GCSE Economics

Mr. Lawrence
2.2.2 International trade
• http://www.wto.org/english/res_e/
statis_e/statis_e.htm#top
America needed to finish off their
railway and Abraham Lincoln was
advised to buy the materials from
Britain.
It seems to me that if we
buy rails from England,
then we’ve got the rails
and they’ve got the
money.

But if we build the rails

here, we’ve got our rails
and we’ve got our money.
 What are the
Why do
gains from
nations trade
trade? between
nations?
How does a
nation What are
determine the
what it obstacles
should to free
produce? trade?
 International trade and The European union
In the exam you will need to know the answers to the following questions. The task for today
is to be able to answer each one of these questions.

1. What do countries trade with each other?

2. Who would be effected and how if the U.K imposed tariffs on American cars sold in the
U.K. ( consider the economy, consumers, businesses and governments)
3. Name and explain the most important aspects of the European union.
4. Discuss the arguments for and against Britain leaving the European union.
5. Describe how changes in the exchange rate affect consumers, businesses and the
economy.
6. Why is free trade beneficial to the world economy?
 Free Trade
Free trade represents trade between countries where imported or
exported goods are not controlled by tariffs, quotas, subsidies.
Objective – we are going to understand what international trade is as
well as the benefits and drawbacks.
Starter – Describe the affects of international trade for the following.
1. Prices for consumers
2. Choice for consumers
3. Access to markets
4. Affect of foreign competition on domestic businesses
5. Production costs
6. Effect on unemployment
Worksheet
Advantages of Disadvantages of
free trade free trade
 Free Trade

Advantages Disadvantages
• More competition • Foreign competition harms
• Lower prices for consumers domestic firms
• Increased choice for consumers • Increased unemployment
• Lower production costs / raw
materials for firms
• Wider markets for firms and
increased exports
 Benefits of international trade for LEDCs

1. Increased exports increased _______ increased GDP.

2. Specialisation  _______  reduced _______  increased profits for
businesses  increased tax revenue  increased _______.
3. Increased competition  increased _______ for consumers  increased
_______ .

4. Extension: Extend the consequences by adding in additional benefits I may have

missed out.

government investment quality & lower prices output

economies of scale production costs standard of living

 Think  Pair  Share
How does global trade improve standard of living? (hint: consider
competition & efficiency)

How could global trade negatively impact standards of living?

 Protecting domestic
economies
Protectionism: Any
attempt to impose
restrictions on trade
of goods and services.

What do countries
need to protect their
economies from?
1.What do you expect are the positive effects of protection of industries?
2.What do you expect the negative effects of protection to be?
What is protectionism?
• Protectionism: Any attempt to impose restrictions on trade of goods
and services.
• Prevent dumping
• Help protect growing infant industries
• Raise revenues
• Reduce current account deficits
• Slows / reduces unemployment
• Prevent the import of harmful / illegal goods
• Retaliation
Why not?
• Goods become more expensive
• Limits competition
• Protects / encourages inefficient businesses
• Trading partners retaliate
• If demand is price inelastic people will by the imported item and have
less disposable income
Reasons why protectionism
occurs
 Protect growing / infant industries
• Infant industry – an industry that a nation or firm has just
entered
• They will have high costs as
• Small industries may not be able to compete against
foreign competitors and be crushed
• Trade barriers can help keep industries safe until it can
compete on its own
 Infant industries (worksheet)
The term infant industry refers to a number of newly-established firms within an economy. These
firms are likely to be operating on a small scale presently but have the potential to expand
significantly. In the short term, it is unlikely that these firms will be able to compete against
_________________ firms operating in the same industry in other countries. This is because low
levels of production will result in relatively high unit costs. If there are significant economies of
scale to be achieved, foreign firms may have already reached __________________ output and,
therefore, be more competitive. The infant industry may, however, develop a _________________
advantage in the long term, if they are protected from competition in the short term and allowed to
grow to the point where they have achieved a ________________cost structure. One of the main
reasons given for the continuing use of trade __________________ by developing countries is to
protect young industries until they reach a point where they can compete on an international scale.

