Trade Policies and Negotiations:
Free Trade:
Free Trade: When trade occurs between countries without restrictions or barriers. This
stemmed from David Ricardo’s theory of comparative advantage developed in the early 19th
century which suggests that it is possible for countries to gain from trade by specialising in
the production of goods in which they have a comparative advantage.
● Without foreign trade, the price and quantity
produced in the domestic market would be at P and Q.
● If the government opens up the economy for free
trade, prices would decrease to Pw reflecting the lower
prices offered by foreign firms who have comparative
advantage in the sector.
● The world supply curve is perfectly elastic as the
market is so large that it can influence the price of goods,
world suppliers can supply smaller domestic markets without
needing price increases to incentivise greater production.
● At the lower price, domestic supply contracts to Q2 while domestic demand extends
to Q1. Q2 is the amount produced by domestic firms while the quantity between Q2
and Q1 is satisfied by imports.
● Consumers are purchasing more at a lower price so their consumer surplus
increases from H to H+D+E+F+G. However producers are producing less and a
lower price and so producer surplus decreases by D+E
● Domestic producer revenue decreases from A+ B+F+E+D to just A
Benefits of Free Trade:
● Exploitation of comparative advantages - resources are allocated where countries
have a cost advantage over/ operate more efficiently than other producers so
allocative efficiency is attained. Output is maximised and countries can operate
beyond their PPC.
● Large economies of scale - businesses have the potential to grow due to large
international markets so they can benefit from purchasing and technical economies
of scale to lower average costs and increase productive efficiency
● Increased competition and lower prices: global competition leads to dynamic
efficiency as businesses are forced to re-invest and innovate to stay ahead of rivals
and consumers benefit from accessing a diversified product range and lower prices.
, ● Increased choice for consumers and businesses: businesses can source raw
materials from all around the world at cheap prices which lowers their costs of
production so they can stay profitable. and consumers have a great range of
products to choose from.
● Higher rates of economic growth: higher export potential and export revenue - actual
growth will increase with an increase in net exports. Unemployment falls as labour is
derived from demand, living standards and prosperity increases.
● Technology transfers: business have access to new technologies and the spread of
technology is much faster
Costs/Criticisms of Free Trade:
● Infant Industry Argument: industries may not be able to develop as they will be
quickly outcompeted by the world market. Countries may wish to nurture new forms
of economic activities and believe that such industries need some protection from
foreign competitors until they are able to hold out on their own. Reason for Trump’s
tariffs on Chinese goods in 2018 - believed that domestic producers were being
subject to unfair competition.
● Theoretical benefits rests on the assumption that capital and other factors of
production are immobile - in today’s globalised world this may not be true and
countries may become overly reliant on each other with the introduction of free trade.
● Could be argued that Britain’s success was actually built upon protectionist systems
in its empire - was able to import raw materials from its colonies such as cotton from
India while subjecting India to heavy tariffs to prevent its textile workshops from
competing with Lancashire textile mills.
Protectionism:
Protectionism: measures taken by a country to restrict international trade in order to protect
domestic producers from foreign competition.
Benefits of Protectionism:
● Infant Industry argument: under free trade, small industries may not have the
economies of scale to compete with companies in larger industries abroad,
particularly in regards to developing countries looking to diversify into manufacturing
to prevent the risk of primary commodity over-specialisation and the resource curse.
Governments may impose protectionism to allow small industries time to grow and
establish themselves.
○ However this reason may fail in the long term as complacency and
protectionist dependency may develop which prevents COPs decreasing
enough to become competitive.
○ Developing countries may lack power to enact protectionism without risking
heavy retaliatory protectionism
● Protection against Dumping: which is the sale of a product in overseas markets at a
price below cost of production due to heavy subsidies which have generated an
excess supply. Dumpled products will be artificially more competitive than home
products leading to industry decline and potential structural unemployment.
