BSB119 Lecture Notes - Lecture 5: Protectionism, Comparative Advantage, Mercantilism
Week 5 Global Business Lecture Notes
Business Environments: Trade and Investment
International Business Environments
Trade and Investment: An Introduction
• The traditional divide→Fee tade s. Potetiois
o Protectionism: emphasises the importance of government intervention in
international trade and investment
▪ Why? To protect national interest by restricting the inflow and
influence of foreign goods and businesses
o Free trade: emphasises the absence of barriers to the free flow of goods and
services between countries
▪ Why? Trade promotes efficiency, competition and creates economic
growth and national wealth
• Early trade-elated theoetial aguets…
o Mercantilism: a country should maximise exports and minimise imports (to
conserve national wealth)
▪ Dominant practice in Europe during 16th to 18th century
o Absolute Advantage: a country should export goods it can more efficiently
produce and trade them for imports that can be more efficiently produced by
other countries
▪ Influened y Ada “iths puliatio
o Comparative Advantage: trade should still occur even if a country can
efficiently produce everything (a country should produce and export only
those goods that it is elatiely oe effiiet at poduig
▪ Developed by David
Ricardo in 1817
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• Free Trade Agreements (FTAs)
o Australia currently has 10 FTAs in force:
▪ New Zealand, Singapore, Thailand, USA, Chile, the Association of
South East Asian Nations (ASEAN), Malaysia, Korea, Japan and China
o These countries accout fo % of Austalias total to-way trade
o ‘eetly oluded FTAs…
▪ ChAFTA – entered into force 20 December 2015
▪ KAFTA – entered into force 12 December 2014
▪ JAEPA – entered into force on 15 January 2015
• Free trade:
o Theoretically, free trade brings economic gains by cutting tariffs and other
trade barriers (Adam Smith; David Ricardo; etc.)
▪ Static benefits: IB and consumers can locate or source production in
countries where products can be produced most efficiently
▪ Dynamic benefits: Encourages investment, enhances cooperation,
contributes to productivity improvements and higher GDP growth
• Although many nations/governments are committed to free trade in principle, they
tend to intervene in international trade to protect the interests of politically
important groups
Motives for Government Intervention in Trade
• Government intervention in trade
• Although many nations/governments are committed to free trade in
principle, they tend to intervene in international trade through regulations
ad estitios… hy?
• Even international E-business (the purchase and delivery of products and
services online) is no longer a free trade zone
• Political motives:
o Protection of domestic jobs and industries
▪ eg. Australian tariffs on foreign cars (as high as 50% back in
the 1980s)
o National security (key industries, security encryption)
▪ eg. Huawei barred from NBN rollout (CEO an ex-army officer)
o Retaliation against actions of other trading partners
▪ eg. US threatened China with imposition of 100% tariff on
Chinese goods if China did not start enforcing intellectual
property laws
o Protection of consumer welfare and safety
▪ eg. EUs a o hooe-treated beef
▪ eg. Austalias ioseuity uaatine) regulations
o Maintain cultural distinctiveness
▪ eg. broadcasting content - local TV channels may have
foreign content restriction
o Foreign relations policy
▪ eg. giving preferential treatment to a trading partner
▪ eg. puishet Austalias satio o Russia during the
2014 Ukraine crisis)
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