🚭Public Policy and Business Unit 7 – Global Trade Policy & Business Impact

Key Concepts in Global Trade

• Comparative advantage enables countries to specialize in producing goods or services they can make at a lower opportunity cost than other countries
• Absolute advantage refers to a country's ability to produce a particular good or service more efficiently than any other country
• Trade liberalization involves reducing or eliminating trade barriers (tariffs, quotas) to facilitate the free flow of goods and services across borders
• Trade protectionism aims to shield domestic industries from foreign competition through measures like tariffs, quotas, and subsidies
  • Protectionist policies can lead to higher prices for consumers and reduced economic efficiency
• Trade deficits occur when a country's imports exceed its exports, while trade surpluses happen when exports surpass imports
• Foreign direct investment (FDI) involves a company investing in business operations in another country to establish a lasting interest and control
• Dumping is the practice of exporting goods at prices lower than their normal value, often to gain market share and drive out competition

Historical Context of Trade Policies

• The Silk Roads, a network of trade routes connecting Asia, Europe, and Africa, facilitated the exchange of goods (spices, textiles) and ideas from the 2nd century BCE to the 18th century CE
• The Age of Exploration (15th-17th centuries) saw European nations establish new trade routes and colonies, leading to the Columbian Exchange of crops (potatoes, maize), animals, and diseases between the Old and New Worlds
• The Industrial Revolution (late 18th to 19th centuries) led to increased production, transportation improvements (steamships, railways), and the rise of global trade
• The Great Depression (1929-1939) led to a rise in protectionist policies (Smoot-Hawley Tariff Act) and a decline in international trade
• The Bretton Woods Conference (1944) established the International Monetary Fund (IMF) and the World Bank to promote international economic cooperation and stability post-World War II
• The General Agreement on Tariffs and Trade (GATT), signed in 1947, aimed to reduce trade barriers and promote free trade among member nations

Major Trade Agreements and Organizations

• The World Trade Organization (WTO), established in 1995, is an international organization that oversees and enforces global trade rules among its 164 member countries
  • The WTO promotes trade liberalization, settles trade disputes, and provides a forum for trade negotiations
• The North American Free Trade Agreement (NAFTA), signed in 1994, created a free trade zone between the United States, Canada, and Mexico
  • NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA) in 2020
• The European Union (EU) is a political and economic union of 27 member states that operates as a single market with free movement of goods, services, capital, and people
• The Association of Southeast Asian Nations (ASEAN) is a regional organization that promotes economic, political, and security cooperation among its 10 member states (Indonesia, Thailand, Vietnam)
• Bilateral trade agreements are negotiated between two countries to reduce trade barriers and promote economic cooperation (U.S.-South Korea Free Trade Agreement)
• Regional trade agreements (RTAs) are treaties between two or more countries in a specific region to reduce trade barriers and foster economic integration (African Continental Free Trade Area)

Tariffs, Quotas, and Other Trade Barriers

• Tariffs are taxes imposed on imported goods, which can increase the price of foreign products and protect domestic industries
  • Ad valorem tariffs are based on a percentage of the value of the imported good
  • Specific tariffs are fixed charges per unit of the imported good
• Import quotas limit the quantity or value of a specific good that can be imported into a country during a given period
• Subsidies are financial support provided by governments to domestic industries, which can give them an advantage over foreign competitors
• Non-tariff barriers (NTBs) are restrictions that can make importing or exporting difficult without directly using tariffs
  • Examples of NTBs include import licensing, complex regulatory standards, and customs procedures
• Voluntary export restraints (VERs) are agreements where an exporting country voluntarily limits the quantity of a good exported to a specific country to avoid trade restrictions
• Embargoes are complete bans on trade with a particular country, often used as a political tool (U.S. embargo on Cuba)

Impact on Businesses and Industries

• Trade liberalization can lead to increased competition for domestic businesses as foreign companies enter the market
  • This can result in lower prices for consumers and increased efficiency as businesses strive to remain competitive
• Protectionist policies can shield domestic industries from foreign competition, allowing them to maintain market share and potentially charge higher prices
• Tariffs and other trade barriers can increase the cost of imported raw materials and components, affecting the profitability of businesses that rely on them
• Trade agreements can open up new markets for businesses, providing opportunities for expansion and growth (EU Single Market)
• Changes in trade policies can disrupt supply chains and force businesses to adapt their strategies and operations
• Industries that are sensitive to foreign competition (textiles, steel) may lobby for protectionist measures to maintain their market position
• Businesses may need to navigate complex trade regulations and compliance requirements when engaging in international trade

Global Supply Chains and Logistics

• Global supply chains involve the coordination of production, transportation, and distribution of goods across multiple countries
• Offshoring refers to the practice of moving production or services to countries with lower labor costs to reduce expenses
• Nearshoring involves moving production or services to countries closer to the target market to reduce transportation costs and improve responsiveness
• Just-in-time (JIT) inventory management aims to minimize inventory holding costs by receiving goods only as they are needed in the production process
• Logistics encompasses the planning, implementation, and control of the efficient flow of goods, services, and information from the point of origin to the point of consumption
  • This includes transportation, warehousing, inventory management, and customs clearance
• Intermodal transportation involves the use of multiple modes of transport (ships, trains, trucks) to move goods from origin to destination
• Supply chain disruptions can occur due to various factors (natural disasters, political instability, trade disputes), highlighting the need for risk management and resilience

Trade Wars and Diplomatic Relations

• Trade wars occur when countries engage in tit-for-tat measures, such as increasing tariffs or imposing other trade barriers, in response to perceived unfair trade practices
  • The U.S.-China trade war (2018-2020) involved escalating tariffs on billions of dollars worth of goods
• Trade disputes can be resolved through bilateral negotiations or through the WTO's dispute settlement mechanism
• Economic sanctions are penalties imposed on a country to pressure it to change its behavior or policies (UN sanctions on North Korea)
• Trade can be used as a tool for diplomacy, with countries using preferential trade agreements or economic assistance to build alliances and influence
• Geopolitical tensions and political instability can disrupt trade flows and create uncertainty for businesses operating in affected regions
• Trade agreements can help to strengthen diplomatic relations between countries by fostering economic cooperation and interdependence (EU-Japan Economic Partnership Agreement)

Future Trends in International Trade

• The rise of digital trade and e-commerce is transforming global trade, with increasing cross-border flows of data and digital services
  • This presents challenges for trade regulation and taxation, as well as opportunities for businesses to reach new markets
• The growing importance of services trade, including financial, telecommunications, and professional services, is reshaping the global economy
• The increasing focus on sustainable trade and the incorporation of environmental and labor standards in trade agreements (USMCA)
• The potential impact of emerging technologies (blockchain, 3D printing) on global supply chains and trade flows
• The shift towards regionalization and the formation of mega-regional trade agreements (Regional Comprehensive Economic Partnership)
• The ongoing debate over the role of the WTO and the need for reform to address new challenges in global trade
• The potential for increased protectionism and economic nationalism in response to global economic shocks (COVID-19 pandemic) and geopolitical tensions