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.pdfLANGUAGE STUDY
1. Find in Texts 1.1–1.4 the English equivalents for the following word combinations and parts of sentences.
Выгода, извлекаемая из специализации; принимать материальную форму; использование зарубежных технологий; безнаказанно злоупотреблять окружающей средой; стали редкими; неосвоенные рынки; перевод денежных средств; способствует получению выгод от крупномасштабного производства; ограничение рынка; показаны в платёжном балансе; получение ссуды; приобретение реальных активов; положительное сальдо баланса; отрицательное сальдо баланса.
2. Match the terms on the left with their definitions on the right.
1) surplus |
a) a non-trading business asset of a relatively permanent nature, such |
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as plant, fixtures, or goodwill |
2) capital asset |
b) a particular product or a characteristic that serves to identify a |
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particular product |
3) brand |
c) lay out (money or capital in an enterprise, esp. by purchasing |
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shares) with the expectation of profit |
4) franchising |
d) an excess of receipts over payments on the balance of payments |
5) invest |
e) an excess of revenues over outlays and expenses in a business |
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enterprise over a given period of time, usually a year; the monetary |
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gain derived from a transaction |
6) profit |
f) the provision of goods or services to meet customer or consumer |
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needs |
7) marketing |
g) an arrangement in which a company gives a business the right to |
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sell its goods or services in return for payment or a share of the profits |
8) adverse balance |
h) an excess of payments over receipts on the balance of payments |
3.Find the words in Text 1.3 which mean the following.
1)To spread throughout a space or area.
2)The price paid or required for acquiring, producing, or maintaining something, usually measured in money, time, or energy; expense or expenditure.
3)The quality or state of being efficient; competence.
4)A level of subsistence or material welfare of a community, class, or person.
5)To provide someone with adequate power, means, opportunity, or authority to do something; to make possible.
6)Affluent; rich.
7)Lack of knowledge, information, or education.
8)A tax levied by a government on imports or occasionally exports for purposes of protection, support of the balance of payments, or the raising of revenue.
4.Replace the italicised words in the sentences below with the words and word combinations in 1
and 2.
1)Nowadays, you can hardly imagine a serious business which would feel certain that it could use the resources with no unpleasant consequences.
2)All McDonald’s restaurants operate globally on the principle of authorization granted by
the head manufacturing enterprise to a distributor to market the manufacturer's products.
3)Unfortunately, limited use was made of the new piece of the equipment imported.
4)Fixed assets, such as plant and equipment, buildings, securities, etc. are more or less liquid, i.e. they can be sold relatively easily.
5)A company can devote big sums of money to foreign companies expecting a huge return derived from the amount contributed.
6)Previously unused resources have been recently developed and extracted.
7)Reserves have to be drawn up to meet a passive or unfavourable balance of payments.
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8)An active balance is an indicator of a country’s successful performance.
9)The purchase of real assets in a foreign country is often made by transmitting money abroad.
10)Using foreign know-how relieves nations of spending huge funds on R&D.
READING
THEORIES OF FREE INTERNATIONAL TRADE
Key concepts and terms
Match up the terms on the left with the definitions on the right.
1) input |
a) a basic idea in the Theory of International Trade, that the highest |
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world production of all kinds of goods and services will be reached |
|
if each country or region puts most of its efforts into producing the |
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things which it is best fitted to produce |
2) relative price |
b) a resource required for industrial production, such as capital |
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goods, labour services, raw materials, etc. |
3) absolute advantage |
c) an axiom of some political economists, deprecating interference |
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of government by attempts to foster or regulate commerce, |
|
manufactures, etc. |
4) comparative advantage |
d) the price of a commodity such as a good or service in terms of |
(comparative cost principle) |
another, i.e. the ratio of two prices |
5) laissez-faire |
e) a progressive increase in the general level of prices brought |
|
about by an expansion in demand or the money supply |
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(demand-pull inflation) or by autonomous increases in costs |
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(cost-push inflation) |
6) free trade |
f) the advantage that one country or part of a country possesses |
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over others because it has natural supplies of raw materials, power, |
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labour, etc. which enable it to make a certain product more cheaply |
7) inflation |
g) a policy of unrestricted foreign trade, with no tariffs or subsidies |
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on imports or exports, and no quotas or other trade restrictions |
8) welfare |
h) a measure of the relative size of two classes expressible as a |
|
proportion |
9) ratio |
i) prosperity and well-being in general |
Text 1.5. Read the text and explain the following concepts: a) division of labour; b) absolute advantage; c) comparative advantage.
