1. Economic systems: Protection and free trade (globalisation)

2. 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

4. 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

5. 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.

6. 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.

8. Now complete Activity 2 on page 121

9. 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.

10. 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.

11. 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

12. 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.

13. 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.

15. 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.

16. Complete Activity 3 on page 125

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

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

19. 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

20. Now answer Activity 5 on Page 129

21. 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.

22. 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

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

24. Now answer Activity 6 on page 131

25. 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.

26. 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.

27. 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.

28. 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

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