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 one of 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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