Economic systems: Protection and free trade (globalisation)

CAPS Requirements Discussion of protectionism and free trade; evaluating the South African international trade policies and major protocols in terms of... Export promotion Import substitution Protectionism (the arguments) Free trade (the arguments) A desirable mix

UNIT 1: Export promotion Export promotion: any incentives provided by gov. to encourage firms to increase their exports. Reasons for export promotion Promotes export-led economic growth Greater employment More workers gain experience and training Greater volume of production leads to economies of scale

Methods of export promotion Export subsidies: enables producers to sell goods at reduced prices in foreign countries. Tax concessions: reductions in taxes on profits and volumes exported and refunds of taxes paid in the foreign country. Tax-free grants: grants to compensate exporters for the extra costs incurred in exporting. Identifying markets: information about possible markets, setting up trade shows, organising trade missions to other countries, and making trade agreements.

ADVANTAGES DISADVANATGES Increased domestic production. Real cost concealed by subsidies - may never be able to compete in an open market. Increased employment opportunities Below cost prices charged - forces out sustainable businesses. World market is very large Dumping pushes out local producers . Leads to increased tariffs and quotas. Balance of payments equilibrium without need for exchange control and quantitative restrictions (quotas etc.) Developed countries protect labour-intensive industries in which developing countries have comparative advantage. Production according to comparative advantage.

Now complete Activity 2 on page 121

UNIT 2: Import substitution Import substitution: policy whereby goods that were previously imported are replaced by locally manufactured goods whenever possible. Done to promote local industry and create economic growth. Done by using protective measures (tariffs & quotas). Enforcing tariffs & quotas easier than forcing developed countries to lift trade barriers against developing countries.

Reasons for import substitution Promotes development of industries as imports made more expensive. More self-sufficient. Increases employment and training of local workers. Import duties source of tax revenue.

Methods used to promote import substitution 1. Import or customs duties Import or customs duties: taxes added to price of goods from other countries. Import duties can be charged in two ways: Ad valorem - according to value of the goods. Eg.40% on imported TV sets Specific tax - according to the weight, number or size. Eg. import tax on carbonated drinks = R7,53 per litre

Import duties charged for the following reasons… Raise revenue for the state. Protect local industry. Eg, ad valorem customs duty of 36% on motor cars. Prevent dumping. Eg. in 2012, anti-dumping customs duty of 104% on steel screws from China and 30% on imported kitchen sinks.

2. Import deposits Importers must deposit with SARS a % of the value of the goods to be imported before products come into country. 3. Import quotas Reduces quantity of imports Can reduce supply and increases prices. 4. Import restrictions Prevents certain goods (banned products) from entering the country.

ADVANTAGES DISADVANTAGES More local businesses established. Can become inefficient. Domestic manufacturing expands. Increased prices because of a lack of competition. Increased employment. Distorts the natural flow of trade. Countries with competitive advantage don’t always trade. Greater variety of businesses increases self sufficiency. Efficient producers can be forced out of the market.

Complete Activity 3 on page 125

Protectionism (the arguments) Protectionism: policy where goods/services are not allowed to flow freely between countries but are restricted by various regulations.

Arguments for a policy of protectionism Allows new industries to be established Prevents dumping (activity 4 – page 126) Promotes industrial development Prior to 1930 62% of SA’s exports were gold Provides employment and job security Improves the balance of payments Provides revenue for the state

Arguments against a policy of protectionism Countries retaliate (export subsidy met with import duty) Consumers are disadvantaged by high prices and poor quality Inefficiency in production is fostered… no reason to produce at the lowest cost per unit profits only while they are isolated from foreign competition most modern technology not utilised unable to compete with foreign goods when tariffs removed Only a small number of producers benefit Misuse of protection destroys developing economies

Now answer Activity 5 on Page 129

Free trade (the arguments) Free trade: occurs where there are no barriers to the importing and exporting of goods and services. Trade is liberalised, for the following reasons… No trade-distorting policies, that give local producers advantage over foreign ones or vica versa. Free movement of labour and capital Leads to globalization. Globalisation: free movement of goods/services, labour and capital without regard to national boundaries.

Arguments in favour of free trade Countries can specialise Productivity is boosted due to greater competition Economic efficiency maximises economies of scale Lower prices for consumers Allows consumers wider variety of goods

Arguments against free trade Free trade creates unemployment and reduces wages Balance of payments problems arise 1995 - trade surplus R685mill 2003 - trade deficit R9,9bill Countries become vulnerable due to over specialisation

Now answer Activity 6 on page 131

A desirable mix: protection and free trade Protection needed for new industries to develop in short-term. Efficiency & high productivity needed to compete on world markets longer term.

How do we create a desirable mix? Reduce protection gradually Local industries have time to adapt to greater efficiency of production. Most-favoured nation status Most-favoured nation (MFN): establishing equality of trading opportunity among states by guaranteeing that, if one country is given better trade terms by another, all other states must get the same terms. Allow nations to export products without duties. Provides trade equality among partners. Once importing country grants concession to one country - must be given to all other countries.

Control free trade Currently no watchdog to control international trade. Causes following problems… Imported products inspected, but no info. on working conditions/wage rates known. NO info on environmental impact/sustainability of products. (Greenpeace advert) Low prices may force local industries to close. Vulnerable if imports are necessities. (Russia - Ukraine gas battles) Difficult for WTO to reach agreement among countries about removal of protection.

Use of trade blocs Free trade area (FTA) A form of economic integration. Member countries remove tariffs between them. Can keep trade protection against non-member countries. Example: The North American Free Trade Agreement (NAFTA) Customs union Member countries remove trade barriers among themselves. Impose common external tariff (CETs) on non-member countries. Example: Argentina, Brazil, Paraguay and Uruguay (Mercosur) Common market Same as customs union + free flow of FOP (labour, capital, etc.) Example: The European Union (EU) Economic union Same as common market + co-ordinates social, fiscal and monetary policies. Example: Eurozone

Evaluation of South Africa Trade Policies Please would you make brief notes on pages 134 – 140 to cover this section over the long weekend.