The Case for Free Trade
The case for specialisation and trade between countries stems from two important economic principles, the benefits of the division of labour and the principle of comparative advantage. The benefits of the division of labour suggest that if each of the world’s countries with its own endowment of both natural or ‘God-given’ resources such as soil, climate and minerals, and ‘man-made’ resources such as capital, know-how and labour skills, specialises in ‘what it does best’, total world output or production can be increased compared to a situation without specialisation.
By engaging in trade, a country can escape the constraints of limited natural resources and small domestic markets. By importing raw materials, energy, foodstuffs and manufactured consumer goods, the country's industries can produce, and its residents can enjoy a range of goods and services which its own resource base would not allow. Likewise, access to the wider world market can allow the country's industries to benefit from long production runs and economies of scale in a way that would not be possible if the country relied solely on the domestic market.
A country possesses an absolute advantage in an industry if it is technically more efficient at producing a good or service than other countries, i.e. if it produces a greater output from given inputs or resources. An absolute advantage must not be confused with the rather more subtle concept of a
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comparative advantage. A comparative advantage is measured in terms of an opportunity cost, or what a country gives up when it increases the output of an industry by one unit. The country which gives up the least other goods when increasing output of a commodity by one unit possesses a comparative advantage in that good.
Text 1.6. Read the text and discuss A. Smith’s contribution into international trade development.
Trade Based on Absolute Advantage: Adam Smith
Smith started with the simple truth that for two nations to trade with each other voluntarily, both nations must gain. If one nation gained nothing or lost, it would simply refuse to trade. But how does this mutually beneficial trade take place and from where do these gains from trade come?
According to Adam Smith, trade between two nations is based on absolute advantage. When one nation is more efficient than (or has an absolute advantage over) another in the production of one commodity but is less efficient than (or has an absolute disadvantage with respect to) the other nation in producing a second commodity, then both nations can gain by each specialising in the production of the commodity of its absolute advantage and exchanging part of its output with the other nation for the commodity of its absolute disadvantage. By this process, resources are utilised in the most efficient way and the output of both commodities will rise. This increase in the output of both commodities measures the gains from specialisation in production available to be divided between the two nations through trade.
For example, because of climatic conditions, Canada is efficient in growing wheat but inefficient in growing bananas (hot houses would have to be used). On the other hand, Nicaragua is efficient in growing bananas but inefficient in growing wheat. Thus, Canada has an absolute advantage over Nicaragua in the cultivation of wheat but an absolute disadvantage in the cultivation of bananas. The opposite is true for Nicaragua.
Under these circumstances, both nations would benefit if each specialised in the production of the commodity of its absolute advantage and then traded with the other nation. Canada would specialise in the production of wheat (i.e. produce more than needed domestically) and exchange some of it (surplus) for bananas grown in Nicaragua. As a result, both more wheat and more bananas would be grown and consumed, and both Canada and Nicaragua would gain.
In this respect, a nation behaves no differently from individuals who do not attempt to produce all the commodities they need. Rather, they produce only that commodity which they can make most efficiently and then exchange part of their output for the other commodities they need or want. As a consequence, total output and the welfare of all individuals are maximised.
Thus, while the mercantilists believed that one nation could gain only at the expense of another nation and advocated strict government control of all economic activity and trade, Adam Smith (and the other classical economists who followed him) believed that all nations would gain from free trade and strongly advocated a policy of laissez-faire (i.e. as little government interference with the economic system as possible). Free trade would cause world resources to be utilised most efficiently and would maximise world welfare. There were to be only a few exceptions to this policy of laissezfaire and free trade. One of these was the protection of industries important for national defense.
In view of this, it seems paradoxical that today most nations impose many restrictions on the free flow of international trade. Trade restrictions are invariably rationalised in terms of national welfare. In reality, trade restrictions are advocated by the few industries and their workers who are hurt by imports. As such, trade restrictions benefit the few at the expense of the many (who will have to pay higher prices for competing domestic goods).
