2 2.1 Does Free Trade Benefit AlL? M3 @ Free Trade vs. Protectionism a) The advantages of free trade Free trade is an economic theory that de- scribes the import and export relations of multiple countries, Countries engage in free trade relations when companies and indivi- duals can import and export goods free from government intervention. Govern- ment intervention can include tariffs, im- port limits and/or bans on specific goods. Free trade offers several advantages to countries. [1 Lower costs Free trade allows companies to lower their business costs by using the cheapest econo- ie resources available. Traditionally, free trade allows companies to import raw ma- terials for producing business goods dome- stically. Companies can also make direct investments nto foreign economies to pro- duce goods at a lawer cost in these envi- ronments, Goods manufactured in foreign ‘countries can then be exported to domestic economies with little tno government in- tervention. Business technology also allows companies to outsource service depart- ‘ments, such as technical support or custo- ‘mer service, to foreign countries...) Increase in Purchasing Power Nations engaging in free trade can also in- crease the purchasing power of businesses ‘and individuals. Businesses may choose to purchase goods from a foreign country if significant advantages exist from foreign currency exchange rates. Fluctuating cur~ rency rates offer businesses a way to con- sistently offer low price goods to consu- mers. Even though companies can produce certain goods domestically, favorable cur~ rency exchange rates can provide compa- nies with better purchase opportunities. Foreign goods may also allow companies to increase their profits by taking advantage of currency exchange rates. Comparative Advantage Comparative advantage is the economic ‘theory that countries can produce a certain type of good better than other countries. This theory often les in the fact that nations can have more natural resources than ano- ‘ther country. Countries can also have a lar~ ‘ge labor pool or other technical abilities for producing consumer goods. A comparative ‘advantage usually allows countries to ma~ ximize the production efficiency of their labor force. Creating highly desirable goods allows nations to generate high profits from exporting these items through the use of free trade agreements with other countries Improves Economic Growth Free trade usually allows nations to impro- vve their economic growth opportunities. Rather than relying on the fixed number of individuals in their domestic economy, countries can engage in free trade to im- prove business opportunities, Smaller countries may need to engage in free trade to acquire economic resources for produ- cing consumer goods or services, Emerging, economic environments also present high profit potential for companies exporting goods through free trade. Emerging econo- mies often have consumers or businesses looking to purchase copious amounts of resources for production or consumption purposes. Osmond Vite, Leaf Group, Ld USA, hep:/fmallbust- ess.chron.som/prow-trate-337 hl (29.3.2017)2 The Economic Dimension of Globalisation © @ 3 ») Reasons for protective behavior ‘Trade protection isthe deliberate attempt to Limit imports or promote exports by putting up bartiers to thade. Despite the arguments in favor of free trade and increasing trade openness, protectionism is still widely prac- tised. The main arguments for protection Deter unfair competition _« Unreasonable/unjustiies packaging, are Barriers may be erected to _labelling, product standards deter unfair competition, * Additonal trade documents ike suchas dampingby foreign satel Og Carine ot firms at prices below cost. « Eyport subsidies + Foaation ofa minimum import price + “Buy national” policy + Over-valued currency + Corrupt andlor lengthy customs procedures in the short term through production quotas is one method employed to con- Non-Tartf Barriers to Trade + Import bans + General or product-specific quotas + Quality conditions imposed by the importing country onthe exporting countries Protect sunrise industries Barriers to trade can he used to protect sun- rise industries, also known as infant indus- tries, such as those involving new techno- logies. This gives new firms the chance to Protecting an industry may, develop, grow, and become globally com- in the short run, protect petitive. [.] jobs, though in the long run it is unlikely that jobs can be protected indefinitely. Save jobs utp radebariers rgthnan soi. 15 Protect sunset industries Dros (2.2007) ‘At the