International Trade

The UK and International Trade

• The world economy is becoming increasingly global.
• The UK has an open economy as far as trade is concerned
• The EU is a customs union which allows free trade of goods and services between member countries
• Majority of UK’s trade is within the EU – this is increasing
• The UK’s largest trading partner is the USA accounting for 15% of trade although this is decreasing
• Increasingly the UK is trading more with emerging economies such as China, Thailand, Malaysia, Singapore, South Korea and Taiwan
• At the moment the UK is the 2nd largest exporter of services in the world and the 8th largest exporter of goods

Benefits of international trade

• Comparative advantage allows businesses to specialise and increase their income and standard of living
• With specialisation countries are able to exploit economies of scale
• Increases efficient allocation of world resources
• Increased competition for producers which leads to improved productive and allocative efficiency
• Greater choice for consumers

Costs of international trade

• Can lead to diseconomies of scale if production gets too large
• Transport costs are not included in comparative advantage model
• Countries may become over dependent on one industry therefore may be vulnerable to any changes in global markets
• Can damage infant industries

Trade with Developing Economies

Trade is seen as a crucial way of increasing the development of a countries economy

Many developing countries are now producing more manufactured goods which they are exporting overseas

However there is still a reliance on commodities such as agricultural products for many of the worlds poorest economies which makes them vulnerable to changes in supply or demand

Two major ways economies can pursue their goal of development:

1. Import substitution – the country produces what it had originally imported, idea is that you import capital goods to produce the consumer goods required however this strategy has had little success

2. Export promotion – where the country seeks to identify markets where they can exploit their comparative advantage

Protectionism

Protectionism is where the government shields domestic producers by restricting foreign competition.

There are a number of ways a government can protect industry including:

• Tariffs
• Quotas
• Embargoes
• Subsidies
• Exchange controls

Causes

Governments protect for a number of reasons:

• To protect employment especially structural unemployment in declining industries
• Changes to comparative advantage in the world economy may lead to governments seeking to protect declining / infant industries
• Governments may seek to control imports to improve their balance of payments account
• As a reaction to dumping of excess capacity at low prices by other countries
• To increase government revenue
• To try and encourage import substitution to occur

Consequences

• Protectionism increases the prices of imported goods for consumers resulting in a loss of consumer surplus
• Increased cost to the government to enforce the controls
• Domestic companies who import materials or components from overseas are faced with higher costs
• Threat of retaliation from other countries
• Protectionism makes domestically produced goods more attractive

Direct Protectionism

• Direct Protectionism includes tariffs
• Tariffs act as taxes on imports which make them more expensive for domestic consumers
• As imports become more expensive relative to exports it means consumption of them declines
• Tariffs also earn money for the government

Protectionism and the EU

• The EU is a customs union which allows free movement of goods, services and factors of production between member states
• No EU member can protect against any other EU member

Balance of Payments

The balance of payments records all trade between one country and all other countries

It includes:

• Trade in goods
• Trade in services
• Net flow of investment income
• Money transfers

Current Account

The current account records all trade in goods and services for a countries economy

This includes

• Imported goods
• Exported goods
• Imported services
• Exported services

Capital Account

The capital account records all capital flows into and out of a country including:

• Financial investment
• Direct investment
• Currency Trading 

Payment Deficits

Payment deficits result where more is imported than exported. This causes an imbalance in the balance of payments. In recent years the UK has run a large current account deficit

The government have been less worried about this deficit because of the following:

• Investment and capital inflows mean the capital account balances the current account
• There will be some automatic correction with changes in demand due to the business cycle
• Some of the deficit could be caused by importing capital goods which will increase productivity of the economy in the longer term

However there are also issues concerned with payment deficits including:

• Falling exchange rate caused by excess supply of £s
• Structural weaknesses – may be a symptom of a lose of comparative advantage / competitiveness
• May be a sign of too much consumption and rising personal debt
• Can lead to a loss in output and employment as consumers purchase goods from abroad decreasing domestic demand
• Problems associated with funding a current account deficit