R e m e m b e r !
Country A has an absolute advantage over Country B in the production of a good when Country A can produce a unit of the good with fewer resources than can Country B. Trade can be mutually beneficial even if one country has an absolute advantage in the production of all goods.
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Text 1.7. Read the text and discuss D. Ricardo’s contribution into international trade development.
Trade Based on Comparative Advantage: David Ricardo
Theory of Comparative Advantage
In 1817 Ricardo published his Principles of Political Economy and Taxation, in which he presented the law of comparative advantage. According to the law of comparative advantage, even if one nation is less efficient than (has an absolute disadvantage with respect to) the other nation in the production of both commodities, there is still a basis for mutually beneficial trade. The first nation should specialise in the production and export of the commodity in which its absolute disadvantage is smaller (this is the commodity of its comparative advantage) and import the commodity in which its absolute disadvantage is greater (this is the commodity of its comparative disadvantage).
Note that in a two-nation, two-commodity world, once it is determined that one nation has a comparative advantage in one commodity, then the other nation must necessarily have a comparative advantage in the other commodity.
Comparative advantage must not be confused with absolute advantage. A country possesses an absolute advantage in producing a good or service if it can produce more of the good from given factors of production or inputs than any of its competitors. Comparative advantage, by contrast, is measured by what a country gives up in terms of other goods, when it produces a particular good or service. The country which gives up the least other goods when it increases production of a particular good possesses the comparative advantage in that good. It is quite possible for a country to have an absolute disadvantage in the production of a good, while still enjoying a comparative advantage.
How the Comparative Advantage Rule Works?
To illustrate the principle of comparative advantage and to explain how the principle can work to make trade efficient, a simplified model of the world economy has been constructed, by assuming just two imaginary countries, Atlantis and Pacifica, each with just two units of resource (for example, man-years of labour) that can produce just two commodities, guns or butter.
Each unit of resource, or indeed a fraction of each unit (because resources or inputs are assumed to be divisible), can be switched from one industry to another if so desired in each country. Suppose that in each country the production possibilities are such that one unit of resource can produce:
In Atlantis: |
4 guns |
and |
2 tons of butter |
In Pacifica: |
1 gun |
and |
1 ton of butter |
Quite clearly, in terms of technical efficiency, Atlantis is ‘best at’ – or has an absolute advantage in – producing both guns and butter, but it only possesses a comparative advantage in gun production. The opportunity cost of producing one extra gun in Atlantis is half a ton of butter sacrificed, whereas Pacifica would have to forego a whole ton of butter. But what about butter production? When increasing its butter output by one ton, Atlantis gives up two guns. By contrast, Pacifica would only have to give up one gun to produce an extra ton of butter. Thus, Pacifica possesses a comparative advantage in butter production even though it has an absolute disadvantage in both products.
When one country possesses an absolute advantage in both industries, as in the example above, its comparative advantage will always lie in producing the good in which its absolute advantage is greatest. Similarly, the country that is absolutely worst at both activities will possess a comparative advantage in the industry in which its absolute disadvantage is least.
Developing the model a little further will show that specialisation, in accordance with the principle of comparative advantage, can lead to gains in total output and, hence, to an efficiency gain. If no specialisation occurs and each country devotes one unit of resource to each industry, total production will be:
5 guns and 3 tons of butter.
Now if each country completely specialises in producing the good in which it possesses a comparative advantage, total production becomes:
8 guns and 2 tons of butter.
With complete specialisation, production of one good (guns) has risen, production of the other (butter) has fallen, which does not represent a net gain in output. However, it is possible to devise a system of partial specialisation which will meet the condition for an efficiency gain: specialisation
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should result in at least as much of one good and more of the other, compared to when there is no specialisation. For example, Pacifica could completely specialise, but Atlantis could devote just enough resources (half a unit) to ‘top up’ butter production from 2 to 3 tons. Atlantis’s remaining one and a half units of resource could then be directed into gun production to produce 6 guns. The total production would now be:
6 guns and 3 tons of butter.