other end of scale are sunset indus tries, also known as declining industries, which might need some support to enable them to decline slowly, and avoid some of the negative effects of such decline. (..] Help the environment = Some countries may protect themselves from trade to help limit damage to their environment, such as that arising from CO, emissions caused by increased production Protect strategic industries Barriers may also be erected to protect stra- tegic industries, such as energy, water, steel, armaments, and food. The implicit aim of the EUs Common Agricultural Policy is to create food security for Europe by protec- ting its agricultural sector. Protect non-renewable resources Non-renewable resources, including oil, are regarded as a special case where the normal rules of free trade are often abandoned. For countries aiming to rely on oil exports las- ting into the long term, such as the oil-rich Middle Eastern economies, limiting output ‘and transportation, s Limit over-specialisation ‘Many economists point to the dangers of over-specialisation [..J. Retaining some self-sufficiency is seen as a sensible econo- mic strategy given the risks of global down- so ‘tums, and an over-reliance on intemational, trade. In addition to the economic arguments for protection, some protection may be for po- litical reasons. 6 ichard Howarth, htp(fowuconomesoalinecoak! Globl-economies/ Trade protectionism. hm! (233.2017)1% © © © — 2.1 Does Free Trade Benefit AU? ‘The Principles of the WTO M4 @ The WTO The trading system should be * without discrimination — a country should not discriminate between its trading partners (giving them equally ‘most-favoured-nation” or MFN status ‘and it should net discriminate between its own and foreign products, services or nationals [giving them “national treatment’! + freer — barriers coming down through negotiation: * predictable — fosign companies, investors and ‘governments should be confident that trade barriers linctuding tarifs and non-tariff barriers) should not be raised arbitrarily: arf rates and market-opening ‘The World Trade Organization (WTO) is the international organization that oversees trade among member nations and acts as a forum for governments to negotiate trade agree ‘ments and settle trade disputes under a system of rules and procedures. Its aim is (0 increase world trade by lowering Dartiers to the international sale of goods and services, in- cluding intellectual property. The WTO was formed on Janu- ary 1, 1995, replacing the postwar multilateral trading order under the General Agreement on Tariffs and Trade (GATT) ‘commitments are “bound” in the WTO; + more competitive — discouraging “unfair” practices suchas export subsidies below cost to gain market share; ‘+ more beneficial for less developed countries — giving ‘them more time to adjust, greater flexibility, and special privileges. © World Trade Organisation (WTO) 2017 / upset, onlenlshthewt. hati eft-efac2_ehem (202.2017) eating place venison = collective name for deer, wild ig ‘and dumping products at ‘with a more formal institutional arrangement, Headquartered in Geneva, Switzerland, the WTO as March 2017 had 164 members, the latest addition being Vietnam. The governing. principles of the WTO's global trading system were described by Director General Pascal Lamy in 2006: “Built up stone by stone over the past 50 years, this system is founded on the Idea that prosperity depends on efficiency, stability, predic- M5 © TTIP-and the Hassle that Came with it London's Conway Hall was the ¥en for a Guardian Membership event held to debate the pros and cons of TTIP. The discussion was chaired by Guardian economies editor Larry Elliott and the panel comprised Clau- de Moraes, Labour MEP; Owen Tudor, head of European Union and International Rela- tions, TUC; John Hilary, executive director of charity War on Want; and Vicky Pryce, chief economic adviser at the Centre for Economics and Business Research. ‘THP is a rather benfgi-sounding acronym, standing for the Transatlantic Trade and Investment Partnership. Stil in the offing, \s TIP is a deal between the EU and the US simed at making it easier for the world's two biggest economies to trade, With 20m consumers and 60 of global GDP between them, American and European economies 2» could both increase by 0.5. percentage points from TTP, ‘ability, and equity in international trade” «© Imeratonal Encyclopedia of the Social Sieces 2008, Thomson Gale / hn: wwwencylopeiacom/stcia-sciences-and-la/plia and-goversment/nteraronl-organtatonsjword-ade (313.2017) lence However, TTP will not just