INTERNATIONAL TRADE

BISMARK OSEI ( PHD CANDIDATE)

LESSON 5
 LECTURE OUTLINE
1.0 Definition and Introduction
2.0 The Growth of World Trade: Trade Values
3.0 The Growth of World Trade: Trade Volumes
4.0 Terms Of Trade
5.0 Specialization as the Basis for Trade
5.1 The Law of Comparative Advantage
5.2 Basis For International Trade
5.3 Absolute Advantage
5.4 Comparative Advantage
 LECTURE OUTLINE
6.0 Advantages of International Trade
7.0 Disadvantages of International Trade
8.0 Trade Restriction or Trade Barriers or Trade Protectionism
8.1 Measures Used for Implementing Trade Barriers
8.2 Arguments in Favour of Restricting Trade
8.3 Arguments Against Protection
9.0 Preferential Trading
9.1 Types of Preferential Trading Arrangement
9.2 Examples of Trading Blocs
10.0 World Trade Organisation( WTO)
 1.0 DEFINITION AND INTRODUCTION
International trade is the exchange of capital, goods and services
across international borders or territories of global countries. In real
world, no country is self-sufficient; each country depends on each
other for raw materials, finished products or semi-finished products.
For example, Ghana exports cocoa and gold to Europe, in returns
import machineries and equipments from these European countries.
Egyptians buy Japanese cameras, Japan depends heavily on
American soybeans as a source of food and the Taiwanese make many
electronic goods whose parts are manufactured throughout Southeast
Asia.
 1.0 DEFINITION AND INTRODUCTION
Countries with strong economies like USA, Germany, China and others are powerful
because they export a lot to the rest of the world. This helps them to earn enough export
revenue to support their budget. There is a substantial evidence to support that
international trade and economic growth are positively linked. Without trade, each country
has to produce all the food, clothing, shelter, entertainment and luxuries that it needs.
A world without trade will lead to low living standards. Trade among countries allows
each country to specialize in the area in which they are good at. Thus, trade and
specialization are intimately connected. A country that export and import is said to be an
open economy, whiles a country does not engage in international trade is known as closed
economy (autarky). In recent years, this situation rarely exists. The advantages realized as
a result of trade are called the gains from trade.
 2.0 THE GROWTH OF WORLD TRADE:
TRADE VALUES
In 1960, the nominal value of world merchandise exports (i.e. the exports of goods) was
estimated at $130 billion. By 2016, this had grown to over $16 trillion. Figure 1.0 helps to
put this into perspective by showing both the value of world merchandise exports and their
value as a percentage of GDP. From just under 10 per cent in 1960, by 2008 they had grown
to 25.5 per cent of GDP. Indeed, from 1960 to 2008 the value of world trade had typically
grown more than twice the rate of the value of world output. However, since the financial
crisis of 2007–2008, this trend has been reversed. By 2016, world merchandise exports had
fallen to 21 per cent of world GDP.
Another way of looking at world trade is through the sum of both exports and imports. This
is commonly used to capture the openness of economies. Table 1.0 shows total merchandise
trade as a percentage of GDP for various countries. As you can see, in all cases the
proportion was higher in the 2010s than in 1960s, and in some cases considerably higher.
Table 1.0 Merchandise trade, percentage of GDP
Figure 1.0 World merchandise exports, $billions
and % of world GDP
 2.0 THE GROWTH OF WORLD TRADE:
TRADE VALUES
So far our focus has been on the trade of goods, but countries trade
services too. Commercial services include manufacturing services
on physical inputs (e.g. oil refining, assembly of electronics and
packing), maintenance and repair, transport, construction, insurance
and financial services, telecommunications, private health and
education services.
In 2016, the global value of exports of commercial services was
$4.9 trillion, the equivalent of 6.5 per cent of GDP. This was an
increase from just $191 billion or 3 per cent of GDP in 1976.
 3.0 THE GROWTH OF WORLD TRADE:
TRADE VOLUMES
The dollar value of recorded global trade is affected by changes in prices and
exchange rates as well as the volumes traded. Therefore, by adjusting the dollar value
of trade flows for changes in export and import prices, we are able to estimate the
change in the volumes of goods being traded. Figure 2.0 shows the growth in the
value and volume of world merchandise exports from 1980. Over the period, the
value of merchandise exports grew at annual rate of 4.6 per cent. After accounting for
changes in the prices of countries’ exports, the volume of exports is estimated to have
grown by 1.7 per cent per year.
The chart also shows the actual year-to-year changes in the values and volumes of
merchandise exports. There are some significant differences between the change in
values and volumes. Take, for example, 2015 when the value of merchandise exports
fell by 13.5 per cent.
 3.0 THE GROWTH OF WORLD TRADE:
TRADE VOLUMES
In contrast, the volume of exports rose by 2.5 per cent. The difference is
largely attributable to the large fall in commodity prices in 2015. For example,
global energy prices falling as much as 45 per cent. From Figure 2.0, we can
see the significant negative impact of the global financial crisis at the end of
2006-2009 on the volume of merchandise exports.
In 2009, the volume of worldwide merchandise exports fell by approximately
12 per cent (whiles their value declined by 23 per cent). This was the biggest
contraction in global trade since the Second World War. Despite the initial
rebound in 2010, the average rate of growth in the volume of exports from 2011
to 2016 was only 2.8 per cent compared to the 5.3 per cent average experienced
from 1981 to 2007.
 3.0 THE GROWTH OF WORLD TRADE:
TRADE VOLUMES
This was partly attributable to weaker global economic growth. The world

