Understanding Trade and Its Benefits

Definition of Trade

• Trade involves the purchase and sale of goods or services.
• Domestic trade happens within a country or region.
• World, international, or external trade occurs between different countries or regions.
• Trade in goods is visible trade.
• Trade in services is invisible trade.
• Import refers to shipping foreign goods into a country or region.
• Export refers to shipping local goods to another country or region, which can be further divided into domestic export and re-export.
• Domestic export refers to exporting locally produced goods to earn money.
• Re-export refers to exporting goods originally imported from another country or region.

Gains from Trade

• Proper allocation of resources: International trade helps countries exchange resources to compensate for what they lack.
• Economic development and job creation: Trade enables lower production costs, creating business opportunities and jobs, and allows people to import products with higher local production costs for profit.
• Enhancement of technology and quality: The international division of labor and specialized production improve overall production technology and product quality. Example: a Japanese video game can be purchased in Hong Kong due to proper resource allocation. The video game was developed in Japan and manufactured in China, enhancing technology and quality.

Harmful Effects of Trade

• Market Monopoly: Large-scale enterprises may acquire or merge with smaller ones, potentially leading to a monopoly, which may result in the dismissal of staff from smaller companies.
• Difficulty of Competing: Foreign companies might use geographical or historical advantages to produce inexpensive products, making it hard for less competitive local companies to survive.
• Lack of Bargaining Power: People in less competitive industries may lack bargaining power in pricing their products under free trade.

Common Trade Protection Policies

• Tariff: A tax levied by the government on imported goods, reducing their competitiveness.
• Quota: A limitation on the quantity of imported goods, protecting local industries by reducing competition. Protects the production and employment of local industries.
• Subsidy: Financial assistance from the government to local producers to reduce production costs and enhance competitiveness.
• Foreign Exchange Control: Restrictive measures by the government on the receipt and payment of foreign exchange, making it harder to import foreign goods.
• Embargo: Aims to prohibit trade with a foreign country, typically due to revenge or political reasons, like war.

Effects of Common Trade Protection Policies on Different Stakeholders

• Governments: Governments can raise funds by imposing tariffs and protect domestic industries to develop the national economy; a trade deficit occurs when the value of exported goods is less than imported goods.
• Local manufacturers: Under trade protection policies, local manufacturers can avoid direct competition.
• Traders: Trade protection policies can reduce trade volumes, seriously affecting traders' business.
• Workers: Trade protection policies reduce the threat of imported goods on local industries but may cause unemployment in exporting regions.
• Farmers: Trade protection policies protect local agricultural product sales and raise incomes in developed countries, but they may harm exports and livelihoods in developing countries.
• Consumers: Trade protection policies generally raise product prices and reduce product quality due to less competition.

Ways to Deal with Trade Protection Policies

• Strengthening cooperation and communication among different countries through participation in international trade organization meetings and negotiation to reduce negative impacts.
• Strengthening domestic demand to reduce dependence on exports.
• Paying attention to early warning by releasing warning information to the local industry to help them reduce losses.
• Actively carrying out international operations by cooperating with countries implementing trade protection policies, allowing participation in related product production, changing imported goods to domestic goods.

Functions of the World Trade Organization

• Establishing trade rules by developing and monitoring their implementation.
• Reviewing trade policies by examining the trade measures of different countries to improve trade transparency.
• Removing all trade barriers by promoting free trade and encouraging members to open markets and eliminate trade barriers.
• Mediating trade disputes by providing a platform for multilateral trade negotiations and handling disputes, as well as conducting investigations and arbitration to ensure the implementation of trade agreements.
• Assisting developing countries by providing technical support and training programs related to trade.

Examples of Coping with Tariffs (Country A and B)

• Country A can strengthen domestic demand to reduce dependence of local enterprises on exports to Country B.
• Country A can co-operate with Country B in order to participate in the production of washing machines in Country B, therefore the products will be changed from imported goods to domestic goods produced in Country B and will not be subject to the new tariff.

Stakeholders Suffering From Trade Protection Policies

• Consumers tend to face higher prices, and the product quality may not progress or may even decline.
• Farmers from developed countries benefit, while farmers in developing countries tend to suffer and have lower income.
• Workers in exporting regions may become unemployed.
• Traders suffer from the policies and make less profits due to reduced trade volumes.
• Governments can raise more funds to ease financial pressure and can protect the domestic industry.

Benefits of World Trade

• Worldwide resources can be effectively exchanged to complement what a country or region is lacking. The Japanese video game can now be purchased in Hong Kong.
• Global trade can contribute to the international division of labour as well as specialised production at various places across the world. Global trade enhances productivity and improves product quality.
• Trade will bring business opportunities and gives rise to jobs