Since at least as much butter and more guns are now produced compared to the earlier ‘self-sufficient’ situation, quite clearly specialisation in accordance with the principle of comparative advantage has led to an increased output and, hence, an efficiency gain, which in this context means increased output produced from the same total resources.
R e m e m b e r!
Specialisation and trade depend on comparative, not absolute, advantage. A nation is said to have a comparative advantage in those products where its efficiency relative to other nations is highest. Trade can be mutually beneficial if a country specialises in the products where it has a comparative advantage and imports the products where it has a comparative disadvantage.
If markets are relatively free and competitive, producers will automatically be led to produce in accordance with comparative advantage. If a country has a comparative advantage in the production of a certain good, it will turn out – after the price of the good in various countries is equalised and the total world output of the good equals the total world demand – that this country is an exporter of the good under free trade.
Text 1.8. Read the text and discuss the philosophy of relative price with your partner.
Relative Price
Relative Price versus Nominal Price
In order to understand whether it is worth selling or purchasing a certain product or to conclude that trade in it does not seem reasonable altogether, the concepts of relative and nominal prices are to be spotlighted.
The difference between a nominal price and a relative, or real price, (as an exchange ratio) is often made. The nominal price is the price quoted in money while the relative or real price is the exchange ratio between real goods regardless of money. The distinction is made to make sense of inflation. When all prices are quoted in terms of money units, and the prices in money units change more or less proportionately, the ratio of exchange may not change much. In the extreme case, if all prices quoted in money change in the same proportion, the relative price remains the same, regardless of inflation.
The relative price is the price of a commodity such as a good or service in terms of another, i.e. the ratio of two prices. In essence, the relative price is an opportunity cost, that is, what must be given up in exchange for the good or service that is being purchased. Thus, microeconomics can be seen as the study of how economic agents react to changes in relative prices.
How Relative Price Works
Trade between countries takes place only when it is mutually beneficial for the parties involved, i.e. each party gets an advantage. Here a problem arises: when it is better to buy, when to sell and when trade does not make sense at all. To solve this problem, let us look at the simplified (and hilarious!) example of trade between … Earth and Mars (Can you imagine!?). The two planets produce both food and clothes. (Fantastic! Martians also need food and wear clothes similar to ours!)
Let us assume that on the Earth one unit of food is $20 (P1) and one unit of clothes is $10 (P2). Since the relative price is P1/P2, then 20/10 = 2. This is the price of food in relation to clothes.
On Mars one unit of food is 6 blops (what a strange name did Martians invent for their currency!) and clothing is 2 blops. So, 6/2 = 3. This is the price of food in relation to clothes on that remote planet.
Should Earthlings trade? Should they buy food from Martians? The answer is ‘No’. We’d better sell our food and abandon production of clothes, because 2 units of clothes mean 1 unit of food, our food could be sold for 6 blops. How should Earthlings spend money? They should buy clothes from Mars, and they will buy 3.
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Now the situation on Mars has changed. The price of food is 4 blops and the price of clothes is 2 blops, the relative price is 4/2 = 2, the same as ours. In this case trade does not make sense at all, because there are no benefits for any party!
The situation changes again: food on Mars is 2 blops and a unit of clothes is also 2 blops. In this case 2/2 = 1. Now, this is the relative price of food on Mars. Should Earthlings buy food from Martians? The answer is ‘Yes’!
A conclusion is to be made: it does not matter which way the relative price differs; what matters is that they do differ for the trade to take place. There is almost always a price difference in different countries (and on different planets!) because of the distinction in relative costs of products, tastes or resources.
R e m e m b e r !
•A nation should sell those goods that other nations value at a higher relative price.
•A nation should buy (visa versa) those goods that other nations value at a lower price.
This truth summarises the fundamental economic laws proposed by Adam Smith and David Ricardo.
Concept check
1.Choose the correct statements. Explain your point of view.
1)The examples of man-made resources are soil and mineral deposits.
2)International labour division increases the total world output.
3)The smaller the domestic market, the more benefits it provides to local manufacturers.
4)An absolute advantage is similar to an opportunity cost.
5)A comparative advantage is similar to an opportunity cost.
6)Opportunity cost is measured in terms of what a country will gain when it increases the output of an industry by one unit.