economy grew by 2.5 per cent per annum from 2011 to 2016 compared with 3.1

per cent from 1981 to 2007. Notably, larger developing economies, such as China,

saw their growth weaken and in some cases, such as Brazil, economies went into

recession.
Figure 2.0 Growth in world merchandise exports
by value and volume
Figure 3 Share of world merchandise exports, by
value (2015)
 4.0 TERMS OF TRADE
The world’s production can only increase when countries specialize in the production of
goods and services in which they have comparative advantage and then trade with one
another. How can gains from specialization and trade will be shared among countries?
The division of the gains depends on the terms of trade. Terms of trade measures the
quantity of imported goods that can be obtained per unit of goods exported.
A rise in the price of imported goods, with the price of exports unchanged, indicates a fall
in the terms of trade (unfavourable terms of trade). This means more exports is needed to
buy the same quantity of imports. In the same way, a rise in the price of exported goods,
with the price of imports unchanged, indicates a rise in terms of trade ( favourable terms
of trade); in this case fewer exports is needed to buy the same quantity of imports.
Terms of trade= (price of exports)/(price of imports) × 100
Figure 4.0 Terms of trade for selected countries
(2010 = 100)
5.0 SPECIALIZATION AS THE BASIS FOR
TRADE
Why do countries trade with each other, and what do they gain from it?
The reasons for international trade is for global growth and employment
creation. Rather than nations trying to do everything by themselves, it
makes sense to specialize. When firms specialize in producing certain
goods. This allows them to gain economies of scale and exploit their
entrepreneurial and management skills of their labour force.
In the same narrative when countries also specialize. They produce
more than they need, what is not consumed domestically is exported.
The revenues earned from the exports are used to import goods that are
not produced in sufficient amounts at home.
 5.1 BASIS FOR SPECIALIZATION IN
TRADE
Countries have different endowments of factors of production. They differ in population
density, labour skills, climate, raw materials, capital equipment, etc. These differences tend
to persist because factors are relatively immobile between countries. Obviously, land and
climate are totally immobile. Even with labour and capital there are more restrictions on
their international movement than on their movement within countries. Thus the ability to
supply goods differs between countries.
What this means is that the relative cost of producing goods varies from country to country.
For example, one country may be able to produce one fridge for the same cost as 6 tonnes of
wheat or 3 MP4 players. Whiles another country can produce one fridge for the same cost as
3 tonnes of wheat but 4 MP4 players. It is these differences in relative costs that form the
basis of trade. At this stage, we need to distinguish between absolute advantage and
comparative advantage.
 5.2 BASIS FOR INTERNATIONAL TRADE
What a country can export and import depends on what in economics
called absolute advantage and comparative advantage by Adam smith
and David Ricardo respectively.

Absolute advantage: According to Adam Smith, a country should

produce and export the commodity that it can produce at a lower cost.
The lower cost was measured in the number of labour hours used in
production.
 4.0 ABSOLUTE ADVANTAGE
Countries Cocoa( hrs used) Oil( hrs used)

