Strategic
trade theory describes the policies countries adopt to protect their domestic
markets from foreign trade and the procedures used to increase their domestic
wealth. Countries encourage international trade through their domestic economy,
using export subsidies, import tariffs, and investments for domestic trading
organisations facing global competition.
This
theory argues that trade policies can raise domestic wealth within each country
by shifting profits from foreign to domestic trading organisations. It
emphasises the importance of trade agreements that restrict such
anti-competitive practices, as opposed to countries that use protectionist
trade barriers to limit global free trade.
Trade
barriers are an intervention in markets that operate internationally through
countries that may install anti-competitive practices in a variety of ways to affect
trade barriers to protect their domestic markets; they include:
- Tariffs
(taxes) on imports.
- Non-tariff
barriers such as import quotas and trade embargoes.
- Subsidies
for domestic trading entities.
- Anti-dumping
duties covering imports.
- Regulatory
barriers.
- Voluntary
export restraints.
The
comparative advantage theory states that if countries have access to resources
in different proportions at differing relative costs, all nations will gain
from international trade. Still, to realise those trade gains, each country
needs to use the industries where domestic production is most efficient to
trade for other goods in which their production is less efficient to satisfy
domestic demand.
Market
distortion occurs when an event, often enacted by a governing body, intervenes
in market pricing to the extent that the clearing price for products
significantly differs from the market price that would occur within a perfect
competition. An example could be subsidising farming activities, making farming
economically feasible to create artificially high supply levels and reduce
agricultural product prices.
Economists
tend to agree that free trade agreements positively affect international trade,
and barriers to free trade negatively impact trading patterns; however, some
foreign governments use trade barriers as a protectionist measure to protect
their domestic economies.
The
recent world economic downturn following the COVID pandemic and increased
competition from emerging third-world economies have further compounded these
concerns.
Third-world
economies’ reliance on fossil fuels continues to be a fundamental source of
competitiveness, funding and improving the trading growth of third-world
economies while increasing the negative impacts on the environment through
global warming.
Preferential
and regional trade agreements, such as customs unions, Free Trade Agreements,
and partial scope agreements, remove barriers to trade between countries by
offering preferential access to markets on a reciprocal basis. These agreements
usually cover businesses in services, products, and foreign investments by
removing tariffs and non-tariff trade barriers.
Free
Trade Agreements can also include harmonising standards to encourage regulatory
cooperation, customs cooperation, and trade facilitation.
Competition
between trading organisations encourages product and service improvements
through innovation. However, this must be tempered by utilising competition law
that is designed to protect consumers, the environment, and other trading
organisations from trading practices that:
- Restricts
or weakens competition.
- Damages
the environment.
- Limits
the impact of increased costs,
- Stagnates
innovation.
- Reduces
either the quantity or the variety of trade undertaken.
The
ability to trade internationally allows access to markets that specific
countries may not have or are restricted to, such as petrochemicals from the
Middle East. Middle Eastern countries have limited resources to manufacture
cars, but they are among the primary consumers of the products that they (the
Middle Eastern countries) have in abundance.
The
General Agreement on Tariffs and Trade (GATT) is a legally binding agreement
signed on 30 October 1947 in Geneva, Switzerland. Initially, 23 countries
signed it, but within seven years, it included 117 countries.
The
principal aim of the GATT Agreement was to oversee a reduction of tariffs and
other trade barriers with the elimination of preferences on a reciprocal and
mutually advantageous basis to bolster economic recovery through global trade
after WW2.
The
GATT is a legal agreement between countries that functions through a body that
has overseen a further eight rounds of multilateral trade negotiations; with
the creation of the World Trade Organisation in 1994, there has been a
reduction of average trade tariffs from 22% in 1947 to below 5% after 1994, the
Doha Development trade negotiation that began in 2001 is still not completed.
The principles of the GATT Agreement include the following between signatory
countries:
- Equal
trading opportunities.
- Reciprocal
trade rights and obligations.
- Transparency
in trade.
- The
commitment to reduce and equalise tariffs.
There
are many free trade agreements globally, for example:
- North
American Free Trade Agreement (NAFTA).
- The
Central American-Dominican Republic Free Trade Agreement (CAFTA-DR).
- European
Union (EU).
- Asia-Pacific
Economic Cooperation (APEC).
The
latest Free Trade Agreement between the UK and New Zealand places the
environment at the heart of the agreement, with commitments for low carbon
footprint, sustainability, and climate change that will affect farming,
fishing, and forestry to promote biodiversity and reduce pollution, illegal
deforestation, illegal wildlife trade and the effects of global warming.
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