17. International Trade

Economic Union

• Characterized by free trade among members.
• Features common restrictions (tariffs) on imports from non-members.
• Allows free movement of production factors like labor.
• Requires common economic institutions and coordinated economic policies.
• Countries function as part of an economic union.
• Differs from a customs union because it permits workers to cross borders freely and includes common economic institutions.
• Differs from a monetary union as it does not require a common currency.

Trade Restrictions

• Nations generally shouldn't protect industries where they already possess a comparative advantage.
• A tariff is a tax on imports, imposed by individual countries.
• A quota limits the quantity of imports, also imposed by individual countries.
• Both countries involved typically benefit in the long run from international trade, with short-run costs affecting specific domestic industries.

Economic vs Common vs Monetary Union

• An economic union distinguishes itself from a common market through the adoption of common economic policies.
• Economic unions and common markets both use trade restrictions with non-members
• Neither requires a common currency, a feature of a monetary union.
• The costs of international trade primarily affect domestic industries that compete with imports.
• Domestic consumers are often harmed by tariffs on imported goods, as this increases prices.
• Tariffs benefit domestic producers by increasing the price on competing imports.

Degrees of Economic Integration

• The order of trading blocs by degree of economic integration, from least to most integrated: free trade area, customs union, common market, economic union, and monetary union.
• A monetary union represents the most integrated type of trading bloc because members adopt a common currency, for example the Euro zone.

Quotas vs Tariffs

• Quotas limit the quantity of imports allowed into a country over a certain period.
• Government payments to firms that export goods are export subsidies, whereas, taxes on imported goods are tariffs.
• Domestic consumers benefit least from tariffs, domestic producers and the government benefit.
• Domestic consumers are hurt by tariffs through higher prices and reduced choice and quality of products.

Import Restrictions

• Governments benefit from import restrictions, often due to the revenue generated from tariffs.
• Trade restrictions benefit workers in protected industries, however, they often cost consumers and other industries more overall.
• Customs unions are the form of regional trading agreement that is least likely to allow free movement of labor unlike economic unions and common markets

Trade and Quotas

• Quotas on imports lead to increased domestic prices, benefiting domestic producers, while often harming domestic consumers.
• Foreign producers may experience decreased sales in countries that impose quotas

Tariffs and Domestic Prices

• The primary benefits from tariffs go to domestic suppliers because tariffs raise domestic prices.
• Industries competing with imported goods are most likely to bear the costs of international trade as these industries may experience reduced profit and employment.
• Economists are least likely to support trade restrictions that claim trade with low-wage countries depresses wage rates in high-wage countries because productivity must also be considered.

Tariffs Examples & Effects

• A government imposing a 150% tariff on imported goods benefits itself and domestic producers.
• Tariffs are less harmful than quotas, as governments collect revenue, while quotas provide revenue transfer to foreign producers.
• Trade restrictions do not protect the net number of jobs in the long run, as import/export firms struggle to compete.

Free Trade Area

• A free trade area is the regional trading agreement that has the least negative impact on reducing low-cost imports from non-member countries.
• This is because a free trade agreement removes trade barriers among members but does not require changes to trade policies with non-members.

Import Quotas & Revenue

• Import quotas and voluntary export restraints do not increase government revenue.
• Trucking companies are least helped by tariffs on transportation equipment due to higher costs

Regional Trade Agreements

• Regional trade agreements primarily aim to improve economic welfare by reducing or eliminating trade restrictions.
• An anti-dumping restriction on trade prohibits foreign firms from selling products below cost to gain market share.