Unit 7 International Trade

Unit 7 International TradeText A What Is Free Trade?Trade between various countries of the world has taken place for many hundreds, perhaps thousands, of years. Originally trade enabled people to obtain food and materials that they could not produce for themselves. For example, the UK does not have a climate suitable for growing bananas, and therefore needs to import these from abroad.More recently, it has been recognized that some countries are 'better' at producing certain types of product than others. (By 'better' we mean that the country can produce the good more cheaply, quickly or efficiently.)It seems to make sense then, for countries to specialize in producing the goods that they can produce most efficiently, and to trade their surpluses of those goods for the products they cannot produce, or are less efficient at producing. This is known as the principle of free trade.How does free trade work?Suppose there are two imaginary countries in the world, Industria and Agriculturia.Industria is very efficient at producing electronic goods. Agriculturia is less efficient at producing electronic goods, but very efficient at producing food.If each country decides to be 'self-sufficient', i.e. to produce its own food and its own electronic goods, both countries will be using some of their resources in a less efficient way.However, if Industria specializes in producing electronic goods, and Agriculturia specializes in producing food, each country's output will be greater than it would otherwise have been.Each country has made the most efficient use of its available resources, and the total output of electronic goods and food has been increased. In principle, the two countries can now trade their leftover goods to obtain the things that they are not producing for themselves. Both countries will then be better off.If there were free trade, would it be better to produce food or other goods?As people's incomes increase, they want to buy more luxury goods (such as electronic goods); but once they have enough food to avoid being hungry, they do not need to buy extra food.Therefore, countries that specialize in producing 'luxury' goods find that the demand for their products grows over time, and they get richer. Countries that specialize in producing food find thatthe demand for their products remains stable, and their income remains the same. Compared with the countries making luxury goods, the countries producing food become worse off. This problem is known as the agricultural problem.In real life, no country produces only food or 'luxury' goods, and we need to remember this when we think about international trade.What is the problem with free trade?Free trade means competition, and competition can be risky, particularly when it affects a country's prosperity. Countries often want to protect themselves against the effects of free trade. They can make foreign goods more expensive by imposing taxes ('import tariffs') on them, which means that consumers have to pay more for them. This protects the people in their own country who produce those goods, because they do not have to compete against cheaper foreign imports.In practice, trade has never been free, because some countries have taken steps to protect themselves. However, as we shall see below, trade is freer for some countries than it is for others.There are several ways. Countries can place a limit on the number of imported goods of a particular type that can be imported during a year. These are known as 'quotas'.Example 1:Cotton farmers in the USA are protected by a quota system. The US government tries to ensure that these farmers receive a stable income. If the price of raw cotton in the USA falls below a certain level, then the government will begin to limit the amount of cotton imported into the country.This makes life difficult for cotton farmers in poorer countries because they are uncertain from year to year how much of their cotton will be bought.Another popular solution is to provide subsidies to local producers. Subsidies are sums of money given by the government to producers. Because their production costs are low, these producers can afford to sell their products more cheaply than foreign goods imported into their country.Example 2:Peanut butter is popular in the USA. Some countries can grow peanuts very cheaply – the climate is suitable, and wages are low.They could sell their peanuts to the USA, but then US peanut farmers might go out of business. To prevent that happening, the US government gives its peanut farmers money (subsidies).Why shouldn’t countries protect their own producers from free trade?You could say that it's OK for countries to protect their own producers. However, in that case, all countries should be allowed to do this. At the moment, the trade rules are unfair. Some countries are forced to accept goods from abroad, while others protect their markets with import tariffs, quotas and subsidies.Example 3:The European Union pays subsidies to sugar-beet farmers. This encourages them to produce so much sugar that the EU accounted for 40 per cent of world sugar exports in 2001. This means that countries such as Mozambique, which actually produce sugar more cheaply, have trouble selling their sugar.Surely, free trade means that countries should specialize in producing the things that they are most efficient at producing?That's how free trade was supposed to be. However, the system we have today means that rich countries can protect their markets, while poor countries cannot.The consequences of this for people in developing countries are disastrous. Unable to sell their goods, they cannot make money through trade. Meanwhile, their own producers are going out of business because of unfair competition.(940 words) Exercise:Questions to think about:1.Can trade ever be free?2.Can trade ever be fair?3.How could the international trading system be made fairer for poorcountries?Text B The Agricultural ProblemFarmers all over the world are faced with a basic problem. Compared with people who make their livings in other ways, they are becoming worse off.Why are farmers becoming worse off?We all need to eat, and farmers produce the food that we buy.However, we only need to eat a certain amount of food. Once we have enough, there is no reason to buy any more.When people earn more money, they may choose to buy expensive food, or eat out at restaurants more regularly, but in general they do not spend a higher proportion of their income on food. They spend their spare money on 'luxuries' such as mobile phones, electronic goods, holidays, entertainment and cars.Money spent, income gainedWhen we buy something, the money that we spend becomes an income to the people who produce the goods.We spend more on luxury goods when we have more money. The incomes of the people who produce these goods will increase as our spending increases.However, we spend roughly the same on food, so the income of farmers – who produce our food – stays the same.Compared with the incomes of other people, farmers' incomes are left behind, and farmers become poorer than others.If it were easier to produce food, would that help farmers?Over many years farmers have become more efficient at producing food. For example, agricultural machinery has improved, and farmers can use fertilisers and pesticides. In general, farmers now produce more food than ever before.However, as the production, or supply, of any good increases its price tends to fall.Normally, as the price of a good falls, we will buy more of it.However, as the price of food falls, if we already have enough to keep us from being hungry, we will continue to buy the same amount. (We may eat in restaurants more, but the money that we spend on this does not benefit farmers.) Because food prices are lower, we will have saved some money. We tend to spend this money on luxuries.Yet for farmers, the lower costs for food mean that their incomes will fall.So, again, farmers have become worse off, this time both in comparison with other people (relatively poorer) and compared with how well off they were before (absolutely poorer).This is the agricultural problem. It affects farmers in both rich countries like the UK and poorer countries such as Jamaica. Farmers in all countries are becoming worse off than others in their societies.So how do farmers survive the agricultural problem?To help to keep farms in business, most governments in rich countries offer some kind of subsidy – a special payment given by the government on top of what the farmers normally earn from producing food – to keep their incomes at reasonable levels.In the European Union (including the UK), the subsidy given is part of what is known as the Common Agricultural Policy (CAP). Farmers on large farms benefit most under the CAP.Why is it so important to keep farmers in business?There are several reasons, including the following.∙Countries like to be self-sufficient in food. They do not like being entirely dependent on other countries in case, for example, war breaks out.∙If farmers went out of business, lots of other businesses would be affected –for example, farm-machinery manufacturers and local shops. It would also affect the local tourist industry: tourists rely on farmers to maintain the countryside.Food is perishable –it goes off quickly. It therefore makes economic sense to grow food locally, rather than pay the high costs of flying food in from abroad before it goes off.What are the effects of subsidies?Subsidies help farmers to stay in business, but they do create a further problem. Receiving subsidies from the government encourages farmers to produce more.The effect of this is for farmers to produce much more food than the country needs –a surplus. The government has paid for this extra production and therefore takes control of the surplus.Often the surplus is sold very cheaply overseas, possibly below what it costs to produce. This is because once the food has been produced, it seems better to receive some money for it rather than throw it all away.This process is called dumping. It is a major problem for farmers in poor countries. They cannot afford to sell the food they produce at the low price of the subsidised, imported food.Since agriculture is the main way of making a living for many people in poor countries, dumping can be very damaging.(767 words)。