Trade Barriers

There is an everlasting argument between economists and governments on the issue of free trade. Despite the advice of economists to follow the concept of free trade, every nation protects its own domestic producers to some degree from foreign competition. Protectionism is the government’s use of special measures to protect domestic producers from foreign competition. Governments use different barriers

– to protect strategic industries – notably agricultural – without which the country would be in danger if there was a war;

– to maintain a favourable balance of payments, which is the total of all payments made to foreign countries minus total receipts from abroad. It is closely affected by a nation’s balance of trade, which is the total value of its exports minus the total value of its imports;

– to protect against dumping (the selling of goods abroad at below cost price in order to destroy or weaken competitors or to earn foreign currency to pay for necessary imports);

– to retaliate against restrictions imposed by other countries;

– to protect ‘infant industries’ until they are large enough to achieve economies of scale and strong enough to compete internationally.

The most common methods to limit international trade are tariffs and quotas. A tariff is a tax collected on imported goods. Many tariffs, called revenue tariffs, are levied only to raise money for the government. Others are protective tariffs, established to discourage importation of certain goods or to raise their price so as to reduce competition with domestic goods of the same type. A quota is a legal limit on the quantity of specific goods that may be imported. An embargo is a final extreme quota. It actually prohibits trade in certain goods or with certain countries.

To illustrate an argument between economists and governments and better understand economists’ view of free trade, let’s suppose that the imaginary country of Isoland ignores the advice of its economic team and decides not to allow free trade in steel. The country remains in the equilibrium without international trade.

Then, one day, some Isolandian inventor discovers a new way to make steel at very low cost. The process is quite mysterious, however, and the inventor insists on keeping it a secret. What is odd is that the inventor doesn’t need any workers or iron to make steel. The only input he requires is wheat.

The inventor is hailed as genius. Because steel is used in so many products, the invention lowers the cost of many goods and allows all Isolandians to enjoy a higher standard of living. Workers who had previously produced steel do suffer when their factories close, but eventually they find work in other industries. Some become farmers and grow the wheat that the inventor turns into steel. Others enter new industries that emerge as a result of higher Isolandian living standards. Everyone understands that the displacement of these workers is an inevitable part of progress.

After several years, a newspaper reporter decides to investigate this mysterious new steel process. She sneaks into inventor’s factory and learns that the inventor is a fraud. The inventor has not been making steel at all. Instead, he has been smuggling wheat abroad in exchange for steel from other countries. The only thing that the inventor has discovered was the gains from international trade.

When the truth is revealed, the government shuts down the inventor’s operation. The price of steel rises, and workers return to jobs to steel factories. Living standards in Isoland fall back to their former levels. The inventor is jailed and held up top public ridicule. After all, he was no inventor. He was just an economist.

Ex. 1. Match the Russian word combinations with their English equivalents:

Ex. 2. Match the words in column A with their synonyms in column B.

Ex. 3. There is a logical connection among three of the four words in each of the following groups. Which is the odd one out, and why?

1) absolute advantage – barriers – comparative advantage – free trade

2) balance – deficit – dumping – surplus

3) banking – insurance – merchandise – tourism

4) barter – import substitution – infant industries – tariff barriers

5) liberalize – protect – subsidize – substitute

Ex. 4. Fill in the blanks, use the prompts below:

1. ________________ means that each nation specializes in a product for which its opportunity cost is lower in terms of the production of another product and then nations trade.

2. ________________ benefits a nation as a whole but individuals may lose jobs and incomes from the competition from foreign goods and services.

3. A government’s use of embargoes, tariffs, quotas, and other methods to protect particular domestic industries by imposing barriers that reduce imports is called ___________.

4. A (an) ________________ prohibits the import or export of particular goods and a (an) __________________ discourages imports by making them more expensive. These trade barriers often result primarily from domestic groups that exert political pressure to gain from these barriers.

5. The _________________ is a summary bookkeeping record of all the international transactions a country makes during a year. It is divided into different accounts including the current account, the capital account and the statistical discrepancy.

6. The __________________ measures only goods (not services) that a nation exports and imports. It is the most widely reported and largest part of the current account.

7. A (an) _________________ is the price of one nation’s currency in terms of another nation’s currency. The intersection of the supply and demand curves for dollars determines the number of units of a foreign currency per dollar.

8. A __________________ is a limit on the quantity of a good that may be imported in a given time period.

Words for reference: comparative advantage; free trade; protectionism; embargo; tariff; balance of payments; balance of trade; exchange rate; quota.

Text 3

As you read the passage, focus on the WTO origin and its functions.