Global Economic Trends and Centres

Distance learning
Spring 2019/2020

Document identifier
Lesson Title How to proceed? Time need

International 1) Reading material

3rd lesson
trade as an 2) Video 1 (Influencing factors) cc. 10
(6 April
economic 3) Video 2 (GATT/WTO) mins.
2020)
catalyst 4) Homework
 GLOBAL ECONOMIC TRENDS AND CENTRES
Lesson #3
International trade as an economic catalyst

1 INTRODUCTION
In general, it is accepted that international trade can contribute to economic development
which is strengthened by the basic macroeconomic
logic. It is also accepted that trade is an engine of INTERNATIONAL TRADE AND
growth. The international community seems to
ECONOMIC GROWTH
accept that instead of aid countries should help The basic macroeconomic
equation is:
developing countries participate in international Y = C + I + G+ X – IM.
trade. That is, many international organizations This means that if a country can
increase the exports while the
accept the idea of “Trade not aid”. The reason may other factors remain unchanged
be that trade promotes development and the country (ceteris paribus), there will be
economic growth.
would not depend on external resources. Aid may
cause dependency.
However, there is a relatively large debate whether trade actually contributes to economic
development or not. The debate includes the following points:

Who can be Only middle income countries can win from participating in international trade.
the winners?
Low income countries (that is, poor countries) only lose. They have to be stronger and
export products with higher level value added, then they can be winners in international
trade.

Countries There are some smaller countries (e.g. the small islands) where tariffs build a high
proportion of a country’s tax revenues. In some countries this proportion exceeds 25%.
dependent on
Because of the liberalization process in the global economy, the average tariff levels is
tariffs decreasing, that is, the revenue from tariff is becoming lower. This will result in reforms
postponed due to the lower income.

Poverty The relationship between poverty reduction and participation in international trade to
larger extent is higher than in the reality.
reduction?
Economic
Poverty reduction (and economic growth) depends on more factors than only on the
growth? effectiveness of participating in international trade. (See China or the oil exporting
countries as examples.)

Effects of Some bilateral trade agreements may have positive effects, but in some case trade
preferences granted by trade agreements may have no impacts.
trade
agreements
GSP scheme and the so-called EBA are highly criticized because the least developed
countries could not gain from these preferences.
 GLOBAL ECONOMIC TRENDS AND CENTRES
Lesson #3
International trade as an economic catalyst

These factors show that it is not obvious that

international trade promotes economic development Influencing factors:
Watch the related video!
in a country. It depends on many factors.

2 TRADE POLICY
Trade policy is in the hand of the government,
TRADE POLICY DEFINITIONS specific to each country and formulated by its

Laws related to the exchange of public officials. A country’s trade policy includes
goods or services involved in taxes imposed on import and export, inspection
international trade including
taxes, subsidies, and import and/or regulations, and tariffs and quotas. It is used to
export regulations. achieve some purposes: to boost international trade
(businessdictionary.com)
Trade policy defines standards, and promote economic growth in the country or to
goals, rules and regulations that increase tax revenues.
pertain to trade relations between
countries.
According the level of intervention, we distinguish
(www.economywatch.com) between two kinds of trade policies:
1) Liberal trade policy refers to low level of tariffs and enables stronger competition in a
country. Liberal trade policy leads to wider range of products in a country resulting in
cheaper access. Furthermore, economies of scale can be beneficial for exporting
companies. We must emphasize the minimum level of tariffs are used but trade
restriction is not so strict as in the
Liberalism
case of protectionist trade policy. •Low trade barriers

2) Protectionist trade policy

imposes high tariffs and strict non- Protectionist
•Tariffs
tariff barriers. This result in •non-tariff barriers (NTBs)
smaller competition in a country.
Arguments for protectionist trade policy is the new-born industries and infant industries
which are not strong enough to bear international

Tools of trade policy: competition and the government tries to protect

1) Tariffs for a certain period. Other arguments: to avoid
2) Non-tariff barriers (NTB)
pollution, to ensure sanitary issues or safety in the
country.
 GLOBAL ECONOMIC TRENDS AND CENTRES
Lesson #3
International trade as an economic catalyst

2.1. Tariffs
By definition, tariff is tax which is imposed on goods which go through a border. There are
several types of tariffs:
Export tariff
imposed on products exported to other countries. It is mainly
imposed on cultural heritage or agricultural products to avoid
hunger in the country.