2.Summarise the main points of A. Smith’s theory (Text 1.6) according to the following questions.
1)What is the main reason for a country to refuse from trade?
2)How can gains from specialisation be measured?
3)What should Canada and Nicaragua specialise in? Why?
4)What does ‘specialisation’ mean?
5)In what way can national and individual behaviours be compared?
6)What does a policy of laissez-faire mean?
7)What are the disadvantages of imposing trade barriers?
3.Summarise the main points of D. Ricardo’s theory (Text 1.7) according to the following questions.
1)What does the law of comparative advantage state?
2)What is the underlying difference between absolute and comparative advantages?
3)Why is it beneficial for Pacifica (an imaginary country) to specialise in butter production regardless of having absolute disadvantages in both products?
4)What do the self-sufficient situation and the complete specialisation illustrate?
5)Why does the partial specialisation lead to an overall efficiency gain?
4.What are nominal and relative prices? Why is distinction made between them? Is it misleading?
5.Explain the significance of the relative price in deciding whether it is worth buying or selling a certain product, or ignoring both options for a country (see the example of trade between Earth and Mars in Text 1.8).
6.Do you agree with the following statements? Give your reasons.
1)The relative price for the same commodity being equal in two countries, trade in this commodity does not make sense.
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2)Specialisation is beneficial only for one of the parties involved.
3)Mercantilists favour government interference into economy and trade.
4)Most industries in each country gain from imposing trade barriers.
5)A country should import commodities of its comparative disadvantage.
6)A country should export commodities of its comparative disadvantage.
7)It is quite unthinkable for a country to have an absolute disadvantage in the production of a commodity, whilst still enjoying a comparative advantage.
7.Complete the following sentences.
1)The case for specialisation and trade between countries results from…
2)Importing raw materials, energy, foodstuffs and manufactured consumer goods, a country and its residents can have…
3)If a country relied only on the domestic market, …
4)What a country gives up when it increases the output of an industry by one unit is …
5)In the exceptional case, if all prices quoted in money change in the same proportion, …
6)Even as the real price remains exactly the same, …
7)A nation should sell those goods that …
8)A nation should buy those goods that …
9)As soon as it is determined that one nation has a comparative advantage in one commodity, then the other nation must necessarily have …
10)Trade restrictions are backed up by …
11)When one country has an absolute advantage in both industries, its comparative advantage will always lie …
LANGUAGE STUDY
1. Match the words on the left with their definitions on the right.
1) endowment |
a) any part or subdivision |
2) self-sufficient |
b) the planting, tending, improving, or harvesting of crops or plants |
3) fraction |
c) the source of income with which an institution, a country, etc., is |
|
granted |
4) cultivation |
d) a person who resides in a place |
5) resident |
e) able to provide for or support oneself without the help of others |
6) curve |
f) produced in, or involving one's own country or a specific country |
7) domestic |
g) a continuously bending line that has no straight parts |
8) output |
h) on (one's) own initiative or responsibility |
9) voluntarily |
i) the amount produced, as in a given period; the material produced, |
|
manufactured, yielded, etc. |
2. Match the verbs on the left with their synonyms on the right.
1) stem |
a) shift or change the direction of something |
2) devise |
b) have |
3) switch |
c) arise or develop |
4) possess |
d) work out |
5) measure |
e) disconcert |
6) confuse |
f) support |
7) advocate |
g) use |
8) utilize |
h) calculate |
3.Replace the italicised words in the sentences below with the correct form of the words in 1 and 2.
1)The allowance was enough to support the company for a month.
2)The concepts of absolute and comparative advantages are not to be mixed up.
3)The internal market accounts for most of the company's income.
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4)The (impossible) situation in which a country is completely self-dependent and has no foreign trade is called autarky.
5)A substantial part of the nation is concerned with eliminating of all trade barriers which may increase unemployment.
6)Some companies willingly help the needy through establishing charitable funds.
7)Nobody was quite ready for such a massive harvest which was due to special tillage techniques.
8)The partners managed to make up such a project that led to mutual benefits.
READING
PROTECTIONISM
Key concepts and terms
Match up the terms on the left with the definitions on the right.