barriers, capacity, comparative, competitive, older

Infant industries
The term infant industry refers to a number of newly-established firms within an
economy. These firms are likely to be operating on a small scale presently but have
the potential to expand significantly. Inolder
the short term, it is unlikely that these firms
will be able to compete against _________________ firms operating in the same
industry in other countries. This is because low levels of production will result in
capacity
relatively high unit costs. If there are significant economies of scale to be achieved,
foreign firms may have already reached __________________ output and, therefore,
comparative
be more competitive. The infant industry may, however, develop a
_________________ advantage in the long term, if they are protected from
competitive
competition in the short term and allowed
barriersto grow to the point where they have
achieved a ________________cost structure. One of the main reasons given for the
continuing use of trade __________________ by developing countries is to protect
young industries until they reach a point where they can compete on an
international scale.
Infant industries: true OR false?
1. An infant industry refers to an older established industry within an
advanced industrial economy which is protected against foreign
competition by the use of trade barriers
• FALSE – this kind of industry is known as a sunset industry, although
protectionist measures may be used to postpone its decline

2. Firms used to being protected behind the ‘infant industry’ walls will
fight hard to stop the government from ever removing those walls
• TRUE – Just as M.P.s may get used to fat expenses, companies get used to
having government help behind them.

3. The benefits resulting from using trade barriers to protect an infant

industry depend on the length of time protectionist measures are used
• TRUE – any cost reductions from achieving economies of scale may be off-
To gain tariff revenues
• Tariffs are paid by importers (the business buying the goods) directly to the
government and thus the government can gain revenues; meaning customers
indirectly pay the costs.

Protect customers from unsafe products

• Countries have different laws on what is legal and different safety standards
e.g. electronic goods and drugs
• So the government puts regulation in place to either make sure the products
are up to standard or banned.

Protecting employment
• Jobs and industries can fail due to cheap imports e.g. foreign businesses
selling at a cheaper price
Protect - Banned or not banned?

Mimolette cheese from France

Banned in the USA – made from mites

French Roquefort banned in New

Zealand

Haggis banned in USA made from

sheep stomach
Foie Gras banned in USA as it
involves force feeding fat to
ducks
 Retaliation (worksheet)

Read through
the case study
of USA vs China
 Dumping
Some firms can produce goods at lower costs than
other firms, this could be due to a subsidy, therefore
they can sell them at a cheaper price.

But when a firm enters a foreign market and starts to

sell their products below what it costs to make or
below the price they charge in their “home”
(domestic) market – this is called dumping.

This happens because firms want to:

• Increase market share
• Put foreign businesses out of competition
• Get rid of surplus stocks
China slaps up to 200% tariffs on
Australian wine
 Reduce current account
If a country is importing more
than exporting, then more
money is flowing out of the
economy than coming in.
So there is the possibility of:
• less money for government
investment
• Unemployment
• Inflation
Types of protectionism
Types of Protectionism
• Tariffs – This is a tax on imports.
• Quotas – This is a physical limit on the quantity of imports
• Subsidies – If a government subsidises domestic production this gives
them an unfair advantage over competitors.
• Embargoes – This is a total ban on a good, this may be done to stop
dangerous substances
• Administrative barriers – Making it more difficult to trade, e.g.
imposing minimum environmental standards.
Tariffs
 Tariffs – what is a tariff
1. A tariff is a tax placed on an import
2. This increases tax revenues for the government
3. It also increases the price the customer has to pay
4. Therefore a fall in demand for the goods
5. Consumers will then switch consumption to domestic goods
6. And help the economy
Tariff – analysed using a diagram
S2

Price S1
Tariff

P2

P1

D1

Quantity
Q2 Q1
 Protectionist Tariffs
Video Lesson

THE EFFECTS OF A TARIFF ON IMPORTS

 Tariff - advantages
• Domestic produced goods do not incur the tariff and so are likely to be sold
at a cheaper price
• Domestic producers gain price advantage
• It can ensure better job security – stops unemployment
• Protect infant businesses from being swamped by international competition
from MNCs
• Raises important tax revenue for government which can be spent on
infrastructure
• Aids economic growth by improving the GDP
• Reduces imports so improves balance of trade
 Tariff - disadvantages
• Makes goods more expensive
• Reduces competition
• If price inelastic high import price won’t
decrease sales
• Tariff may just increase prices for consumers
• Restricts the volume of trade
• Other countries may impose their tariffs in
response to this on their imports (trade wars)
Import quotas
 Import Quotas – what is a quota
• A quota is a physical limit on the
quantity of a good imported or
exported.
• Imposing a limit on the quantity of
goods that are imported will
increase the share of the market
available for domestic products
 Import Quotas - advantages
1. Protects domestic businesses