○ However, dumping is extremely difficult to prove as finding info regarding
COPs and proving that products have purposely been sold at prices below
cost is a challenge for WTO. Accused countries may feel wrongly targeted
Free Trade:
Free Trade: When trade occurs between countries without restrictions or barriers. This
stemmed from David Ricardo’s theory of comparative advantage developed in the early 19th
century which suggests that it is possible for countries to gain from trade by specialising in
the production of goods in which they have a comparative advantage.
● Without foreign trade, the price and quantity
produced in the domestic market would be at P and Q.
● If the government opens up the economy for free
trade, prices would decrease to Pw reflecting the lower
prices offered by foreign firms who have comparative
advantage in the sector.
● The world supply curve is perfectly elastic as the
market is so large that it can influence the price of goods,
world suppliers can supply smaller domestic markets without
needing price increases to incentivise greater production.
● At the lower price, domestic supply contracts to Q2 while domestic demand extends
to Q1. Q2 is the amount produced by domestic firms while the quantity between Q2
and Q1 is satisfied by imports.
● Consumers are purchasing more at a lower price so their consumer surplus
increases from H to H+D+E+F+G. However producers are producing less and a
lower price and so producer surplus decreases by D+E
● Domestic producer revenue decreases from A+ B+F+E+D to just A
Benefits of Free Trade:
● Exploitation of comparative advantages - resources are allocated where countries
have a cost advantage over/ operate more efficiently than other producers so
allocative efficiency is attained. Output is maximised and countries can operate
beyond their PPC.
● Large economies of scale - businesses have the potential to grow due to large
international markets so they can benefit from purchasing and technical economies
of scale to lower average costs and increase productive efficiency
● Increased competition and lower prices: global competition leads to dynamic
efficiency as businesses are forced to re-invest and innovate to stay ahead of rivals
and consumers benefit from accessing a diversified product range and lower prices.
, ● Increased choice for consumers and businesses: businesses can source raw
materials from all around the world at cheap prices which lowers their costs of
production so they can stay profitable. and consumers have a great range of
products to choose from.
● Higher rates of economic growth: higher export potential and export revenue - actual
growth will increase with an increase in net exports. Unemployment falls as labour is
derived from demand, living standards and prosperity increases.
● Technology transfers: business have access to new technologies and the spread of
technology is much faster
Costs/Criticisms of Free Trade:
● Infant Industry Argument: industries may not be able to develop as they will be
quickly outcompeted by the world market. Countries may wish to nurture new forms
of economic activities and believe that such industries need some protection from
foreign competitors until they are able to hold out on their own. Reason for Trump’s
tariffs on Chinese goods in 2018 - believed that domestic producers were being
subject to unfair competition.
● Theoretical benefits rests on the assumption that capital and other factors of
production are immobile - in today’s globalised world this may not be true and
countries may become overly reliant on each other with the introduction of free trade.
● Could be argued that Britain’s success was actually built upon protectionist systems
in its empire - was able to import raw materials from its colonies such as cotton from
India while subjecting India to heavy tariffs to prevent its textile workshops from
competing with Lancashire textile mills.
Protectionism:
Protectionism: measures taken by a country to restrict international trade in order to protect
domestic producers from foreign competition.
Benefits of Protectionism:
● Infant Industry argument: under free trade, small industries may not have the
economies of scale to compete with companies in larger industries abroad,
particularly in regards to developing countries looking to diversify into manufacturing
to prevent the risk of primary commodity over-specialisation and the resource curse.
Governments may impose protectionism to allow small industries time to grow and
establish themselves.
○ However this reason may fail in the long term as complacency and
protectionist dependency may develop which prevents COPs decreasing
enough to become competitive.
○ Developing countries may lack power to enact protectionism without risking
heavy retaliatory protectionism
● Protection against Dumping: which is the sale of a product in overseas markets at a
price below cost of production due to heavy subsidies which have generated an
excess supply. Dumpled products will be artificially more competitive than home
products leading to industry decline and potential structural unemployment.
○ However, dumping is extremely difficult to prove as finding info regarding
COPs and proving that products have purposely been sold at prices below
cost is a challenge for WTO. Accused countries may feel wrongly targeted
