Warm up List all the resources needed to make a pencil and then use your phone to find out where each resource can be found in the world.

Trade barriers and free trade Unit 4 Standard 2

Essential question Why do countries enforce trade barriers that inhibit imports and exports?

Things to know International Trade: the exchange of capital, goods, and services across international borders or territories. Benefits of trade: Can help countries grow Reduce poverty Increases the total world output of goods and services

What are trade barriers? Trade barriers limit the flow of goods, services, and productive resources between countries. When there are no trade barriers, this is called FREE TRADE, meaning that the flow of goods, services, and productive resources is unrestricted between countries. Specific political, ideological, and economic factors affect a country and may be incentive to erect trade barriers.

Trade barriers Trade barriers are law passed or actions taken by the government of a country with the intention of restricting the flow of goods and services between itself and another country or countries. Except for embargoes, the motivation for trade barriers is protection of domestic industry or domestic jobs. The most common trade barriers are tariffs, quotas, embargoes, standards, and subsidies.

What is a tariff? A tax placed on imported goods. Two types: Protective tariff – designed to make domestic products cheaper than their foreign made rivals. Revenue tariff – generates revenue for the government without making the product more expensive than the same domestic products.

The positive and negative aspects of tariffs Benefits: Protect young domestic industries from foreign competition. Protect aging and inefficient domestic industries from foreign competition. To protect domestic companies from “dumping” from foreign companies or governments. Costs: Price of goods increases. Reduced competition Hidden costs of political and cross-industry retaliation.

Examples of tariffs In the year 2000, tariff’s were increased 8-30% on imported steel. Goal was to save jobs in the U.S. steel industry. Tariff’s are placed on imported cars depending on the value of the car.

Quota A quota limits the quantity of a good imported into a country.

The costs and the benefits of quotas Costs of Quota’s Shortages Higher prices Benefits of Quota’s Domestic job protection Domestic industry protection

Examples of Quotas In 1981, President Reagan put a limit on the number of imported cars that foreign car produces could bring into the United States. Consumers had fewer cars to choose from Prices were higher than they would have been without the quota. Sugar quota’s have been in effect for 50+ years Limits the amount of imported sugar Protects U.S. sugar industry.

What is an embargo? Complete trade ban with a country usually because of political disputes.

The costs and benefits of embargoes Loss of imports Human rights Benefits Political leverage Increase in substitutes

example Cuba embargo began in 1963 and is just now coming to an end. No imports or exports allowed No free travel between the countries

standards Requirements a good must meet before it can enter the country as an import.

The costs and benefits of standards Increased cost of inputs Increased prices Decreased competition Benefits: Safer products Higher quality products Recourse against products not made to specifications.

examples Cars must have seat belts Toys cannot be made with lead paint.

subsidies A government payment to an individual, business, or other group to encourage or protect a certain type of economic activity.

The costs and benefits of subsidies Protects inefficient industries When repealed, costs go up and producers leave the market Benefits: Lowers the cost of production Encourages current produces to remain in the market and new producers to enter

examples Dairy farmers receive subsidies to help them stay in business. Research and production of biofuels

question Think about the warm up. How might these trade barriers affect the world’s production of pencils?

Free trade vs trade barriers There are two arguments about how trade should happen: Free Traders, or people who advocate free trade, believe that it is the right of the individual consumers to be able to buy what they want wherever they want it. Protectionists, or people who advocate trade barriers, believe that barriers are important to protect domestic companies and encourage growth.

The arguments against free trade Protecting infant industries-markets in need of time to develop before competing against foreign rivals. Protecting national security. Protecting domestic employment. Protecting workers in developing countries from unfair labor practices. Protecting the environment in developing countries.

The infant industries argument Supports the use of trade barriers when a new industry is in the early stages of development. Unless the industry can grow and establish economies of scale, it will be unlikely to survive in competition with established industries in other countries. Opponents of this argument cite the difficulty in accurately predicting which industries are likely to “grow up” and be competitive as well as the potential for retaliation by other countries.

The national security argument Cites the importance of maintaining industries critical to the country’s national security even when the industry cannot efficiently compete at the international level. National security is also the biggest argument behind an embargo. Opponents to this argument cite the potential for abuse because at some level many industries can argue their importance to national security. In other words, it is too vague.

The domestic employment argument Seeks to protect workers of a country from being unemployed due to competition from products made by workers in developing countries who usually work for much lower wages and benefits. Opponents of this argument emphasize the increased consumer prices caused by protectionism. Also, free trade and efficient production usually lead to new industries and new jobs, and the workers in developing countries will eventually become consumers of international products as they make more and more money.

The developing country workers argument This is the basis for limiting the purchase of those goods by people in the developed country. By developed world standards, working conditions in developing nations are often very bad, relatively speaking. Opponents of this argument emphasize that workers in developing countries would lack jobs entirely if their countries were unable to produce and sell goods abroad. The thought is that as the industry develops, workers will demand better working conditions.

The environmental protection argument Supports restrictions on trade with countries that have lax environmental standards. Opponents argue that developing nations must have the ability to produce goods without the same environmental standards as developed nations because they would be uncompetitive otherwise. Economic research shows that as a country becomes richer, the people of the country demand higher environmental standards. If countries increase growth, some economists believe a cleaner environment will follow.

Trade blocs Trade BLOCS are free trade agreements among countries in a region. The goals for trading blocs may include: reducing or eliminating trade barriers; increasing specialization and efficiency in production; allowing free movements of workers within the bloc; establishing common currency; and/or coordinating infrastructure projects to facilitate efficient trade among members.

activity Complete the trade bloc handout