Entries Tagged 'trade' ↓

Readers Question: What counts as an import on the Balance of Payments

Current Account measures trade in:

1. Goods,
2. Services,
3. Investment incomes
4. Net Transfers

A Debit on the credit account occurs when the UK imports goods and therefore money flows from the UK to oversees to purchase it. If debits are greater than credits the UK will have a current account deficit.

Examples of debits

• UK consumers buy Chinese manufactured toys
• UK consumers go on holiday to China
• A Chinese firm in the UK sends back profits to China.
• UK firms import raw materials from China.

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Readers Question: Is outsourcing beneficial for multinationals and their home countries?

The benefits of outsourcing for multinationals include:

• Lower wages for labour intensive stages of production. A good example, is the outsourcing of call centres from the UK to India. Wages in India are significantly lower than the UK, enabling a reduction in costs.
• Comparative advantage. Production can be concentrated in the most efficient location.
• Improvements in Technology. Improvements in internet and communications means it is easier to outsource and keep control on what is happening.

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Readers Question
1.What are “gain from trade ” ?
2.To what extent is “globalisation” a cost and a benefit ?

Free Trade is a way for countries to exchange goods and resources. This means countries can specialise in producing goods where they have a comparative advantage (this means they can produce goods at a lower opportunity cost). When countries specialise there will be several gains from trade:

1. Lower prices for consumers
2. Greater choice of Goods
3. Bigger export markets for domestic manufacturers
4. Economies of scale through being able to specialise in certain goods
5. Greater competition

See: Benefits of Free Trade

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1.How can a change in the terms of trade affect the balance of trade ? (25)

2. How can a change in the balance of trade affect the terms of trade ?

The terms of trade is the index of export prices divided by index of import prices (*100)

An improvement in the terms of trade mean that export prices are increasing faster than import price. Therefore there will be a fall in exports and an increase in quantity of imports. Therefore, it is likely that with lower exports the current account deficit (+ trade deficit) will get worse i.e. bigger deficit

However, it relies on the Marshall Lerner Condition. If the Marshall Lerner condition is satisfied then an improvement in the terms of trade will worsen the current account.

The Marshall Lerner condition states that if demand for exports and imports is relatively elastic PED x + PED m >1 then an increase in terms of trade will worsen the current account (balance of trade)

Sometimes elasticity of demand varies over time. In the short term demand is often inelastic, in the longer term demand becomes more elastic. Therefore, we can often see a J Curve effect, where an improvement in terms of trade worsens current account in short term but improves in long term.

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Readers Question: what are the possible consequences/effects of protectionism with regard to the UK and the rest of the world?

Protectionism involves placing tariffs and other barriers to trade. If there is a rise in protectionism we will experience a reduction in trade between the UK and the rest of the world. It is argued that if trade falls the UK will lose out on many benefits such as:

• Exporters will see a fall in demand, causing less output and possibly unemployment
• Consumers will have to pay higher prices for imports of goods (e.g. electronic goods from China, food from Africa)
• There is less scope for specialistaion and economies of scale.
• Less competitive pressures for firms and economies to cut costs

For a more theoretical explanation look at the benefits of free trade that the UK will no longer have.

However, some argue, that the benefits of free trade ignore many good reasons to impose tariffs. In particular it is argued free trade discriminates against developing economies. It is argued developing countries need an element of protection to enable new industries to grow and their economies to diversify. See arguments against free trade

In the case of the UK many of these arguments don’t really apply. However, for developing countries carefully implemented protectionism may help develop their economies. There are also good environmental reasons for promoting an element of protectionism.

However, it depend on the type of protectionism. If it is just tariffs increased out of spite, then there may be very little benefit to anyone. Tariffs have to be carefully targeted and ideally only last for a couple of years.

Conclusion

Since the UK relies on trade for much of its economy, a rise in protectionism will harm the UK economy (perhaps more than other economies). Higher tarrifs will definitely lead to lower exports, lower imports and a lower rate of economic growth.

However, it is worth noting that 60% of UK trade is now with the EU. Therefore, if it is just protectionism with regard to non-EU countries, the effect will be smaller and the impact not so severe.

Explaining the Growth in Globalisation

Globalisation refers to the increased integration and interdependence of the world economy’s. These are some reasons to explain the growth of globalisation

1. Increase in Free Trade.

Since the second world war, tariffs have generally been reduced. This has been encouraged through organisations such as the WTO. This has increased trade between different countries; this is an important factor in the process of globalisation.

2. Technology

Technology has improved communication between different countries. Therefore, it has become easier to split up production on a global level. It is also easier to discover what is happening in other countries. For example, through the internet you can find the cheapest raw materials.

3. Improved Transport and Infrastructure.

Global airline travel has increased exponentially. It is now easier and cheaper to transport goods by air and water.

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Readers Question: Has WTO abused its power?

The WTO is committed to improving free trade amongst its member countries. However, its role has been very controversial and has created polarised views. These are some of the criticisms of the WTO

1. Free Trade benefits developed countries more than developing countries. Developing countries need some trade protection to be able to develop new industries. The WTO have sought to maintain same rules for developing countries, however, 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. (This is related to the infant industry argument)
2. 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, this may be the least important.
3. 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 the multinational companies.
4. 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.

See also: Advantages and disadvantages of the WTO