International Trade and Economic Integration

Posted on Jun 28, 2024 in Economy

International Trade

International trade allows countries to specialize in producing goods they are best at. Defenders of free trade propose international trade without public sector involvement.

Advantages of Free Trade

  • Encourage competition, specialization, and technology
  • Increase productivity and welfare
  • Promote improved quality of goods and cost reduction

Arguments for Protectionism

Advocates of protectionism argue that the public sector should regulate international trade to support domestic industries and protect developing countries from foreign competition.

Trade Policy Measures

  • Tariffs: Taxes imposed on foreign products to increase their domestic selling price and protect domestic products from cheaper competition.
  • Contingents: Limits on the quantity of specific goods that can be imported, regardless of their price.
  • Export Subsidies: Financial aid for domestic manufacturers to export goods and services at lower, more competitive prices.
  • Non-Tariff Measures: Administrative regulations that favor domestic goods over foreign goods.

Forms of Foreign Trade

Bilateral Trade

Trade agreements established between two specific countries.

Global Action

Initiatives aimed at promoting international free trade worldwide, such as:

  • GATT (General Agreement on Tariffs and Trade)
  • WTO (World Trade Organization)

Regional Blocs

Groups of countries with similar development levels that associate to remove trade restrictions among themselves. Different types of economic integration include:

  • Preferential Agreements: Not all products are included, and free trade is not comprehensive.
  • Free Trade Area: All trade tariffs are eliminated among member countries.
  • Customs Union: Member countries eliminate trade restrictions and establish a common external tariff on imports from the rest of the world.
  • Common Market: A customs union with free movement of production factors, including labor and capital.
  • Economic Union: Harmonization of economic policies, such as the common agricultural policy and trade policy in the EU.
  • Monetary Union: Member countries adopt a single currency, relinquishing control over monetary and exchange rate policies.

Effects of Economic Integration

Economic Effects

  • Economies of scale due to increased production volume
  • Progress towards specialization
  • Intensified competition
  • Favorable effects on development and employment due to competition
  • Enhancement of large-scale economic activities
  • Increased bargaining power of member countries

Socio-Political Effects

  • Minimized political conflict

Balance of Payments

An accounting document that records and classifies trade and financial flows between a country and the rest of the world. It uses a double-entry system, with each transaction recorded twice.

Components of the Balance of Payments

  • Current Account:
    • Balance of trade (goods)
    • Balance of services (tourism, transport, insurance, etc.)
    • Balance of current transfers (pensions, remittances)
  • Capital Account:
    • Capital transfers (EU funds for infrastructure)
    • Purchase or sale of intangible assets (patents, trademarks) and non-produced assets (land)
  • Financial Account:
    • Direct investment (real estate)
    • Portfolio investment (stocks, bonds)
    • Other investments (commercial loans, deposits)
    • Variations in reserves (currency held by the central bank)
  • Errors and Omissions: Difference between total receipts and payments