make trade ea- sier with tariff reduction; itis also set to remove a number of regulations that divide ‘the US and the EU so the standards are har- ‘monised between the two markets. [.J [As Vieky Pryce put it, “There is nothing, ‘wrong with increasing trade but it’s how you go about it that is important.” TTP will most likely benefit many indust- ries in the EU and US ~ including phar- ‘maceutical, energy, clothing and textiles, ‘and food and drink. There will be a number ‘of goods and services that the UK will be able to export for the first time ~ for ex~ ample, British Venison and lamb, which is banned in the US - and it will remove tariffs on exports, such as clothing produced in the EU. “If we can build cars for the European mar- ket that don't need to be modified in Euro- pe, which can also be sold in the US, well, that is going to benefit us hugely,” Pryce said.4 So.. what’s the problem? First off, stan- dards between the US and EU need to be harmonised, which will involve some rather picky changes » one example Larry Elliott gave was deciding where fire extinguishers will be placed on newly manufactured speedboats ~ and some big ones, such as redefining labour standards, environmental protections and standards of goods and ser- vices in the EU and across the Atlantic. + “Establishing standards for things Tike I~ bour and safety, [ITIP] could also give us the ability to push and increase standards around the world,” Pryce said. “Ifyou think US standards are low, you should see some ‘ other places around the world.” John Hilary doesn't agree, “TTIP is about reaching behind the barriers and removing, the standards and rules big business don't, like dealing with, like labour standards, en- vironmental standards, food safety stan- dards,” he said, “The EU is pushing to an end to port inspections of imports and ex- ports, for example, which could lead to food safety problems.” In the UK, there are worries about the po- tential privatisation of treasured public ser- vices ~ education, transport, water, the NHS ~ and that this could lead to US companies running British institutions. (. There are environmental issues too: an esti mated 11m extra tonnes of carbon dioxide will be produced if TTIP happens, and our 2 The Economic Dimension of Globalisation reliance on fossil fuels will increase if it becomes easier for the US to export shale ss, According to Jobn Hilary, this will all lead to “sub-saharan Afvica gettinggitin the ‘eet’, And your Parma ham and Champa- fgne might be about to get a bit worse. What? Say it isn't so! Cornish pasties fom Colorado? I know. 've seen what Americans call cheese it imply won't do. One contentious part of TTP is that Europe wants its geographically-spe- cifle food stuffs, such as Champagne and ‘Parma ham, to retain their protected status, ‘which America apparently finds “a little bit surprising’ There is room for amendments to THP: Brussels has asked retain the above protections and the French government asked to keep audio-visual services exempt, so the French film industry can be preser- ved in the face ofthe behemiath Hollywood machine, So will TTIP ever become a reality? Because all 28 members ofthe EU will have to agree to TIP and a number of countries have voiced concerns ~ mainly Germany, Aust- ria, France and the UK ~ all ofthe members of the panel doubted to various degrees whether the treaty would become a realty (a. Sian Coine, 18 Feb 2015, hps:fows.thequardan ‘om/nembership/2015/e/18/querdien-lve-wha-i- tip-and-how-doesiaffec-us, (203.2017) Gi @ Analyse the cartoon in M 1 © Additional Research: Choose one of the trade agreements shown in M 2 and find more information about it (members, years of establishment, main conflicts, goals), etc.) © Compare and contrast the economic advantages of free trade and protectionism in the form of a table (M 3} © Explain how the WTO tries to increase world trade (M di. @ Inclass have a pro-con debate about TTIP, In preparation use M 3 and M 5, ‘Current Status of TTP Since the 2016 US presidential election and the last round of talks between the EU and US, TTP fate is uncertain Shortly ater taking office in January 2017, President Trump signed ‘an executive order ending the TPP (Transatlantic Pacific Partnership) free trade agreement between the US and Asia, Since President Trump's actions no large events have taken place to continue talks on TTP ‘On the other hand no official action has been taken to actively ond the negotiations between the US and the EU. 1.42017) Nis = National Health Service getting itn the teeth = slap in the face behemoth = sigantic