Import tariff

imposed on products which come into the country. This is the

most frequent type of tariffs.

Transit tariff
imposed on products going through a country but not sold there.
E.g., if Serbia exports to the US through Hungary. Hungary as a
transit country may impose a transit tariff.

Fiscal tariff
aims to improve the budget balance. Tariffs are taxes, so higher
tariffs may improve the tax revenues and therefore the budget
balance.

Prohibitive tariff

imposed to punish a country or to protect the domestic producers.

Prohibitive tariffs are extremely high: they can exceed 200%.

The logic of tariffs can be understood very easily. Just assume that the price of a product
equals to production cost. If there is no tariff, the producer can sell the product world price. If
there is a tariff in effect, it will be an additional financial element, since tariff is a tax imposed
on a product. The exporter must pay the tariff!
Tariffs directly increase the product (For instance, if the USA exports to the EU, the
price
USA must pay tariff.) If the producer must pay an
additional amount, it will be an additional cost
resulting in increasing production costs. As a result, there will be an increase in product price.
So, how can tariff restrict trade? A product becomes more expensive and consumers will not
 GLOBAL ECONOMIC TRENDS AND CENTRES
Lesson #3
International trade as an economic catalyst

buy it, and they will prefer the cheaper

domestic products to the more
The operations of tariffs
expensive imported goods! Since there
Assume that the production cost of 10,000
is no or only decreasing demand for the pencils is 18,500 USD. The USA wants to
export 10,000 pencils to the EU. In case
product, trade will decrease.
there is no tariff, the USA can sell 10,000
pencils on the price of 18,500 USD in the
EU. In case there is tariff of 10%, the prices
2.2. Non-tariff barriers will be higher:
• 10% tariff: 18,500*0,1 = 1,850 USD
By definition, non-tariff barriers
• USA must sell pencils at higher prices
include every measure but not tariffs in order to cover the costs: 18,500 +
1,850 = 20,350 USD
which aim to restrict or influence trade. As a result, pencils will be more expensive
Main types on NTBs: in the EU.

• Quota which restrict the quantity of goods. A certain quantity can be imported without
any restriction, or a country may decide that a certain quantity can be imported freely,
but above this quantity the exporter must pay tariff. Either the exporter, or the importer
is responsible to get the necessary license.
• Embargo is a ban on the import.
• Administrative prescribes (sanitary, phytosanitary measures, environment, quality
certifications): the exporter must prove that the exported goods totally comply with the
national sanitary and quality rules. In order to prove it, the exporter must obtain and
submit official documents.
• Volunteer export restrain: an importer
country forces the exporter country to restrict
EXAMPLES OF NTBS
its export to the importer country. That is, the
Quota: quotas on US sugar imports:
„imports of raw sugar are limited to exporter will decrease its export but not
about 3 billion pounds”
voluntarily due to the pressure of the
Embargo „The US trade embargo on
Cuba” importer country.
Sanitary and phytosanitary measures:
„requiring products to come from a • Preferential trade agreements give
disease-free area, inspection of special rights to certain partners while others
products, specific treatment or
processing of products” will be excluded.
VER: „Japan imposed a VER on its auto
• Subsidies may distort the competition.
exports into the US as a result of
American pressure in the 1980s.” Subsidies can be export subsidies: the
producer receives financial assistance if the
 GLOBAL ECONOMIC TRENDS AND CENTRES
Lesson #3
International trade as an economic catalyst

producer exports the product. The main aim of the subsidy is to help producer
appear on the global market with products not produced effectively. E.g. the
world prices are lower than the cost of production and in order that the producers
can cover the costs of production, the government provides subsidies.

3 COMPARISON OF TARIFFS AND NTBS

Feature Tariffs NTBs

Financial impact Direct Indirect

Type Financial tool Document-based

Price Increase Not unambigous

Documentary Relatively simple Complicated, costy

4 FURTHER READING
https://www.wto.org/english/tratop_e/tariffs_e/tariffs_e.htm
https://www.wto.org/english/res_e/publications_e/wto_unctad12_e.pdf