are in the G20, G8, EFTA and APEC and what do they do?
What are some of the other forums designed to improve trade and trade relations?
Research – GROUP ACTIVITY

31. Levels of trading agreements
Bilateral
Regional (often via trade cooperation forums)
Multilateral (usually under the auspices of WTO)
Levels of trading agreements

32. Multilateral trade agreements and the WTO
Questions
Summarise in your own words the main points from this forum
What are the stated achievements of multilateral trade agreements via the WTO (and GATT) processes?
Does the panel believe that world trading system has benefitted both developed and developing economies? What arguments do they put forward.
Multilateral trade agreements and the WTO

33. Research - Free Trade in Denmark and the EU
Who do the EU and Denmark have trade agreements with?
What type are they?
Any currently in negotiation?
Research - Free Trade in Denmark and the EU

34. TRADE
The Australian experience

35. Australia’s major trading partners 2010-11
Export market
Import market
China (23.7%)
Japan (16.4%)
Republic of Korea (8.2%)
India (6.1%)
United States (4.8%)
New Zealand (3.7%)
United Kingdom (3.6%)
Taiwan (3.2%)
Singapore (2.8%)
Thailand (2.7%)
APEC 75.3% ASEAN 11.1%
EU 8.8% OECD 43.8%
TOTAL EXPORT VALUE AUD$297.5b
China (15.5%)
United States (13.1%)
Japan (6.8%)
Singapore (5.5%)
Germany (4.2%)
Thailand (4.0%)
United Kingdom (3.8%)
New Zealand (3.6%)
Malaysia (3.6%)
Indonesia(2.8%)
APEC 70.9% ASEAN 14.4%
EU 13.5% OECD 46.3%
TOTAL IMPORT VALUE AUD$276.6b
Australia’s major trading partners
Source DFAT 2012

36. Australia top two-way trading partners 2010-11
China 19.7%%
Japan 11.8%
United States 8.8%
Republic of Korea 5.5%
Singapore 4.1%
United Kingdom 3.7%
New Zealand 3.7%
India 3.7%
Thailand 3.3%
Malaysia 2.7%
Australia top two-way trading partners
Source: DFAT 20012, ABS catalogue (2012)

37. Australia’s top exports 2010-2011
Iron ore & concentrates
Coal
Education-related travel service
Gold (b)
Personal travel (excl education) services
Crude petroleum
Natural gas
Wheat
Aluminium ores & conc (incl alumina)
Copper ores & concentrates
Aluminium
Beef,
Copper
Technical & other business services
Medicaments (incl veterinary)
Business travel services
Professional services
Passenger transport services (d)
Refined petroleum
Wool & other animal hair (incl tops)
Australia’s top exports

38. Australia’s top imports 2010-11
Personal travel (excl education) services
Crude petroleum
Passenger motor vehicles
Refined petroleum
Freight transport services
Medicaments (incl veterinary)
Telecom equipment & parts
Computers
Passenger transport services
Goods vehicles
Gold
Technical & other business services
Charges for intellectual property
Civil engineering equipment & parts
Business travel services
Furniture, mattresses & cushions
Measuring & analysing instruments
Professional services
Vehicle parts & accessories
Monitors, projectors & TVs
Australia’s top imports

39. Australia’s bilateral FTAs
We currently have Free Trade Agreements with:
USA
Singapore
Thailand
Chile
NZ (closer economic relations)
We are currently negotiating FTAs with:
ASEAN nations (negs completed)
China
Malaysia
Japan
Korea
Gulf states (Bahrain, Kuwait, Oman, Qatar, UAE)
We are considering FTA’s with India and Indonesia
Australia’s bilateral FTAs

40. Finalise research on your countries and their trade agreements:
Are they members of WTO?
Are they members of any other forums?
Who do they have bilateral or regional agreements with and in what products and services?
Assignment research

41. Other good learning sites from the WTO
Other good learning sites from the WTO

42. Free trade, fair trade and strategic trade
Economists argue that international trade should be based on comparative advantage and free trade.
Free trade is the flow of goods and services between countries without restrictions or special taxes
Fair trade is the flow of goods and services with countries that do not have an ‘unfair’ competitive advantages (and is also willing to reduce trade barriers). There is an alternative definition of “fair trade” (i.e. non-exploitation of developing economies) which will be discussed in the next few weeks.
Strategic trade is where governments facilitate certain sectors of the economy and industries that have export potential

43. Benefits of free trade
Free trade helps to bring lower prices, greater choice for consumers and lower input prices for firms using imported factors.
Higher spending power within the economy may also stimulate growth in other industries.
But…. moving towards free trade may have short-term adjustment problems.

