Chapter Summary
- Free trade = no government restrictions on imports/exports. It brings lower prices, more choice, bigger sales, and cheaper inputs — but can hurt jobs in developed countries and exploit developing ones.
- Protectionism = governments deliberately limit free trade using tariffs, quotas, or subsidies to protect jobs, infant industries, or correct trade imbalances.
- Tariffs = a tax on imports. Raises price of imports, cuts quantity imported, raises government revenue.
- Quotas = a physical limit on how much can be imported. Raises price by creating a shortage — but earns the government nothing.
- Subsidies = government payments to domestic firms per unit produced. Lowers their costs, so they can lower prices and compete internationally.
- Trading blocs (FTA → Customs Union → Common Market → Monetary Union) represent increasing levels of economic integration between countries.
- The WTO exists to promote free trade globally and settle trade disputes between member countries.
- Trade patterns have shifted — global trade has grown massively since 1950, and emerging economies like China now rival traditional trade powers.
1. Free Trade
What is Free Trade?
International trade is simply the exchange of goods and services between countries — through exports (goods/services sold to other countries) and imports (goods/services bought from other countries).
Trade is called "free" when there are no government restrictions at all — no taxes on imports, no limits on quantities, nothing artificially blocking the natural flow of goods between countries. Think of it like a market with the border gates wide open: goods move to wherever they're wanted, at whatever price the market decides.
The Benefits of Free Trade
Imagine two neighbouring countries — one brilliant at growing coffee, one brilliant at making machinery. If they trade freely, each can focus on what they're best at (this is called specialisation) and swap the surplus. Everyone ends up with more of both goods than if each country tried to make everything itself. That's the whole logic behind free trade's benefits:
- Greater choice — access to a wider variety of goods/services raises the standard of living.
- Lower prices — international competition forces prices down, so households can buy more with the same income.
- Increased sales — bigger markets let firms achieve economies of scale (lower cost per unit from producing more), spread risk across more customers, and boost revenue.
- Lower input costs — firms get cheaper access to raw materials and labour from abroad, which cuts production costs and boosts profit.
The Costs of Free Trade
Free trade isn't a win for everyone, everywhere, all the time. It tends to create winners and losers — and who wins depends heavily on whether you're a developed or developing country.
| Cost | Explanation |
|---|
| Unemployment |
structural unemployment
|
| Domestic business |
Infant industries
sunset industries
|
2. Protectionism
Introduction to Protectionism
specialisation at a national level
limit
protectionism