International trade is necessary, because the scarce resources are distributed unevenly between different countries and some countries are better at producing some products than others.
Another, not so clear and maybe arguable, uneven measure is the allocation of education for labour. As the possibilities for getting education in the west are much greater, the services sector or tertiary sector is much more developed for example: workers in banking sector have to be trained for long time. In the developing countries the educational standards are lower; they have developed manufacturing and extraction primary and secondary industries, which require much not so educated labour. Generally, each country specializes in the production of certain goods and services ,those required by their citizens; therefore countries are normally not equal in their efficiency since each depends on and uses variant human and natural resources in addition their capital resources are different .In order to decide on the good or the services to be produced there is an opportunity cost that has to be considered ;that is the quantity of any other chosen type of product or the service that could have alternatively been produced .When there is a choice of production ,it is wiser to go for the one with a lower opportunity cost , so that the increase in the For example: production of that good can be used in exchange with the higher opportunity cost good. A country is considered to have complete privilege in the production of a certain good if it can produce a greater quantity of that good though it possess similar resources to another country but which is unable to do the same .Yet, in case the latter country has the privilege of producing another good that the first country needs it is beneficial for both of them to specialize and exchange. Nevertheless, the fact remains that even if one country has complete privilege in producing both goods to be traded; it is still advantageous for both countries to trade. A country gets a relative advantage with the good of the less opportunity cost when two products are involved. The trade conditions should imply that both countries have to reduce the opportunity costs of the traded goods or services. But trade is usually beneficial to both countries even if one has a complete privilege in the production of both goods that are to be traded. The international trade helps to make the distribution of resources more even. The countries can specialize to work what they are best at. It also helps countries to obtain the products they otherwise might not get. Also, it increases the variety of goods. For example: UK can produce cheese, but with international trade English are also able to enjoy French cheese.
There are also transports costs involved in international trade, which decrease the efficiency and increase production costs. They are especially important when two countries are not neighbours for example: USA and any European countries.
Some might argue that the wages in developing countries are very low; therefore it is unfair for the home country to trade. But not trading at all will make the situation worse and create unemployment in the developing country.
The monopolies abroad might find the elasticities of different countries different and can price differentiate. If the elasticity in home country is high they might lower the price below production costs to sell a lot. This is called dumping and protectionism is usually considered against it in the home country.
The countries might have obstacles to trade tariffs and quotas, political differences, different currencies, some disguised barriers. These increase the cost, decrease the welfare and international trade. But the tariffs imposed in one country will bring revenue to this country and losses to the other. And if the other country imposes tariffs the situation is opposite, thus in the whole world revenue is not increased with imposition of taxes, only welfare is decreased.
The specialization itself can create disadvantages for trade. If a country is too dependent of one industry and the prices fall in that industry, then massive unemployment will occur.
International trade can also damage infant industries in home country, because their production costs are high at the beginning. Over specialization might have devastating effects if the war starts and import export ceases. As a matter of fact, countries never completely specialize because of strategic reasons. Also if the import is much greater than export, balance of payments would be negative, which will damage the economy in home country and might lead to reduction of the currency.
In spite of the previously mentioned drawbacks, not many are viable; in time workers could be taught skills. People who are specialized in economy affairs state that free trade is advantageous and helps enhance well-being and that’s why it ought to be promoted.
Explain the reasons why countries carry out trade protectionism. Provide specific examples for your explanation.
Protectionism is defined as the constraints of imports into a nation by government procedures. It is a system set in order to protect domestic production from foreign competition by way of imposing trade restriction.
Reasons For Carrying Out Protectionism
1- National Security
A country that depends on the supply of foreign sources is in a susceptible position during a war. Therefore there is need for developing certain industries which are considered substantial to national security during peacetime. Adam Smith wrote in 1776 that "defence is more important than opulence."For example industries like steel and iron, agriculture and scientific instruments are considered to be strategic industries which have to be under protection to lower the nation’s dependence on imports of strategic materials.
A new industry which has a potential comparative advantage might face difficulties in getting started in a nation if it is not given a provisional protection in opposition to foreign competition. Protection gives home producers the time to develop their skills in production, organization and selling. It also promotes the growth of domestic manufacturing and strengthens the national economy. Once viable strength is developed, protection would be discarded for free trade..For example the industrial revolution was based on protectionism: in 1699, Britain prohibited the import of Irish woollens; in 1700 they prohibited cotton cloth from India. To protect their infant industries, they imposed fierce tariffs (trade taxes) on almost all manufactured goods.
3-Keeping Money at Home
When domestic people buy imported commodities, the country gets the commodities and the foreigners get the money. Alternatively, when the people buy domestic commodities, the country is capable of keeping both the commodities and the money. Therefore, the country gets wealthier by restraining imports.
The domestic producers have a right to the nation’s local market. It is believed that by eliminating foreign imports, more jobs can be created. This notion states that a country should not specialize in the merchandise which has a comparative advantage.
5- Variations of Industry
Depending on one or a few industries could lead a country to mass unemployment if the foreign demand falls. To reduce these drawbacks a country needs to produce diverse industries and have a protection policy applicable.
6- Equalizing of Costs
Since foreign producers have excessive advantages over home producers for example: their tax charges are lower, work force cheaper or subsidies are elevated. Therefore, there is need to neutralize their advantages.
(b)Explain the ways in which countries carry out trade protectionism. Provide specific examples for your explanation.
Methods Of Protectionism
1- Tariffs or Import Duties, this means imposing taxes on imported goods. This action causes a raise in the price so that customers refrain from buying imported goods they also make them less attractive. For example “during the 1980s and 1990s, Mauritius imposed import tariffs of up to 80%. Protectionism”,
2- Quotas: these put a limit on the amount of goods which is allowed be imported into a country, for example: 100,000 cars, 300,000 television sets etc.
3- Regulations: This means taking all precautionary measures including laws and safety guidelines that impose restrictions on foreign imports..
4-Subsidies: these are expenses or funding given by the government to producers. They are likely to reduce the costs and promote the consumption of home products in favour of imported goods.
5- Exchange control: this is a scheme of trade control that limits the amount of foreign exchange people could obtain .since importers need foreign currency to pay for imports, the amount of imports could be restricted by being in charge of the issue of foreign currency.
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