Sport at the Renaissance

Essay: Notes

Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade. Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods. In more detail, the benefits of free trade include:

1. The theory of comparative advantage:

This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialise in those goods where they have a comparative advantage.

2. Reducing tariff barriers leads to trade creation:

Trade creation occurs when consumption switches from high cost producers to low cost producers.

3. Increased exports:

As well as benefits for consumers importing goods, firms exporting goods where the UK has a comparative advantage will also see a big improvement in economic welfare. Lower tariffs on UK exports will enable a higher quantity of exports boosting UK jobs and economic growth.

4. Economies of scale:

If countries can specialise in certain goods they can benefit from economies of scale and lower average costs, this is especially true in industries with high fixed costs or that require high levels of investment. The benefits of economies of scale will ultimately lead to lower prices for consumers and greater efficiency for exporting firms.

5. Increased competition:

With more trade, domestic firms will face more competition from abroad therefore there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices.

6. Trade is an engine of growth:

World trade has increased by an average of 7% since the 1945, causing this to be one of the big contributors to economic growth.

7. Make use of surplus raw materials:

Middle Eastern counties such as Qatar are very rich in reserves of oil but without trade there would be not much benefit in having so much oil. Japan on the other hand has very few raw material without trade it would be very poor.

8. Tariffs may encourage inefficiency:

If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.

 Against: Infant Industry Argument. If developing countries have industries that are relatively new, then at the moment these industry’s would struggle against international competition. However if they invested in the industry then in the future they may be able to gain Comparative Advantage. This shows that comparative advantage can change over time. Therefore protection would allow them to progress and gain experience to enable them to be able to compete in the future. The Senile industry argument: If industries are declining and inefficient they may require large investment to make them efficient again. Protection for these industries would act as an incentive to for firms to invest and reinvent themselves. However protectionism could also be an excuse for protecting inefficient firms. To diversify the economy: Many developing countries rely on producing primary products in which they currently have a comparative advantage. However relying on agricultural products has several disadvantages. Prices can fluctuate due to environmental factors: Goods have a low income elasticity of demand. Therefore with economic growth demand will only increase a little. Raise revenue for the government: Import taxes can be used to raise money for the governmentt however this will only be a relatively small amount of money. Help the Balance of Payments: Reducing imports can help the current account. However in the long term this is likely to lead to retaliation. Cultural Identity: This is not really an economic argument but more political and cultural. Many countries wish to protect their countries from what they see as an Americanisation or commercialisation of their countries. Protection against dumping:  The EU sold a lot of its food surplus from the CAP at very low prices on the world market. This caused problems for world farmers because they saw a big fall in their market prices. Environmental: It is argued that free trade can harm the environment because LDC may use up natural reserves of raw materials to export. Also countries with strict pollution controls may find consumers import the goods from other countries where legislation is lax and pollution allowed. However supporters of free trade would argue that it is up to individual countries to create environmental legislation.

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