Policies for Growth

Module 07
Trade Policy

World Bank
Institute

Presentation Script

Policies for Growth

Module 07: Trade Policy Presentation Script

Introduction and Objectives In this presentation, we will: 1. Understand the rationale for trade 2. Explore the reasons for barriers to trade

Slide 3 Why do countries engage in trade? Well, we know that trade is motivated by the expectation of economic gain. The theory of absolute advantage tells us that nations gain by producing goods that require fewer domestic resources and by exchanging their surplus for goods produced abroad with fewer resources. The theory of absolute advantage is incomplete; however, because it ignores the rewards available through trade even when one party has an absolute advantage.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 4 So, what are those rewards? The theory of comparative advantage can explain this. The theory of comparative advantage holds that mutually beneficial trade is always possible between nations whose pre-trade relative costs and prices differ. According to the theory, international trade occurs when two countries begin to explore the benefits of trade. When trading countries concentrate on producing goods and services in which they have a comparative advantage, they benefit and world output of goods and services is maximized.

Slide 5 The theory of comparative advantage assumes free trade across countriesthat is, free access of each country to the markets of other countries. It also assumes fair trade among countries. Fair trade implies that all countries have perfect market information, perfect access to credit and that producers have the ability to switch production techniques and outputs in response to market information and demand.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 6 Additionally, the theory recognizes that policies can be trade-creating or trade diverting. Trade-creating policies are outward-oriented policies, which encourage production for export. Trade diversion occurs when policies are inward-oriented and do not encourage production for export.

Slide 7 By engaging in trade, most countries expect to increase incomes for their producers and reduce the costs of goods for their citizens. When the opportunity cost of producing everything in every country is minimized, the global value of income and output is maximized. That means that all production inputs have been put to their most efficient use. By encouraging efficient allocations of capital, labor and land, trade improves the operation of many sectors of the economy, even those that produce goods and services that are not traded internationally.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 8 Additionally, trade is a source of revenue for government from licenses and trade taxes. Through exports, it is a source of foreign exchange. Exchanges of goods and services encourage better relationships between countries as well. Countries that trade with each other are more likely to seek a peaceful solution to conflicts in order to avoid disrupting trade.

Slide 9 Not only does trade benefit countries, but millions of people depend on trade for a livelihood. From producers to retailers, to importers and exporters, trade is often the only source of revenue that enables people to make a living. Efficient trading patterns permit people everywhere to enjoy higher living conditions.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 10 A number of factors ensure positive gains from trade at the international level Specialization Specialization gains arise from producing and selling goods which a country enjoys a comparative advantage and b from countries that can produce them at a lower cost. Uniqueness In some regions, local sources of certain goods do not exist. Uniqueness gains arise from trading for goods that are not locally available.

Slide 11 ScaleGains from scale occur when access to export markets s production of larger amounts of goods at lower average costs. Dynamic Dynamic gains occur when trade accelerates economic growth and development by spreading technology, accelerating capital formation or encouraging innovation in the anticipation of succeeding in lucrative export markets. Political stabilityPolitical gains from trade arise when economic interdependency facilitates international political stability.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 12 While countries have reasons to increase trade, countries also have a variety of reasons for creating barriers to trade. For example, states that have limited sources of revenue use trade barriers as a method of raising revenue. Trade barriers may be attractive because they protect domestic industries, which may constitute a powerful political constituency, capable of lobbying effectively to protect their interests. Some countries also prefer not to be dependent on other countries, believing that self-sufficiency in as many economic sectors as possible will protect their stability and sovereignty.

Slide 13 Barriers to trade come in two basic forms: 1. Border barriers also known as tariff barriers 2. Behind the border barriers also known as non-tariff barriers Now, lets learn about different types of barriers.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 14 Tariffs and quotas are two often employed barriers to trade. A tariff is an excise tax that applies only to imported goods. Its purpose is either to generate revenue or protect domestic firms. Quotas limit the amount of goods limit the amount of goods that may be imported or exported. Quotas raise the price of imported goods.

Slide 15 Voluntary export restrictions are another type of barrier to trade. These are agreements in which foreign firms voluntarily limit the amount of their exports particular countries. Exporters agree to such restrictions in the hope of avoiding more stringent trade barriers.

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Policies for Growth

Module 07: Trade Policy Presentation Script

Slide 16 Non-tariff barriers can take many forms, among them licensing requirements, unreasonable standards pertaining to product quality and safety and cumbersome documentary or administrative requirements designed to discourage imports.

Slide 17 In this presentation, we learned about: 1. The reasons why countries engage in trade 2. The rationale for trade barriers

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