Ghana 4 10

Nigeria 8 6

Total production 15 26
 EXPLANATION TO THE TABLE
From the table, Ghana produces 15 bags of cocoa using 4 hours while Nigeria uses
8hours to produce 15 bags of cocoa. This means that, Ghana produces cocoa at a
lower cost than Nigeria; therefore Ghana has absolute advantage in the production
of cocoa. With regards to Oil production, Nigeria uses 6 hours for the production
of 26 barrels of oil whiles Ghana uses 10 hours to produce 26 barrels of oil. Which
implies that, Nigeria has absolute advantage in the production of oil.
Therefore for the two countries to benefit from trade, Ghana should produce and
export cocoa to Nigeria whiles Nigeria also produce and export oil to Ghana.
Simply put, Ghana will import oil from Nigeria whiles Nigeria imports cocoa from
Ghana. Assuming there are only two countries trading.
 5.4 COMPARATIVE ADVANTAGE
The trade between two countries can still be beneficial even if one
country can produce all goods with less cost than the other country.
Take the case of a developed country that is absolutely more efficient
than a less developed country producing both wheat and cloth.
Assume that with a given amount of resources (labour, land and capital)
the alternatives shown in Table 5.0 can be produced in each country.
Despite the developed country having an absolute advantage in both
wheat and cloth. The Less Developed Country (LDC) has a comparative
advantage in wheat and the developed country has a comparative
advantage in cloth.
 5.4 COMPARATIVE ADVANTAGE
This is because wheat is relatively cheaper in Less Developed Country (LDC). Only 1 square
metre of cloth has to be sacrificed to produce 2 kilos of wheat. Whiles 8 square metres of
cloth would have to be sacrificed in the developed country to produce 4 kilos of wheat (i.e. 2
square metres of cloth for every 1 kilo of wheat). In other words, the opportunity cost of
wheat is four times higher in the developed country (8/4 compared with 1/2). Hence, the
LDC should focus on the production and exports of wheat to developed countries.
On the other hand, cloth is relatively cheaper in the developed country. Here the opportunity
cost of producing 8 square metres of cloth is only 4 kilos of wheat. Whereas in the Less
Developing Country (LDC), 1 square metre of cloth costs 2 kilos of wheat. Thus the
opportunity cost of cloth is four times higher in the Less Developing country (2/1 compared
with 4/8). Hence, the developed country should focus on the production and exports of cloth
to LDC.
5.0 COMPARATIVE ADVANTAGE
 6.0 ADVANTAGES OF INTERNATIONAL
TRADE
1)Increases Productivity: International trade is basis on specialization with
emphasis on the commodity which the country has comparative advantage in its
production. Countries specializing on the commodity they are good at helps to
produce commodities in large quantities efficiently with minimum waste. This
goes a long way to increase the productivity of global goods and services.
2)Better supply of goods: One important benefit of international trade is that, it
helps countries to enjoy goods and services it cannot produce itself. For instance,
Ghana does not produce mobile phones, laptop, aeroplane, agriculture machinery
and other essential commodities. Yet till Ghanaians get access to all these goods
and services it doesn’t produce from her trading partners. This wouldn’t have
been possible without international trade.
 6.0 ADVANTAGES OF INTERNATIONAL
TRADE
3)Lower cost of production: International trade makes it possible for every producer to access
the entire global market for its goods and services. As a matter of fact, each domestic producer
does not only produce for its immediate market but as far as the entire world, this increases the
size of the market for their products. Producing on a large scale allows firms to enjoy economies
of scale, helping to reduce the cost of production and prices of their products. For example, if
Switzerland is producing watches for its own domestic market, the cost of production per unit
would have been higher.
4) Monopolies can be curbed: The phenomenon of monopoly is completely dying out due to
international trade. Indeed, monopoly in some countries led to exploitation of consumers. Even
if a firm is a monopolist in a country, the firm cannot enjoy monopoly power due to importation
of the same product into the country. For instance, if in Spain one company produces cars, the
firm cannot enjoy monopoly power because other business men and women will import the
same product into the country cutting off the firm’s monopoly power.
 6.0 ADVANTAGES OF INTERNATIONAL
TRADE
5)Encouragement of international cooperation: Persistence trading among countries
helps to foster international peace and friendship among those countries. Countries
become concern about any development in the area of security, investment, economic
growth, education and others of the other country. Trade between Russia and other
European countries make these countries developed growing concern over the conflict
between Russia and Crimenia in 2014-2015. Their concerns were appropriate because
these two countries supply European countries petroleum products.
6)Shortages can be prevented: Shortage of products is now a thing of the past due to
importation. Trading countries can reduce the likelihood of shortages of goods and
services by offsetting temporary domestic shortages with supplies from abroad. This
helps to reduce the possibility of famine in developing country.
 6.0 ADVANTAGES OF INTERNATIONAL
TRADE
7) Better risk management: One of the significant advantages of international trade is
market diversification. Focusing only on the domestic market may expose you to
increased risk from downturns in the economy, political factors, environmental and other
risk factors. Becoming less dependent on a single market may help you to mitigate
potential risks in your core market. This is because it allows countries and companies to
diversify their business operations in multitudinous countries.
8) Increases the country’s international reserves: Through excessive exports of goods
and services, the country is able to obtain foreign currency from foreign countries to
