International Trade: Advantages, Barriers, and Policies
International Commerce
International commerce fundamentally rests on the fact that nations have very different resources and diverse technological capabilities.
Advantages
Free trade is associated with the following points:
- Fostering competition
- Promoting specialization and technological advancements
- Increasing productivity and well-being
- Favoring quality improvement and cost reduction
Trade Policy
Barriers
- Duties: Taxes on imports.
- Quotas or import limits
- Export subsidies
- Dumping: When the national industry voices its demand and cannot reduce it, it increases market share in foreign markets and penetrates them more easily, sometimes at prices below the sale price in the national market.
- Non-tariff barriers: Administrative regulations that discriminate against foreign goods in favor of national ones.
GATT (General Agreement on Tariffs and Trade)
This organization favored the liberalization of international exchanges and the elimination of trade restrictions. Their representatives met to negotiate agreements that tended to reduce obstacles to free trade. The basic principle was the most-favored-nation clause, which established that any tariff reduction agreed upon between any group of member countries should be extended to all other GATT members.
WTO (World Trade Organization)
Its objective is to defend free trade and solve problems among the three major current blocs: Asia, Europe, and America.
WTO Principles
- a) Enforcing the multilateral trade agreements signed to create and continue promoting free trade.
- b) Serving as a forum for multilateral and even bilateral trade negotiations among member countries.
- c) Cooperating with other international institutions, such as the International Monetary Fund (IMF) and the World Bank (WB).
Free Trade Areas
Among them, they do not pay taxes, but other countries do. They can set tariffs against the rest of the world. Example: NAFTA (United States, Canada, and Mexico).
Customs Unions
They have a 0% tariff, but they also agree that countries wishing to join will have the same tariff (%).
Common Markets
A common market has the following features:
- Member countries agree to eliminate all restrictions.
- A common external tariff is established on imports from elsewhere.
- Free movement of production factors is allowed.
- Member countries adopt common policies in areas such as social security, taxation, transportation, agriculture, and competition.
Financing
- a) Value-added tax (VAT)
- b) Tariffs on imported agricultural products
- c) Customs duties
- d) Contributions from member countries based on their GNP
Main EU Policies
- Regional policy: Aims to reduce the differences between the various regions of the member countries.
- Social policy: Implemented through the European Social Fund (ESF). It provides funds for social policies.
Instruments
- Structural Funds: For infrastructure.
- EAGGF: Guarantee to maintain the targeted income of farmers.
- Cohesion Funds: Aimed at reducing welfare differences between EU countries.
Balance of Payments
It is a systematic record of economic transactions occurring during a given time between residents of one country and residents of the rest of the world. Incomes (inflows of foreign currency, for example, exports of goods or capital inflows) and payments (outflows of foreign currency) are accounted for. There is a difference between the balance of incomes and payments.
Current Account
Merchandise Trade Balance
It includes the export and import of goods, excluding freight and insurance (exports by sea). The value of exports is recorded in the income column, and the value of imports in the payments column.
Services Account
It includes the import and export of services, including transactions of intangible products such as transportation costs, travel, etc. In the case of Spain, tourism.
Income Account
For instance, if a worker works just across the border but lives here, everything they earn in France and bring into our country enters the income account. It includes income from capital and labor obtained in a country other than the residence of the owner.
Current Transfers Account
For example, when emigrants send money home. It includes all operations that do not have a direct economic counterpart, such as remittances from emigrants. Inflows of transfers are recorded in the income column, and outflows in the payments column.
Current Account Balance
The sum of the balances of merchandise, services, income, and transfers constitutes the current account balance. When the account has a surplus (incomes > payments), it increases the assets against the exterior, and the rest of the world finances the economy. When the account has a deficit (incomes < payments), it decreases the assets against the exterior, and the economy is financed by the rest of the world.
Demand for Euros
1) Real Exchange Rate
Exports depend on the price of national goods relative to foreign ones, as low prices stimulate exports.
Nominal Exchange Rate
An increase in the exchange rate makes exports more expensive because foreigners have to pay more for European goods and services. A decrease in the nominal exchange rate lowers European exports and increases the demand for euros.
National Prices
An increase in European prices makes goods and services from the Eurozone relatively expensive, which generates a reduction in exports and the demand for euros.
Foreign Prices
Increased foreign prices make foreign goods and services cheaper in Europe, while a decrease in foreign prices makes foreign goods and services more expensive, and European exports are reduced, decreasing the demand for euros.
2) Foreign Country Income
Exports from a country increase when foreign income grows. The growing demand for investment is also linked to production levels.
3) Interest Rate Differential
Short-term capital inflows depend mainly on the return on assets that can be placed in that capital compared to the return in other countries.
Variables in the Supply of Euros
1) Real Exchange Rate
When the real exchange rate increases, foreign goods and services become cheaper, and imports increase, while the opposite will happen if the real exchange rate decreases.
Nominal Exchange Rate
An increased nominal exchange rate makes imports cheaper, but a reduced rate reduces imports and the supply of euros.
Domestic Prices
An increase in domestic prices makes foreign products cheaper and increases imports. A reduction in domestic prices makes foreign products more expensive and decreases the supply of euros.
Foreign Prices
A foreign price increase makes foreign products more expensive. A decrease in foreign prices makes foreign products cheaper, increasing imports and the supply of euros.
2) National Income
The demand for foreign consumer goods depends on disposable income in the Eurozone.
Reasons to Offer Euros
- Imports: Euros are offered by European importers.
- European tourists wishing to visit America: European tourists want to exchange euros for dollars, thus offering euros.
- Capital Outflow: Euros are offered in exchange for dollars by individuals and businesses that want to buy foreign financial assets.
- Capital Flight: Short-term capital flight is guided by the return that can be obtained on assets.