Trade Policy, Protectionism, and Global Commerce
Trade Policy and Economic Protectionism
Arguments for Protectionism
Arguments for protectionism include:
- A consumption sacrifice is desirable to support other national objectives.
- Support is given to special interest groups, e.g., farmers.
- Firms and workers know certain sectors where a duty on a product helps, but this can impose costs on other members of society.
Trade Policy Measures
Trade policy is specified in the following measures:
- Tariffs: A tax the government requires on foreign products in order to raise their price when sold in the market and so protect domestic products that do not suffer foreign competition.
- Import Quotas: Quantitative restrictions imposed by governments on importing certain foreign goods. This limits the amount that can be imported, regardless of price.
- Subsidies or Export Subsidies: Aid to domestic manufacturers of certain goods so that they can export at lower prices and be more competitive.
- Dumping: Occurs when firms sell abroad at a price lower than the cost or the price in their domestic market.
- Non-Tariff Barriers: Administrative regulations that discriminate against foreign goods in favor of domestic ones.
Free Trade Principles
Free trade proposes trade between countries without any kind of public sector hindrance. According to most scholars, openness to trade has benefited countries by increasing trade flows and living standards. They maintain that the free circulation of goods stimulates the free play of supply and demand, specialization, and the development of technological innovations.
Global Trade Institutions and Agreements
The GATT
The General Agreement on Tariffs and Trade (GATT) was established in 1948. Its representatives meet regularly to negotiate agreements that tend to reduce obstacles to free trade. One of its basic principles is the Most Favored Nation clause, which states that any tariff reductions agreed between any group of member countries must be extended to all other GATT members.
World Trade Organization Objectives
The main objectives of the World Trade Organization (WTO) are:
- To enforce multilateral trade agreements signed since its creation and further promote free trade.
- To provide a forum for multilateral and even bilateral trade negotiations among member countries.
- To cooperate with other international institutions like the IMF and World Bank.
Regional Economic Integration
Free Trade Area
A Free Trade Area is characterized by having no internal tariffs, but its members are free to set their own tariffs against the rest of the world.
Customs Union
Countries belonging to a Customs Union have a common external tariff against the rest of the world and no internal customs barriers.
Common Market
A Common Market is a customs union with a common system of commercial legislation allowing the free movement within it of goods, capital, services, and labor.
Net External Demand
Domestic demand is equal to consumption plus investment plus public spending. It differs from aggregate demand because aggregate demand includes domestic spending satisfied with goods produced abroad and the difference between national income and household spending (which are net exports). The components of aggregate demand are consumption, public investment spending, and net exports.
Spanish exports depend on the income of countries with which Spain has trade relations, the exchange rate, and the relative prices of goods and services for export that compete with international imports. Spanish imports are positively related to national income, the exchange rate, and the prices of domestic products in relation to foreign ones.
When net exports are positive, it leads to an increase in domestic demand; when they are negative, it leads to a reduction. Therefore, if domestic products are more competitive, it will help increase production and employment.