44. Arguments for free trade
Provide consumers with lower prices
Extra buying powers of consumers stimulates growth in other areas of the domestic economy (with the resulting increase in employment, investment etc.)
Allows local industries to purchase raw materials and intermediate goods more cheaply, lowering the cost of production, thus making the end price of goods more competitive on the domestic and international market (lower input prices)

45. Arguments against free trade
Puts local industries out of business as they cannot compete on price (higher labour costs)
May reduce income of employees, or lead to job loss (with consequent impact on consumption, prices and employment)

46. Protectionism
Protectionism uses restrictions to protect domestic producers from foreign competition, including
Embargoes: laws that bar trade with another country.
Tariffs: taxes on imports.
Quotas: limits on the quantity of a good that may be imported (variation is voluntary export restraint)

47. More forms of protectionism
Other forms of protectionism are export subsidies and product standard requirements
Subsidies are grants or other funding given to firms or industries that compete with imported goods to allow them to keep input costs and prices down.
Product standards provide restrictive rules on imported goods such as safety requirements, product features, and packaging requirements (which may increase input costs due to “red tape”)
Protectionism reduces international trade

48. Arguments for protectionism
Protecting employment in industries affected by foreign competition
To compete with countries that use anti-competitive “cheap labour”
Protecting new or ‘infant’ (sunrise) industries, which have not yet grown to a size big enough to allow them to compete
To avoid the risks of over-specialisation, so as not to be over-dependent on the export of one or two products
Maintaining industries which are considered strategic, e.g. food supplies, defence supplies, energy supplies (sometimes called the “national security” argument)
reducing imports in order to improve a weak balance-of payments position
retaliating against those countries which protect their industries and markets
To increase government revenue (increasing tariffs means increasing tax income for the government)

49. Arguments for protectionism
preventing dumping; dumping is the selling of goods, by foreign producers, at prices below the cost of production; this may be done to gain a foothold in new markets or to get rid of surpluses
helping the environment, e.g. banning the import of hardwoods from tropical rain forests; products from rare animals, e.g. rhino horn, furs.
To protect product standards
protecting consumers from harmful products, e.g. illegal drugs, dangerous animals, poor quality foods etc.
exerting political pressure, e.g. the US embargo on Cuba, UN embargo on Iran
These arguments are especially strong during times of economic decline (pressure on jobs and failing companies/industries etc. due to economic downturn)
All of these arguments only receive weak support from economists as ANY intervention into the market creates inefficiency
//LAST SLIDE TAUGHT 26/2/13

50. Arguments against protectionism
Supports industries that are not economically viable or efficient
Less consumer choice
Reduces competition
Increases prices
Distorts comparative advantage (reduces specialisation and thus world output)
May result in “retaliation” from other countries (reducing export potential)

51. Activity Student workpoint 22.1, p. 270 of textbook
Article: EU imposes long-term tariffs on Asian shoes
In groups, answer the following
Define dumping
Outline the arguments for and against the European imposition of tariffs on Chinese and Vietnamese shoes
Present your findings to the class

52. Activity
Student workpoint 22.2, p.271 of text RESEARCH – Environmental standards as a barrier Discuss in your groups then share with the class

53. Discussion
Who is advantaged and who is disadvantaged by the introduction of the following protectionist measures:
Tariffs
Subsidies
Quotas
Embargoes
Product standard requirements
Consider why each of these parties advantaged or disadvantaged

54. Next week
Free trade agreements
International trade organisations

55. Research for this week
Complete your research from last week (data required for the report)
Research what protectionism measures your three countries use (use domestic government websites for this if you can – they will be more up to date).
Note down the reasons for the various trade restrictions perhaps using the “arguments for protectionism” list in this class presentation
Think about whether these are good reasons for reducing trade (see if you can research or come up with arguments for and against the particular form of protectionism)

56. Clips http://www.youtube.com/watch?v=9rgdahE5t3o

57. Effect on Aggregate Supply and Demand from protectionism

58. Culbertson Article (HBR)
Questions to consider
Why does Culbertson argue that international trade IS NOT governed by comparative advantage ? (p.124) Do you find this argument compelling? Why or why not?
Is cost-cutting possible to assist countries to compete internationally and does it produce efficiencies in the market?
How valid do you think his argument is for not allowing developing countries free access to the US market?
What are the key recommendations about US trade policy (for 1986 hence). Is this what you would recommend? Why or why not?
What is the key message from this article?
Are these arguments as valid today as in 1986? Why or why not?

