This is an excellent video from the FT about Brexit. It goes into detail about the costs of leaving a free trade area and how Brexit has impacted small business and investment in the UK. Below are some quotes from the video – useful for the barriers to trade topic.
A French company will buy from Germany because they’ll probably be able to get the same product easier and without any of the extra costs that we’re having to apply to get it out of the UK
We couldn’t ship anything to the EU, nothing. It’s 27 countries, they all have different borders, they all have different rules.
Signing a free trade agreement with New Zealand or Australia has ups and downs of the UK economy, and is probably very, very marginally positive. But it’s nothing like losing a free trade agreement and losing the frictionless trade you had with your biggest trading partner that’s only 20 miles away across the channel.
We lose 4 per cent of our GDP by Brexit. We gain 0.08 per cent by the government’s own estimate through this trade deal with Australia.
The topic Barriers to Trade on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.
The WTO has warned that the reduction in global trade could be bigger than that following the GFC in 2008 – see graph below. For countries to start reducing the volume of imports because export volumes have been decreasing is not seen as the right way forward. With countries dependent on the global supply chain for PPE and pharmaceuticals, it would be wrong to focus on being self-sufficient in these essential products.
As Martin Wolf of the FT pointed out the issue is not with trade but a lack of supply. Export restrictions merely relocate the shortages, by shifting them to countries with the least capacity. The natural response might be to become more self-sufficient in every product but free trade and globalisation does have its advantages:
In his US Presidential campaign one area that Donald Trump was clear about was trade. During the oil crisis years of 1973 (oil prices quadrupled) and 1979 (oil prices doubled) the traditional US car / truck became very expensive to run and Americans started to buy significant numbers of Japanese cars which were much more reliable and cheaper to run. Trump alluded to this and stated that Japan was robbing America blind. He also criticised inept and corrupt elites for moving jobs abroad – ‘China is killing us’ he said.
In order to even the playing field he has vowed to:
impose a 45% tariff on imports from China to compensate for their manipulation of its currency.
impose a 35% tariff on goods from Mexico in order to protect American jobs.
renegotiate existing agreements like the North American Free Trade Agreement with Canada and Mexico
pull out of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
Trump has threatened to withdraw from the World Trade Organisation (164 members)
America has free-trade agreements with 20 other states and the percentages below tell you how important trade is. See also the graphic from The Economist.
33% of America’s imports come from countries they have free trade agreements
50% of Americas’ exports come from countries they have free trade agreements
If Trump does go ahead with a trade-war it is estimated employment in private companies employment would decline by 4.8m jobs by 2019. It is ironic that the very group that supported Donald Trump will be the most disadvantaged. Furthermore, with anti-free trade policies comes higher prices which will harm living standards and worsen Americas fiscal position. Although it might preserve some jobs it will worsen prospects and lower well-being for others – OECD.
With America pulling out of the TPP China maybe keen to take the place of the US in this agreement with 11 other Pacific nations.
TPP [would be] a good thing in the long run because it sets high standards for international trade and investment,” says Prof. Larry Qiu, of Hong Kong University’s School of Economics and Finance. He adds that what the world needs is not “more trade and investment … but higher quality and better ordered trade and investment
Below are some statistics showing the changes in trade between New Zealand and China.
On 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China. However this is not the only first with regard to the relationship between the two countries. New Zealand was the first to negotiate a WTO accession agreement with China as well as the first to recognize China as a “market economy”. With this in mind, the Chinese government have acknowledged the support of New Zealand by granting them the first bi-lateral agreement with a western nation. The table below shows how the value of trade has increased as well as the ranking of particular goods and services.
Main goods exports to China:
milk powder, butter, and cheese ($2,419 million)
With Europe keen on a transatlantic deal with the US, there have also been calls for a separate EU-China trade pact. Although they have shown a lot of enthusiasm to the US deal, the pact with China has been met with scepticism.
Here are the facts:
* China has overtaken the US as the biggest single trader
* China will overtake the EU as the biggest single trader in 2020
* China will surpass the EU in global GDP by 2020
* By 2020 the biggest destination for German exports will be China
* By 2020 the second biggest destination for French exports will be China
* Italy and Germany will export more to developing markets their euro-zone partners.
Therefore if Euro countries start to trade more with countries outside Europe the commitment to a single currency may weaken. With countries less or more reliant on exports and imports the exchange rate will not satisfy all members. If it is going to work Euro members economy’s will have to become more affiliated and better equipped to withstand unbalanced shocks from external partners.
Here is a recent clip from Paul Solman of PBS which looks at free trade being the cause of the demise of America’s middle class. A new book entitled “The Betrayal of the American Dream,” by investigative reporters Donald Barlett and James Steele suggest that as manufacturing jobs went to developing countries overseas the middle class in America has seen their standard of living drop. As Donald Bartlett states –
The real bottom-line question is, what kind of a society do we want? Do we want a society built on the principle that the only thing that matters is the lowest possible price or a society built on the principle that everyone should have a living wage?
And those are going to be two very different societies. And this goes back again so what we’re talking about. The people up here, they don’t want everyone to have a living wage.
In order to protect Americans jobs the government needs to get tougher on free trade and impose some barriers to trade like quotas and tariffs.
Here is a clip on Free Trade and Protectionism. Although quite long it is very good as an introduction to the Trade topic – Unit 4 of the Cambridge International AS course.
Societies have traded for thousands of years. However, the last 35 years have seen an explosion in world trade. How has this global integration affected the world’s economy and individual markets and how are the overall gains of world trade distributed?
The rise of China as a producer of just about anything has had a detrimental impact on the industry of many developed nations. Brazil and Argentina are particularly concerned about cheap imports from China impacting on their main export market – North and South America.
Brazil and Argentina are worried about deindustrialisation and have resorted to protectionism – trade barriers/import restrictions. This protectionist policy means that the consumers are the ones that suffer from the higher prices. Argentine officials now require importers to match the value of their orders with exports which had led some car importers to sell wine. This is a particular worry for South American countries as history tells us that for large countries to become developed there needs to be a strong industrial sector. For Brazil the problems are:
– the high domestic interest rates – 9.75% – which make the currency uncompetitive for exports
– a high tax level
– poor infrastructure
Brazil and Argentina had the chance to turn the NATFA (North America Free Trade Agreement) into a 34 country Free-Trade Area of the Americas but they turned it down. If they are to succeed they will need to embrace the global economy and maybe revisit potential trade agreements.