Gains from Trade and Terms of Trade
Qe be a volume index for exports based on the year 1961
Pi is a price index for imports based on the year 1961
Pe be a price index for exports based on the year 1961
T be the net barter terms of trade
G be the gross barter terms of trade
I will be the income terms of trade.
- From its subscribed capital.
- By encouraging private investment in guarantees, so long as all loans were used for productive purposes.
Comparative costs and free trade
|Units of cotton||Units of wool||Units of labor|
|Units of cotton||Units of wool||Units of labour|
- To promote the diffusion of advanced technology.
- To provide consumers with a greater variety of goods.
- To increase employment possibilities throughout the world.
- To facilitate higher standards of living.
- To increase real output throughout the world.
- No member country should show trading discrimination against another.
- If the protection of home industries is felt to be essential, it should only be by customs duties, and not by fixed import quotas, which often work harshly against particular suppliers.
- Consultations should take place when tariff changes are contemplated so that traders should be warned and trading interests should not suffer unduly.
- Negotiations should be held with the intention of general reductions in tariffs and other trade barriers.
In recent years, a large part of the work of GATT has been devoted to the trade problems of developing countries, which now represent close to 66 percent of the total membership. The United Nations set up the Committee on Trade and Development (UNCTAD) to supervise practical work for the benefit of developing countries, such as export promotion and technical assistance.
The supporters of GATT appreciated from the outset that customs unions, or free trade areas, by which national economies are integrated, might be a way of contributing towards the main objective of a relaxation of restrictions on foreign trade. Several free-trade areas or associations have been established. Most of the contracting members are also members of GATT.
These free trade areas, common markets, or associations include:
The European Economic Community (EEC or Common Market) was established by the Rome Treaty.
- EFTA was established by the Stockholm Convention.
- Latin American Free Trade Association was established by the Montevideo Treaty.
- Central American Free Trade Association.
- Borneo Free Trade Area.
- New Zealand and Australia Free Trade Area.
- Central African Customs Union.
- Arab Common Market.
Although from the point of view of comparative costs, free trade is most desirable, arguments advanced against free trade (apart from the fact that the theory of the comparative cost assumes no transport costs and perfect competition) include:
- Customs duties provide a government with revenue.
- The excess of imports connected with a balance of payments deficit may be corrected by import duties, import quotas, or import deposits.
- Infant industries require protection until they can stand on their own feet.
- Countries already imposing tariffs have a bargaining weapon when trade concessions are under discussion.
- Workers expect to be protected against cheap labor abroad.
- Tariff walls may be erected to prevent foreign monopolistic concerns from' dumping' goods abroad at a low price so that they may maintain prices in the home market upon which they mainly depend.
- As other countries have trade protection measures, no country can afford to go it alone" and adopt free trade. When the UK did this in the late nineteenth century, it was subject to a trade depression as duty-free foreign goods flowed in whereas British exports were subject to tariffs.
- Military and political policies cut across free trade principles.
- Home industries may need subsidies to compete against foreign concerns that receive help from their governments.
In the eighties, the movement towards trade protection received fresh impetus as unemployment increased. In 1982, the US Congress considered banning all car imports. In the UK, the TGWU threatened to block imports of the General Motor Corsa car, while Mrs. Thatcher warned the Japanese to restrict their exports to Britain, particularly of machine tools and forklift trucks.
However, economists generally still believe in free trade, so long as free trade is fair trade. The answer to cheap Japanese imports is for the rest of the world to be more competitive and to concentrate on those things in which they have a comparative advantage. The UK has its peculiar opportunities to trade in aircraft, patented pharmaceuticals, oil and mining equipment, etc. import controls have been advanced as an 'alternative economic strategy' supported by many British trade unionists. These controls would involve much greater government supervision of the economy and can only be supported while there is 'unfair trade' existing in world markets. Such unfair trade is exemplified by the report that GATT reckoned that trade restrictions outside its control affect £60 billion worth of goods (Sunday Times Business News, Graham Serjeant, 29 September 1982).