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 feasible economically
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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