Trade And Barriers To Trade Example

Trade and barriers to trade:

Rodamia:

Rodamia is an agricultural economy, it mainly produces wheat, cotton grains and other farm products, it is a developing country and therefore its level of GDP and per Capita income is quite low, despite all these disadvantages it has a potential to develop and attain high levels of development, according to the classical economist economic development can be achieved through trade and favorable terms and balance of trade.

Theories of international trade:

Adam smith and David Ricardo developed theories to show how countries gain by trading, Adam smith developed the theory of absolute advantage, this theory states that trade is caused by differences in labor productivity, he stated that cost differences between countries will cause trade, this theory states that if country A produces two products Y and X, and also country B produces the same products then if country A has absolute advantage in producing Good X whereby it uses 10 units of labor and country B uses 20 units of labor to produce the same product then the two countries will trade.

David Ricardo was also a classical economist who formulated the comparative advantage theory of trade, in his theory he stated that even if one of the countries either country A or country B is more productive in all the products they trade the two countries can till gain through trade, he considered Portugal and England who produce both wine and cloth, Portugal has absolute advantage in the production of both wine and cloth, however Portugal was more efficient and more comparative advantage in the production wine, therefore the two countries

Trade and barriers to trade

would still gain through trade.

Therefore the economy of Rodamia has comparative advantage in the production of cotton and therefore it will gain through trading with other countries even if those countries have absolute advantage in the production of all the products it produces and export.

Barriers to trade:

Trade impediments include tariffs, quotas and qualitative restrictions and also bans, all these are barriers to trade in that they restrict the value of potential export or imports.

Tariffs:

Tariffs are imposed on imports where import duties are imposed on imports, when tariffs are put in place they increase the prices of imports, the purpose of these tariffs is to protect infant industries in a country, raise government revenue and to block undesired imports. When tariffs are imposed the price of imports rises and therefore the demand for these good goes down.

Tariffs in Rodamia will be used to protect the local industries, restrict the quantity of imports to improve the balance of trade and also to raise government revenue that will be used in the provision of public goods and improvement of the infrastructure.

Trade and barriers to trade

Quotas:

This form of trade barriers are also referred to as quantitative restrictions, the government restricts the quantity of imports of certain product, in this case the government does not necessarily gain revenue but quota holders do get revenue, the purpose of quotas is to protect infant industries and at the same time reduce the balance of trade of a country.

Quotas in Romania should be used to improve balance of trade, this is to ensure that imports do not exceed exports; also they will be used to protect local industries that are not internationally competitive.

Dumping:

Dumping is the process of exporting substandard quality products to trade partners, this is the process of exporting products that do not meet international standards, dumping involves exporting products at very prices which increases the demand for this products and at the same time the products are not of quality standard.

The government should avoid dumping of substandard goods through establishing a standard bureau that will inspect all products imported.

Trade agreements include:

There exist various trade agreements which aid in stimulating trade between countries, trade

Trade and barriers to trade

agreements are also referred to as regional integration and all involve offering fair trade to member countries through removal of trade barriers, here is some of the regional integration the country should join:

PTA- referred to as preferential trading agreement, in this type of integration countries impose low tariffs on goods imported from member countries than the rest of the world.

FTA- referred to as free trade area, this is a zero tariff integration whereby member countries impose zero tariffs on goods imported from member countries, and however there exist transshipment rules that prevent imports being channeled via low tariff countries.

CU – referred to as common union, it is similar to an FTA but with a common external tariffs by member countries.

UTL- unitary trade liberation, this is a non discriminatory reduction in trade barriers where goods imported are imposed zero tariffs

The above integrations will stimulate trade and offer fair trade between member countries therefore the country will experience favorable terms of trade when it joins such regional integrations.

The possibility production frontier of the Rodamia economy:

Trade and barriers to trade

Point A on the diagram above shows an impossible achievable production point, point B on the diagram shows underproduction whereby the country does not utilize all its resource, the production possibility curve joins together the points at which different combinations of capital and labor can be used to produce optimally, therefore a point on the curve is the most optimal point the country can produce.

Conclusion:

Romania should join trade agreements in order to increase exports and improve terms of trade and trade balances, it should also consider avoiding dumping and at the same time use trade barriers to imports from countries that are not from its trade integration.

References:

Robert Heller (1973) International Trade: Theory and Empirical Evidence, Prentice-Hall publishers, US