1) tariff |
а) a theory, or a policy, of defending the producers in a country from |
|
foreign competition in the home market by the imposition of such |
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discriminating duties on goods of foreign production that will restrict or |
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prevent their importation |
2) dumping |
b) a tax levied by a government on imports or occasionally exports for |
|
purposes of protection, support of the balance of payments, or the raising |
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of revenue |
3) protectionism |
c) any legal stoppage of commerce; a government order prohibiting the |
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departure or arrival of merchant ships in its ports |
4) quota |
d) selling goods abroad at (or below) cost price |
5) embargo |
e) a financial aid supplied by a government, as to industry, for reasons of |
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public welfare, the balance of payments, etc. |
6) subsidy |
f) a prescribed number or quantity, as of items to be manufactured, |
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imported, or exported, immigrants admitted to a country, or students |
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admitted to a college |
7) revenue |
g) faulty, unequal, or unfair distribution (as of wealth, business, etc.) |
8) maldistribution |
h) the income accruing from taxation to a government during a specified |
|
period of time, usually a year |
9) cartel |
i) involving more than two nations or parties |
10) multilateral |
j) a collusive international association of independent enterprises formed |
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to monopolise production and distribution of a product or service, control |
|
prices, etc. |
11) conditional |
k) not absolute; made or granted on certain terms |
Text 1.9. Read the text, clear up the reasons for government control of international trade in the UK and discuss whether they are applicable for most countries.
Controlling International Trade
Reasons for Government Control of Foreign Trade
In general trade is controlled because governments think nationally rather than internationally. Although people as a whole lose when trade is restricted, those of a particular country may gain.
Many reasons are put forward to justify controls. Occasionally, they have some logical justification; more usually they stem from sectional interests seeking to gain advantages. We can, therefore, examine the arguments under three main headings:
1)those based on strategic, political, social and moral grounds;
2)those having some economic basis; and
3)those depending on shallow economic thinking.
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Non-Economic Arguments
1) To encourage the production of a good of strategic importance
Where a nation is dependent on another for a good of strategic importance, there is a danger of its supply being cut off in the event of war. Thus, one argument for subsidising aircraft production in the UK is that it will ensure the survival of technical know-how, plant and skilled labour.
2) To foster closer political ties
As a member of the EC, Britain must impose a common external tariff as part of a movement towards political as well as economic unity.
3) To prosecute political objectives
Trade can be a weapon of foreign policy, e.g. in the sanctions against Serbia following the invasion of Bosnia.
4) To promote social policies
Although in the past Britain has subsidised its agriculture mainly for strategic reasons, today the purposes are basically social – to avoid depression in rural districts.
Economic Arguments Having Some Justification
1)To raise revenue to the budget
2)To improve the terms of trade
The incidence of a selective tax is shared between a producer and a consumer according to the relative elasticities of supply and demand. A government can therefore levy a tax on an imported good to improve the terms of trade if demand for the good is more elastic than the supply, for the increase in price is borne mainly by the producer, while the government has the proceeds of the tax. In practice this requires that
a)the producing country has no alternative markets to which supplies can be easily diverted;
b)its factors of production have few alternative uses; and
c)the demand for the exports of the country imposing the tariff is unaffected by the loss of income suffered by countries who now find their sales abroad reduced.
3) To protect an ‘infant’ industry
It may be possible to establish an industry if during its infancy it is given protection from well-established foreign competitors already producing on a large scale. It is argued that eventually the ‘infant’ will be strong enough to compete successfully. Britain’s car industry, for instance, initially benefited from such protection.
In practice, industries tend to rely on this protection, so that tariffs are never withdrawn; for example, American duties on manufactured goods imposed in the eighteenth century still persist today. Moreover, industries are often encouraged because without protection they would have no chance of survival. This leads to maldistribution of a country’s resources.
4) To enable an industry to decline gradually
Fundamental changes in demand for a good may severely hit an industry. Such, for instance, was the fate of the British cotton industry in the 1970s. Restrictions on imports can cushion the shock, giving the industry more time to contract or restructure.