2. Creates more job opportunities

3. Goods become less expensive

Through quotas and protectionism, the prices of imported goods become
expensive so that customers choose to buy domestic goods. This way, the
government can still get a steady source of revenue, which improves
the economy in the process
Import Quotas - disadvantages
• Quotas are there to protect infant businesses but often the quotas
last long after the industry has matured.
• Trading partners react and this stops free trade
• Limits choice
• Increase in price, until the domestic market picks up the slack
Effect of Quota on supply

£6

£5
Quotas – analysed using a diagram
P
Quota Supply (free market)

Price after
quota
Free market
equilibrium
price

Demand

Q
Free Mkt
Q1
Quantity
Subsidies
 Subsidies
A subsidy is financial help from the government given to
businesses to reduce the costs of production and increase supply
e.g. Green energy Subsidies on Mexican sugar mean
that Mondelez the manufacturer
of Oreos have announced they are
As the production costs decrease and supply increases, this should going to move production from
reduce the market price. Chicago to Mexico
The maker of Oreo cookies
announced last week it’s moving
A subsidy should: 600 jobs to Mexico, due to U.S.
sugar subsidies that drive up the
• Lower price and increase sales cost of the sweet ingredient.
• Protect jobs Video here
• Increase supply
• Increase competition against foreign businesses

However, the price savings are not always passed onto consumers
and subsidies can protect failing businesses.
 Evaluating Protectionism

Arguments for and Against Protectionism

The links below go to videos in which the issues of free trade and protectionism are debated.
Watch the videos, then consider the discussion questions at the bottom of the slide.
• Make Trade Fair - by Oxfam:
• Joseph Stiglitz on globalization:
• Columbian FTA, why it's good for America
• Kenyans want trade not aid
• Lou Dobbs on the dangers of trade
• More Lou Dobbs with guest David Sirota
• Ambassador to Columbia on the Benefits of Free Trade
• Obama vs. McCain on Free Trade - 3rd Debate

Discuss the following questions after watching each video:

1. What views on trade are expressed in the video?
2. Are there biases expressed by the people in the video? If so, what are they?
3. Evaluate the arguments for or against free trade made in the video.
Summarise the arguments for and
against the UK Government
protecting against imports (worksheet)
 Stakeholder Advantages of protectionism Disadvantages of protectionism
Government

Consumers

Firms
Trading blocs
Trading Blocs - Countries that agree to free trade between
them are called trading blocs
1 Name that trading bloc!
1 Name that trading bloc!

EU
2 Name that trading bloc!
2 Name that trading bloc!

NAFTA
3 Name that trading bloc!
3 Name that trading bloc!

G20
3 Name that trading bloc!
3 Name that trading bloc!

ASEAN
Examples of trading Blocs
• European Union - EU
• Association of Southeast Asian Nations – (ASEAN)
• NAFTA – North American Free Trade Agreement
• South African Customs Union – SACU
• G20 – developing nations
Benefits and drawbacks of trading Blocs.
Benefits Problems
•An enlarged market •More competition from
•Economies of scale imports
• No tariffs •Bureaucracy
• Decreased prices •Rely to heavily on trade from
•Increased choice partner countries
•Increased FDI
World Trade Organisation (WTO)
International trade is increasing. Why?
1. Better transport and
communication
2. Globalisation
3. Increasing size of MNCs
4. Travel and consumer
awareness
5. Removal of trade
barriers
6. Actions taken by the
World Trade
Organisation
Role and impact of WTO
• Holds meetings between countries that:
• Promotes free trade (removing barriers) between member
countries
• Settles trade disputes (e.g. dumping, copyright) between
countries through meetings
• Imposes fines and penalties on countries that break the rules
• Has helped to reduce developed country import tariffs/ quotas from
14% in 1952 to less than 4% in 2006.

• However, some believe that the WTO prefers richer nations, firms'
rights over workers and causes hardship for developing nations
Trade patterns
Developed Developing
Loss of trade in manufacturing – to developing nations Increase in net migration – people leaving the country
More air travel Increase in FDI
More inequality Reduction in barriers
Large dependence on selling natural resources