What Is International Trade?
International trade is the exchange of goods and services between countries.
This type of trade gives rise to a world economy, in which prices,
or supply and demand, affect and are affected by global events. Political change
in Asia, for example, could result in an increase in the cost of labor, thereby
increasing the manufacturing costs for an American sneaker company based in
Malaysia, which would then result in an increase in the price that you have to pay
to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the
other hand, would result in you having to pay less for your new shoes.
Trading globally gives consumers and countries the opportunity to be exposed to
goods and services not available in their own countries. Almost every kind of
product can be found on the international market: food, clothes, spare parts, oil,
jewelry, wine, stocks, currencies and water. Services are also traded: tourism,
banking, consulting and transportation. A product that is sold to the global market
is an export, and a product that is bought from the global market is an import.
Imports and exports are accounted for in a country's current account in the
balance of payments.
What does 'Free Trade' mean
Free trade is the unrestricted purchase and sale of goods and services between
countries without the imposition of constraints such as tariffs, duties and quotas.
Free trade is a win-win proposition because it enables nations to focus on their
core competitive advantage(s), thereby maximizing economic output and
fostering income growth for their citizens.
Benefits of International Trade can be reaped further, if there is a considerable
decrease in barriers to trade in agriculture and manufactured goods.
Some important benefits of International Trade
Enhances the domestic competitiveness
Takes advantage of international trade technology
Increase sales and profits
Extend sales potential of the existing products
Maintain cost competitiveness in your domestic market
Enhance potential for expansion of your business
Gains a global market share
Reduce dependence on existing markets
Stabilize seasonal market fluctuations
What are the benefits?
A free-trade area is the region encompassing a trade bloc whose member countries have signed
a free trade agreement (FTA). Such agreements involve cooperation between at least two countries
to reduce trade barriers import quotas and tariffs and to increase trade of goods and services
with each other.[1] If people are also free to move between the countries, in addition to FTA, it would
also be considered an open border. It can be considered the second stage of economic integration.
How each Free Trade Agreement will benefit your business will depend on the type of goods
or services that you offer and the terms of each particular FTA.
Some benefits include:
Increasing goods exports to a market or commencing exports into a new market
Accessing new and often larger services markets
Lower tariffs on exported goods, although this often occurs over time and in a
staggered manner
Removal or relaxation of quotas on certain goods that can be imported
Access to other Government procurement markets, for example in the United States
Access to cheaper inputs for Australian business, which can assist in making
Australian goods and services more competitive
Potential investment in Australian business by offshore investors
What is 'Protectionism'
Protectionism refers to government actions and policies that restrict or restrain
international trade, often done with the intent of protecting local businesses and
jobs from foreign competition. Typical methods of protectionism are
import tariffs, quotas, subsidies or tax cuts to local businesses and direct state
intervention.
1. EU Common Agricultural Policy (CAP). Despite reforms and some reduction in
tariff rates, the EU still impose substantial tariff rates on many agricultural markets. The
aim is to increase prices for domestic European farmers in order to increase their
income.
The table below suggests that some agricultural products, e.g. beef and diary, have very
substantial tariff rates of over 75%. For example, there are 54 dairy products which have
tariff rates of more than 75%
Source: Reform the CAP
In addition EU farmers benefits from the domestic subsidies of the CAP which help give
an advantage in exports.
2. Banana wars. For a long time, there were substantial tariffs on banana imports from
Latin America. Exporters had to pay 176 (141) per tonne of bananas. But, in 2012, an
agreement has seen these tariffs reduced. (Banana wars )at Telegraph
3. Tariffs on imports of Chinese tyres into US. The US imposed tariffs of 35% on
imports of tyres from China. This tariff was upheld by WTO (FT)
4. Argentina food tariffs. Argentina has increased imports duties on 100 products,
including over a dozen agricultural goods under the Mercosur Common External Tariff
(CET). ([Link]). In this example, tariffs on the import of milk powder were increased to
9% after record levels of imports and fears Argentinian farmers would suffer falling
incomes. (Argentinian milk powder tariffs)
5. Escalated tariffs. This occurs when higher tariffs are placed on processed food. This
creates a disincentive for countries to process and add value to the raw commodity. For
example, a WTO report found that the average EU tariff on primary food products (in
2008) was 9.9% but for processed food products it was more than twice as high, at
19.4%. This is for the EUs MFN (most favoured nation) (Protectionist measures)
Anti-Dumping Tariffs
Dumping occurs when firms sell goods below a fair market price e.g. below cost,
because of excess supply. This can flood a domestic market with cheap imports and
make it difficult for domestic firms to stay in business. In this case, countries may justify
tariffs on the grounds they are preventing this damaging effect of dumping.
Tariffs are justified by the WTO, if you can prove dumping is occurring.
1. China tariffs on imports of stainless steel tubes from EU and Japan. Tariffs vary
between 9% and 14% (BBC Link)
Illegal Subsidies
Another form of protectionism occurs when a country gives a subsidy or support to a
domestic export industry. This gives the exporters an unfair advantage in the world
market.
1. Subsidy of European airlines. For example, European airlines have been criticised
for receiving unfair support from their government. Though European governments
respond they were just preventing the airline going bust. This article from the Economist,
suggests that the practise of subsidising European airlines has been declining.
2. China subsidies for its car industry. In 2012, the US filed a complaint that China
was given excess subsidies to its car industry giving unfair competitive advantage.
USTR said the targeted export bases made at least $1 billion in subsidies available to
auto and auto-parts exporters in China during the years 2009 through 2011. (link)
3. Calls for tariffs on imports of solar panels from China. (China Daily)
Growth of Red Tape
Rather than put tariffs which break WTO rules, some countries prefer to strangle trade
by imposing red tape, bureaucracy and things which increase the administration cost of
trading. This has the same effect of discouraging imports. For example, the increasingly
stringent standards set by the private sector in the area of certification and traceability
create difficulties for developing countries exports. (EU Protectionist measures)
An increasingly popular method nowadays is to strangle traders not with high tariffs,
which are easy to spot, but with red tape, which is not. Protectionism Alert at Economist
Types of Protectionism
1. Tariffs This is a tax on imports.
2. Quotas This is a physical limits on the quantity of imports
3. Embargoes This is a total ban on a good, this may be done to stop dangerous
substances
4. Subsidies If a government subsidises domestic production this gives them an unfair
advantage over competitors.
5. Administrative barriers Making it more difficult to trade, e.g. imposing minimum
environmental standards.
Why Trade Protectionism?
Countries may impose tariffs on goods because:
1. Infant industry argument protect new industries
2. Diversify the economy help develop new industries to give more diversity to economy
3. Raise revenue
4. Protect certain key industries from international competition to try and safeguard jobs.
5. Protect domestic jobs which are threatened by rise of imports.
WHAT IT IS:
The World Trade Organization (WTO) establishes rules of trade among its member
nations. To this end, the WTO also handles trade disputes, monitors trade policies,
provides technical assistance for developing countries and cooperates with other
international trade organizations.
The WTO was created on January 1, 1995, and is headquartered in Geneva,
Switzerland. The WTO replaced the General Agreement on Tariffs and Trade (GATT),
which was created in 1948. GATT primarily regulated the trade of goods; the WTO
regulates the trade of services and intellectual property as well. GATT still exists as the
WTO's umbrella treaty for trade in goods.