The Global Context II (session 8)
-International Trade essentially involves the purchase, sale or exchange of goods or
services across countries.
-Can be distinguished between domestic trade, which involves trade between
provinces, cities or regions with in a country.
-Trend of globalization included reduction in trade barriers among many nations of
the world as a mean to promote greater international trade.
The Logic Of Trade:
-Some countries can produce certain goods and services more efficiently than
others; wealth can be improved through free trade.
-Each country can focus on producing these goods and services in which it
maintains an absolute advantage, and simply trade with other countries to obtain
goods and services that are required, but not produced by domestic suppliers.
-Free trade based on free markets.
-Comparative Advantage, each country expects to take advantage of each others
strengths, and thereby permitted to focus on there own strengths.
-Simpler form, it is relatively inefficient for Canada to try to grow beans, bananas,
given the climate.
The Logic of Trade: encourages nations to specialize in goods/services in
which they are most efficient and trade with other countries for
goods/services not produced domestically.
- Comparative Advantage (David Ricardo)
-Trade theory underlining economic from the period ranging from about 1500-1800
is referred to as mercantilism.
-Country’s wealth depended on its holdings of treasures. (form of gold)
- It is the economic policy of accumulating this financial wealth through trade
-Trade Surplus: comes about when a country’s exports exceed its imports, and more
money in entering the country (from foreign consumers buying these exports) than
leaving the country (from domestic consumers buying from foreign imports).
-The government would intervene to ensure a trade surplus by imposing tariffs or
quotas, or by outright banning of some foreign commodities.
-The government would also subsidize domestic industries in order to encourage
growth in their exports.
-Colonialization: acquiring less developed regions around the world as sources of
inexpensive raw materials. (Sugar, cotton, rubber, tobacco.)
-Serve for markets as finished products.
-Trade between mercantilist countries and their colonies result in large profit.
-Aimed to become self-sufficient as possible, minimize reliance in foreign imports. Mercantilism (1500-1800): encourages trade surpluses where exports of
goods or services exceeds imports.
Colonial powers (Britain, France, Spain, Netherlands) conquered countries to
gain access to raw materials and markets for finished products
-is about protecting a countries domestic economy and business through restriction
-Why might imports be a threat to a business or economy?
1. Low-prices foreign goods that enter a country could compete with goods already
purchased here and in effect, take business away from domestic producers, loss of
sales and loss of jobs from domestic industries that are unable to compete with
these lower-prices imports.
2. A country that imports more than it exports will have a negative balance of trade,
or trade deficit-which often results from more money flowing out of the country (to
buy the imported goods) than flowing in (for our exports).
-Tariff: a tax placed on goods entering a country.
-Protective tariffs are intended to raise the price of imported products in order to
ensure that they are not less expensive than domestically produced goods.
-This discourages domestic consumers from buying these foreign imports by
making them more expensive to purchase.
-Import Quota: which limits the amount of a product that can be imported.
-Reason for restriction, to help ensure that domestic producers retain an adequate
share of consumer demand for this product.
Trade Protectionism: protects domestic economies through import
Tariffs – tax placed on goods entering a country
Quotas – limits the amount of imports
Subsidies to domestic industries/firms to encourage exports
What’s wrong with mercantilism and protectionism?
-Mercantilism assumes that trade involves a zero-sum gain – that is, the worlds
wealth is a fixed pie, and a nation can only increase its share of the pie by forcing
other nations to reduce their shares of pie.
-One way street of trade.
-Mercantilist country aims to maximize the goods/services it sells to other
countries, yet it expects to restrict the goods/services that these same countries
attempt to sell it to.
-other countries would put tariffs and quotas on us
What is the problem with mercantilism and trade protectionism?
Increased costs to consumers
Limits competitiveness of domestic firms
See handout on Tariffs
Impact on exporting country: Lower production, job losses, economic decline…
Impact on importing country:
Less competition for domestic firms, rising sales, prices,
employment, spending, government revenues…
Increased costs to consumers, less spending on other
industries, economic decline, costs of imposing +
collecting tariffs, possible costs of retaliation and trade
Promoting International Trade:
-Most countries are endeavoring to eliminate trade barriers.
-GATT (The general agreement of tariffs and trade), which was an agreement among
100 countries to reduce the level of tariffs on a worldwide basis, it did encourage a
gradual reduction in trade barriers. (Encouraged free trade)
-IMF (International Monetary Fund) to provide short term assistance in the for of
low interest loans to countries conducting international trade and in need of
-World bank will borrow funds from the more developed countries and offer low
interest loans to underdeveloped third world nations. Both these organizations, by
assisting less prosperous nations, help facilitate trade and investment between
GATT (1948) – 100 countries agreed to reduce tariff levels.
WTO (1995) – took over from GATT, to manage world trade agreements.
IMF – provides short term aid to developing countries.
World Bank – seeks to provide long-term loans for development.
Facilitating Global Business: Regional Economic Integration:
-means bringing different countries closer together by reductions or elimination of
obstacles to the international movement of capital, labour and product or services.
(regional Trading Bloc.)
-Maximizing the benefit of international trade, greater availability of products, lower
prices and increased efficiency or productivity.
-Trading Blocs increase international trade and investment, with the central aim of
improving their economy and living standards for their citizens.
-The lowest to highest levels of integration, free trade areas, custom union, common
market and economic union.
-Free Trade area: removal of tariffs and non-tariff trade barriers (subsidies and
quotas), greater member autonomy, how it chooses to deal with non-members and
what types of barriers it should construct against non-member countries.
-Customs Union: Removal of trade barriers on international trade in goods and
services among the member countries. Less member autonomy chooses to deal with non-members, and what types of barriers it should construct against non-member
countries. MERCOSUR custom union (major group in South America).
FTAA (The free trade area of the Americas) that would allow greater access to the
Latin America markets for North American exports.
-Common Market: removal of trade barriers and the implementation of a common
trade policy regarding non-members.
More difficult to achieve the previous 2 levels. Ex; European Union.