7.4 Trade policies and economic integration

International trade policies shape global economic interactions. From protectionist measures like tariffs to liberalization efforts through free trade agreements, these policies impact prices, competition, and resource allocation. They reflect the ongoing debate between protecting domestic industries and embracing global market forces.

Trade agreements and organizations like the WTO facilitate economic integration. Regional trade blocs, such as NAFTA and the EU, have reshaped trade patterns and development. These arrangements offer benefits like increased market access but can also lead to uneven outcomes among member countries.

Trade policy types and implications

Trade protectionism

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Top images from around the web for Trade protectionism

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  Tariffs vs. Quotas | Marginal Revolution University View original

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  Introduction to the Trade Barriers and Protectionism | Macroeconomics View original

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  Tariffs vs. Quotas | Marginal Revolution University View original

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• Trade protectionism involves policies that restrict or discourage international trade to protect domestic industries from foreign competition
  • Tariffs are taxes imposed on imported goods, making them more expensive and less competitive compared to domestic products (e.g., US tariffs on Chinese steel)
  • Quotas are quantitative restrictions that limit the amount of a specific good that can be imported into a country (e.g., EU quotas on imported bananas)
  • Subsidies are government financial support given to domestic producers, allowing them to lower their prices and gain a competitive advantage over foreign producers (e.g., US subsidies for agricultural products)
• Trade protectionism may lead to higher prices for consumers, reduced competition, and inefficient allocation of resources
  • It can also invite retaliation from trading partners, potentially escalating into trade wars (e.g., US-China trade war)

Trade liberalization

• Trade liberalization involves policies that promote and facilitate international trade by reducing trade barriers and restrictions
  • Free trade agreements are arrangements between countries to remove tariffs and other trade barriers (e.g., NAFTA, EU-Japan Economic Partnership Agreement)
  • Lowering tariffs and eliminating quotas help to increase competition and promote the efficient allocation of resources based on comparative advantage
• Trade liberalization may result in increased competition, lower prices for consumers, and more efficient allocation of resources based on comparative advantage
  • However, it can also lead to job losses in less competitive domestic industries as they face increased foreign competition (e.g., US manufacturing jobs lost to China)

Trade protectionism vs liberalization

Arguments for trade protectionism

• Protecting domestic industries and jobs from foreign competition
  • Infant industry argument suggests that new domestic industries need protection until they become internationally competitive (e.g., South Korea's support for its automotive industry in the 1960s-70s)
• Reducing trade deficits and promoting domestic production
  • Countries may seek to reduce their trade deficits by limiting imports and encouraging domestic production (e.g., Trump administration's focus on reducing US trade deficit with China)
• Ensuring national security by reducing dependence on foreign suppliers
  • Countries may protect strategic industries to maintain domestic production capabilities (e.g., US restrictions on technology exports to China)
• Preventing dumping of foreign goods at prices below production costs
  • Anti-dumping duties can be imposed to protect domestic industries from unfairly priced imports (e.g., US anti-dumping duties on Chinese steel)

Arguments for trade liberalization

• Increased competition leading to lower prices and improved product quality for consumers
  • Trade liberalization exposes domestic firms to foreign competition, incentivizing them to improve efficiency and product quality (e.g., increased variety and lower prices of consumer goods in Mexico after NAFTA)
• More efficient allocation of resources based on comparative advantage
  • Countries can specialize in producing goods and services in which they have a comparative advantage, leading to increased productivity and economic growth (e.g., Chile's specialization in copper production)
• Access to larger markets for domestic producers, enabling economies of scale
  • Trade liberalization allows domestic firms to access foreign markets, increasing their potential customer base and enabling them to achieve economies of scale (e.g., South Korean electronics firms expanding globally)
• Increased foreign direct investment and technology transfer
  • Trade openness can attract foreign direct investment, bringing capital, technology, and knowledge to the host country (e.g., China's economic growth driven by FDI)

International trade agreements for integration

Bilateral and multilateral trade agreements

• International trade agreements are treaties between two or more countries that outline the terms of trade, such as tariff reduction, quota elimination, and investment rules
  • Bilateral trade agreements involve two countries (e.g., US-South Korea Free Trade Agreement)
  • Multilateral trade agreements involve three or more countries (e.g., NAFTA, CPTPP)
• These agreements contribute to economic integration by reducing trade barriers, harmonizing regulations, and facilitating the flow of goods, services, capital, and labor between member countries

World Trade Organization (WTO)

• The WTO is the primary international organization dealing with the global rules of trade between nations, ensuring that trade flows smoothly, predictably, and freely
  • It provides a framework for negotiating trade agreements and settling trade disputes based on principles of non-discrimination, reciprocity, and transparency
  • The WTO promotes trade liberalization through rounds of multilateral trade negotiations, such as the Uruguay Round (1986-1994) and the Doha Development Round (2001-present)
• The WTO's dispute settlement mechanism helps to resolve trade conflicts between member countries (e.g., US-EU dispute over aircraft subsidies to Boeing and Airbus)

Regional trade blocs and development

Regional trade agreements (RTAs)

• RTAs are reciprocal trade agreements between two or more countries in a specific region, aiming to reduce trade barriers and promote economic integration
  • Free trade areas eliminate tariffs and quotas between member countries (e.g., NAFTA, ASEAN Free Trade Area)
  • Customs unions establish a common external tariff for non-members (e.g., European Union, Mercosur)
  • Common markets allow for the free movement of goods, services, capital, and labor (e.g., European Single Market)
• The formation of RTAs can lead to trade creation (increased trade between members) and trade diversion (reduced trade with non-members)

Impact on trade patterns and economic development

• Regionalization of trade: The proliferation of RTAs can lead to a concentration of trade within specific regions, potentially reducing global trade integration
  • Example: Intra-EU trade accounts for a significant share of total EU trade
• Increased market access and foreign direct investment: RTAs provide member countries with access to larger markets and can attract FDI as investors seek to take advantage of preferential market access
  • Example: NAFTA led to increased FDI flows between the US, Canada, and Mexico
• Technology transfer: Increased trade and investment within RTAs can facilitate the transfer of technology and knowledge between member countries
  • Example: ASEAN countries have benefited from technology transfer through increased trade and FDI
• Uneven distribution of benefits: The benefits of RTAs may be unevenly distributed among member countries, depending on factors such as economic size, development level, and bargaining power
  • Example: In Mercosur, Brazil has gained more than smaller members like Paraguay and Uruguay