59. The effect of protectionism
Various forms of protectionism will shift the shift the supply curve
You will see from the Blink and Dorton handout that there is:
a shift along the curve with tariffs (due to simple change in price)
A shift in the supply curves for subsidies and quotas

60. Costs and Benefits of Tariffs
A tariff raises the price of a good in the importing country, making its consumer surplus decrease (making its consumers worse off) and making its producer surplus increase (making its producers better off).
Also, government revenue will increase.

61. Costs and Benefits of Tariffs (cont.)

62. Costs and Benefits of Tariffs (cont.)
For a “large” country that can affect foreign (world) prices, the welfare effect of a tariff is ambiguous.
The triangles b and d represent the efficiency loss.
The tariff distorts production and consumption decisions: producers produce too much and consumers consume too little compared to the market outcome.
The rectangle e represents the terms of trade gain.
The terms of trade increases because the tariff lowers foreign export (domestic import) prices.

63. Costs and Benefits of Tariffs (cont.)
Government revenue from the tariff equals the tariff rate times the quantity of imports.
t = PT – P*T
QT = D2 – S2
Government revenue = t x QT = c + e
Part of government revenue (rectangle e) represents the terms of trade gain, and part (rectangle c) represents part of the value of lost consumer surplus.
The government gains at the expense of consumers and foreigners.

64. Costs and Benefits of Tariffs (cont.)
If the terms of trade gain exceeds the efficiency loss, then national welfare will increase under a tariff, at the expense of foreign countries.
However, this analysis assumes that the terms of trade does not change due to tariff changes by foreign countries (i.e., due to retaliation).

65. Costs and Benefits of Tariffs (cont.)

66. Subsidies
Where subsidies are paid to local firms to make them more competitive in the local market the domestic supply curve will shift downwards by the amount of the subsidy.
(See Blink and Dorton summary for S+D curves)

67. Export Subsidy An export subsidy can also be specific or ad valorem
A specific subsidy is a payment per unit exported.
An ad valorem subsidy is a payment as a proportion of the value exported.
An export subsidy raises the price of a good in the exporting country, making its consumer surplus decrease (making its consumers worse off) and making its producer surplus increase (making its producers better off).
Also, government revenue will decrease.

68. Export Subsidy (cont.)
An export subsidy raises the price of a good in the exporting country, while lowering it in foreign countries.
In contrast to a tariff, an export subsidy worsens the terms of trade by lowering the price of domestic products in world markets.

69. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
Export Subsidy (cont.)

70. Import Quota
An import quota is a restriction on the quantity of a good that may be imported.
This restriction is usually enforced by issuing licenses to domestic firms that import, or in some cases to foreign governments of exporting countries.
A binding import quota will push up the price of the import because the quantity demanded will exceed the quantity supplied by domestic producers and from imports.

71. Import Quota (cont.)
When a quota instead of a tariff is used to restrict imports, the government receives no revenue.
Instead, the revenue from selling imports at high prices goes to quota license holders: either domestic firms or foreign governments.
These extra revenues are called quota rents.

72. US Import Quota on Sugar
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
US Import Quota on Sugar

73. Voluntary Export Restraint
A voluntary export restraint works like an import quota, except that the quota is imposed by the exporting country rather than the importing country.
However, these restraints are usually requested by the importing country.
The profits or rents from this policy are earned by foreign governments or foreign producers.
Foreigners sell a restricted quantity at an increased price.

74. Homework for next week Read chapter 22 of Blink and Dorton (2011)
Attempt the activities in the Chapter

75. //LAST SLIDE TAUGHT 22/2/13 NB 2X Thank You! Coming weeks
Topic 2, Ch 22:
Free Trade and Protectionism
//LAST SLIDE TAUGHT 22/2/13
NB 2X

76. //LAST SLIDE TAUGHT 20/7/11

77. SEND NOTES to
DIST LIST

78. APPENDIX – additional slides