Reasons for International Trade

Domestic Non-availability

International trade is the exchange of goods and services between countries. An import is the UK purchase of a good or service made overseas. An export is the sale of a UK-made good or service overseas.

A nation trades because it lacks the raw materials, climate, specialist labour, capital or technology needed to manufacture a particular good. Trade allows a greater variety of goods and services.

Principle of Comparative Advantage

The principle of comparative advantage states that countries will benefit by concentrating on the production of those goods in which they have a relative advantage.

For instance, France has the climate and the expertise to produce better wine than Brazil. Brazil is better able to produce coffee than France. Each country benefits by specializing in the good it is most suited to making.

France then creates a surplus of wine which it can trade for surplus Brazilian coffee.

Protectionism

Advantages of Protectionism

Protectionism occurs when one country reduces the level of its imports because of:

                Infant industries. If sunrise firms producing new-technology goods (eg computers) are to survive against established foreign producers then temporary tariffs or quotas may be needed.

                Unfair competition. Foreign firms may receive subsidies or other government benefits. They may be dumping (selling goods abroad at below cost price to capture a market).

                Balance of payments. Reducing imports improves the balance of trade.

                Strategic industries. To protect the manufacture of essential goods.

                Declining industries. To protect declining industries from creating further structural unemployment.

Disadvantages of Protectionism

                Prevents countries enjoying the full benefits of international specialization and trade.

                Invites retaliation from foreign governments.

                Protects inefficient home industries from foreign competition. Consumers pay more for inferior produce.

Protection Methods

Tariffs

Tariffs (import duties) are surcharges on the price of imports. The diagram below uses a supply-and-demand graph to illustrate the effect of a tariff.

Tariff

Note that the tariff

                raises the price of the import;

                reduces the demand for imports; a

                encourages demand for home-produced substitutes;

                raises revenue for the government.

Quotas

Quotas restrict the actual quantity of an import allowed into a country. Note that a quota:

                raises the price of imports;

                reduces the volume of imports;

                encourages demand for domestically made substitutes.

Other Protection Techniques

                Administrative practices can discriminate against imports through customs delays or setting specifications met by domestic, but not foreign, producers.

                Exchange controls (currency restrictions) prevent domestic residents from acquiring sufficient foreign currency to pay for imports