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.
The concept of this
theory is that trade policies can raise domestic wealth within each country by
moving profits from foreign to domestic trading organisations. This theory
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 effect 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 through subsidies, 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 upon the environment through global warming.
Preferential and regional trade agreements such as customs unions, Free Trade Agreements, and partial scope agreements remove the barriers to trade between countries by offering preferential access to markets on a reciprocal basis and usually cover the business in services, products, and foreign investments through the removal of tariff 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 varieties of trade undertaken.
The ability to trade internationally allows access to markets that specific countries may not have or are restricted, such as petrochemicals from the Middle East. Middle Eastern countries have limited resources to manufacture the cars that 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 30th October 1947, in Geneva, Switzerland, initially by 23 countries, but within seven years to include 117 countries.
The principle 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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