5) To prevent dumping
Goods may be sold abroad at a lower price than in the home market. This may be possible because: a) producers are given export subsidies; b) price discrimination by a monopoly is possible; or c) it enables the producer to obtain the advantages of decreasing costs. People in the importing country benefit directly from the lower prices. If, however, the exporter is trying to establish a monopoly which can be exploited once home producers have been driven out there is a case for protecting the home market.
6) To correct a temporary balance of payments disequilibrium
Economic Arguments Having Little Validity
1) To retaliate against the tariffs of another country
The threat of a retaliatory tariff may be used to influence another country to modify a restrictive policy. While this may be successful, it can induce counter-retaliation, with everybody losing.
2) To maintain home employment in a period of depression
Countries may place restrictions on imports to promote employment in the manufacture of home-produced goods. The difficulty is that other countries retaliate, thereby leading to an all-round contraction in world trade. GATT was set up to prevent this from happening.
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3) To protect home industries from ‘unfair’ foreign competition
The demand that British workers must be protected from competition by cheap, ‘sweated’ foreign labour usually comes from the industry facing competition. The argument, however, has little economic justification. First, it runs counter to the principle that a country should specialise where it has the greatest advantage. That advantage may be cheap labour. Second, low wages do not necessarily denote low labour costs. Wages may be low because labour is inefficient through low productivity. What is really significant is the wage cost per unit of output. Thus, the USA can export manufactured goods to the UK even though its labour is the most highly paid in the world. The threatened industry can compete by improving productivity to reduce wage-cost per unit. Third, a tax on the goods of a poor country merely makes the country poorer and its labour cheaper. The way to raise wages (and the price of the good produced) is to increase demand in foreign markets. Indeed, if imports from poor countries are restricted, other help has to be given. They prefer ‘trade to aid’. Fourth, they have less to spend on Britain’s exports. Fifth, the policy may lead to retaliation or aggressive competition elsewhere, thereby making it more difficult for the protecting country to sell abroad. One reason why Japan captured many of Britain’s foreign markets for cotton goods was that its sales to Britain were restricted by protective barriers. Last, restrictions on competitive imports may allow domestic firms to raise their prices. If wage increases, exports of goods generally could fall through higher prices.
While restriction of trade tends to lower living standards, there may be benefits – economic, political and social. Thus, protection may be given to an industry because home workers cannot adjust quickly to other occupations or industries. Usually, however, such economic gains are doubtful. Others cannot be measured, and it has to be left to politicians to decide where the balance of advantage lies. It must, however, always be remembered that protection creates vested interests opposed to subsequent removal.
Text 1.10. Read the text about methods of controlling international trade. Can you add any other protectionist measures?
Methods of Controlling International Trade
Introduction
The economic theory suggests that trade should be as free as possible, for only then can maximum specialisation according to the law of comparative advantage take place. In practice, however, all countries follow policies which, to varying degrees, prevent goods from moving freely in response to differences in relative prices. Methods vary. These may be price-based constraints, like customs duties and tariffs or government subsidies to certain domestic industries; quantity limits, like quotas and embargoes; Buyers’ or Sellers’ cartels, like OPEC (Organisation of Petroleum-Exporting Countries) or the International Sugar Agreement (ISA); limits on foreign direct investment (FDI) entry and operations; and other non-tariff barriers, like political and administrative constraints (licences and other documents); financial limits, like exchange control.
Customs Duties and Tariffs
Customs duties, e.g. the common external tariffs of the Common Market, are both revenue-raising and protective. They become protective when the imported good bears a higher rate of tax than the similar home-produced good.
Customs duties are duties imposed on imported and exported goods, assessed according to special customs tariffs. Customs duties are closely connected with the prices of goods and customs tariffs are, therefore, of greatest interest.
If the customs duties are assessed in proportion to the estimated value of goods, they are ad valorem duties. If they are imposed according to the weight of goods or according to their quantity, they are specific duties.
Tariffs can be of various kinds. Revenue tariff (fiscal duties) serves as a source of revenue for the government. Protective tariff is intended to protect domestic industrial or agricultural production from foreign competition. Prohibitive tariff is so high that it makes the importation of goods subject to it practically impossible. Preferential tariff promotes and supports the development of trade between two countries, the duties on their goods being lower than those on the goods coming from other countries.
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