Trade liberalisation
- Trade liberalisation means reducing the limitations on trade that other countries
around the world have erected over the past years.
Benefits of trade liberalisation Costs of trade liberalisation
Net gain in economic welfare Dumping
- The removal of trade barriers will lower the - Increased competition from large MNCs, who
costs of production for foreign producers, have EOS, and sell in many different markets
and this would increase the number of can afford to sell their surplus output at a
foreign suppliers into the market. This price well below their AC. This is an anti-
increases global supply. This then decreases competitive pricing strategy that drive out
the market price. This will eliminate the local producers who cannot have lower costs
distortion if comparative advantage and and are therefore unable to match their
allows countries to specialise in what they lower prices- driving them out of the market.
have the lowest opportunity cost of This can lead to a contraction in various
producing. sectors, leading to fewer job opportunities
Lower prices and subsequently lower incomes.
- The removal of trade barriers will decrease Additionally, fewer profits for firms will also
the costs of production as if domestic mean a fall in business investment- reducing
industries import raw materials, their costs the consumption and investment component
of production would decrease. This would of AD- decreasing short- run economic
cause SRAS to increase- shifts outwards. As growth.
AS rises relative to AD you may have cost Overspecialisation
push deflationary pressures, APL falls. This - Countries may desire to exploit their
meets the macroeconomic objective of comparative advantage, but they may rely on
low/ stable inflation. Additionally, lower the exports of a few goods, particularly low
costs of production are passed on as lower value-added goods- this can mean that a
prices to consumers which will increase large proportion of their economy is
demand and increase economic growth in dependent on low value-added goods (PPD),
the short run. this can then lead to detrimental effects e.g.
Increased competition greater vulnerability of external shocks.
- Removal of trade barriers means that the Workers may lack required skills (structural
global supply decreases and thus the costs unemployment)- when these sectors
of productions will also fall. This will contract, workers may find employability
increase the number of global suppliers in harder in the long run. This undermines the
the market. Domestic sellers will therefore macroeconomic objective of low
face increased competition from foreign unemployment levels 4-5%.
producers which can create a greater Environmental damage (negative externality)
incentive for the firms to lower their costs. - Lowers the costs for producers which allows
In addition, they will be motivated by them to sell goods and services at a lower
increased profits and incentivised to spend price. This would cause the demand for those
on upskilling workers and (R and D)- goods/ services to then rise. As the demand
dynamic efficiency would therefore for these exports increase, net trade
increase in the LR. component increases, causing AD to shift
Economies of Scale outwards- an expansion in national output
- Trade liberalisation can generate economies leads to an increase in short- run economic
of scale. If the US erects protectionist growth. As GDP increase, this can lead to
, barriers against imports of coffee from negative third-party spill over effects that are
Kenya. Kenyan producers may face fewer not accounted for in the production process
barriers to entry into the US market. This (loss natural habitats, emissions of carbon
may incentivise Kenyan producers to have and other greenhouse gases).
greater access to a larger consumer base in Structural unemployment
America- mass production will lead to - Trade liberalisation can increase the marginal
increased technical, risk bearing and propensity to import, changing the patterns
purchasing EOS. of demand from changing preferences of
Access to wider markets locals from domestic to foreign producers,
- Fewer barriers to entry will allow firms to which can mean that lower- skilled workers
come into larger markets and therefore are becoming occupationally immobile-
have access to a larger consumer base. This leading to structural unemployment in the
will allow for greater demand, sales and long run.
thus generate more revenues and profits.
Incentive for MNCs to establish production plants
in developing nations
- Trade liberalisation can attract inward FDI
because the removal of protections barriers
increases the profit potential for foreign
firms operating in those markets. They may
want to move closer to their natural
resource base- which will encourage foreign
investors to purchase the assets in those
LEDCs.
, Foreign direct investment
- FDI is the net transfer of funds to purchase and acquire physical capital, such as
factories and machines e.g. Nissan purchasing a factory in Somerset UK.
Benefits of FDI Costs of FDI
Benefit to workers Risk of default increases
- A benefit to workers is an increase in skills as - MNCs may control rights over foreign
foreign firms are more likely to afford countries- the scale of borrowing increases
training for workers. So, as workers skills and the risk of default increases e.g. state
improve their earning capacity would assets can be put as collateral e.g. oil
increase and thus reduces the risks of reserves will be sold to foreign
absolute poverty. governments, which means that overtime
- Another benefit is improved working LEDCs lose access over their local assets.
conditions as many of the firms that operate This means that MNCs can negotiate lower
on a global scale have a brand image to taxes and influence policies. Foreign MNCs
maintain so it is in their best interests, when may also carry out bribery and influence
they branch into international markets, to higher levels of corruption in these states-
provide good working conditions for their which leads to political instability.
foreign workers so it does not tarnish their Environmental laws
brand reputation. This is particularly good for - FDI may be convenient to bypass
local workers as their overall socio- economic environmental laws. This will be a race
wellbeing improves because of safer working among countries as they try to see who can
environment. make their economy the most attractive to
Benefits to the government FDI. e.g. they may do this through
- Increased job creation and employment deregulating their environmental laws. Yet,
opportunities means that there are more this is harmful for the environment as
people in work and more individuals paying during the construction of these projects
income tax. Additionally, an increase in the natural habitats may be destroyed etc.
incomes will also lead to an increase in the Some of these projects may also not comply
consumption component of AD thus VAT with the regulations in that nation. E.g.
receipts will also increase- increasing tax dumping of waste through mining projects-
revenues for the government overall. leading to poorer air quality- health related
- The taxable base can increase as the number issues.
of foreign firms operating in the UK increases Poor governance
and can therefore also increase the - FDI does not always benefit the recipient
corporation tax receipts for the government countries as it enables foreign MNCs to gain
(corp. tax currently at 25%). from the ownership of raw materials.
- Increased inflows of capital can also help Governments may then attract FDI but the
finance the current account deficit as inward lack of strong governance in these nations
FDI is a positive entry into the financial can make it harder to distribute the benefits
account. A net surplus on the financial of FDI, lack of widespread distribution limits
account can help finance the deficit on the economic growth/ development.
current account. As, if foreign investors are Poor working conditions
purchasing local assets they have to convert - MNCs have been criticised for poor working
their foreign currency into domestic conditions in foreign factories.
currencies, which generates foreign currency Limitations of consumer choice
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