increase their international reserves to stabilize their currencies. For instance, Ghana’s
export of gold, cocoa and oil helps the country to earn foreign currencies to back the
cedis. Hence, the country’s ability to exports more means that it gets access to foreign
exchange to strengthen their currencies.
 7.0 DISADVANTAGES OF
INTERNATIONAL TRADE
1)Collapse of domestic industries: globalization of trade not withstanding it benefits to nations, also has
huge impact on domestic or infant industries, if not well protected by government. Foreign companies
especially in Europe, Asia and America have been existing and enjoying economies of scale for so many
years. With advance methods and machines for production, domestic or infant industries cannot compete
with them unless protected for number of years. Failure on the part of government especially in Africa to
do this will lead to the collapse of these industries and hence higher unemployment.
2)Dumping of goods: International trade has been criticised over dumping of excess cheap or low
quality goods by developed countries on developing or low middle income countries. The export of
excess cheap products adversely affect domestic industries.
In Africa for instance, the dumping of second-hand fridges, car tyres, air-conditioners, mattress, bulbs,
handkerchief, other electrical gadgets, hard perfume & pomade and others have imposed a lot of health
threats on these countries. Of late, much has been said about Chinese plastic rice and plastic cabbage
production and exports.
 7.0 DISADVANTAGES OF
INTERNATIONAL TRADE
3)Security threat: International trade is also a threat to national security. Goods produced
for defense purposes should be produced in the home country to ensure that, it is not
dependent on foreign suppliers in times of conflict. Other commodities like foodstuff should
be produced by countries, in times of war export and import of these commodities will be
difficult.
4) Economic and political dependence: The underdeveloped countries depend on
developed ones for their manufactured products. Such reliance often leads to economic
exploitation. For instance, most of the underdeveloped countries in Africa and Asia have
been exploited by European countries. International trade often encourages subjugation and
slavery. It impairs economic independence which endangers political independence. For
example, the economic and political independence of Francophone countries is being
infringed upon by France.
 7.0 DISADVANTAGES OF
INTERNATIONAL TRADE
(5) Exploitation of Natural Resources: Excessive exports may exhaust the natural
resources of a country in a shorter span of time than it would have been otherwise. This
will cause economic downfall of the country in the long run. Most companies especially
mining and petroleum companies, in their quest to exports more to the international
market exploit forest reserves, water bodies, mining forest and others. This has
monstrous effect leading to current problem of climate change in the world.
6) Unemployment in importing countries: Excessive importation by a lot of countries
especially among African countries has contributed immensely to higher level of
unemployment in these countries. Ghana for instance imports sugar, rice and chicken
amounting to US$1billion yearly. If these commodities were produced domestically, it
would have created employment for more than 600,000 Ghanaians.
 7.0 DISADVANTAGES OF
INTERNATIONAL TRADE
7) Depreciation of the currency: Excessive importation does not adversely affect
employment alone but also it hurts the local currency. Excessive importation means that
more of the local currency has to be changed for foreign currencies for importation. This
puts pressure on the demand of foreign currencies leading to the depletion of the
international reserves and the fall in the value of the local currency. In Ghana for
instance, the cedi has depreciated more than 35% in the first five months of 2022.
8) Intellectual proper theft: The wider a product is distributed the more likely that it
may be illegally copied by a competitor. This can be in the form of proprietary
information or market branding. With cross-country borders, it becomes very difficult
for a company to prosecute such cases. For example, US companies like Apple has
accused phone manufacturing companies in China of intellectual theft.
 8.0 TRADE RESTRICTION OR TRADE
BARRIERS OR TRADE PROTECTIONISM
Despite the benefits from international trade, it accompanied disadvantages force
government to bring all forms of restrictions to reduce the volume of trade
especially importation into their countries. Hardly do countries ban international
trade upright but by using various devices to delay imports or make them more
expensive. Countries can effectively create barriers to free trade. However,
imposing trade barriers is difficult as it can cause other nations to take retaliatory
actions and court disapproval from the World Trade Organization (WTO).
Notwithstanding this, formal trade barriers are still employed by countries.
Trade barriers refer to the measures that are put in place by governments to
reduce the volume of goods imported in order to protect domestic producers and
employment in the country.
 8.1 MEASURES USED FOR
IMPLEMENTING TRADE BARRIERS
i) Import tariff: Import tariff are customs duties and taxes imposed on goods which the country
imports. Tariffs are used to restrict imports. Governments impose tariffs to raise revenue, protect
domestic industries or exert political leverage over another country. Simply put, they increase the
price of goods and services purchased from another country, making them less attractive to
domestic consumers. Tariff affects the exporting country indirectly as domestic consumers might
shy away from their product due to the increase in price. If the domestic consumers still chooses
the imported product then the tariff has essentially raised the cost of living for the domestic
consumers. These tariffs are usually ad valorem tariffs, that is a tariff impose on the percentage
of the price of the import (Ad valorem tariffs levied as a percentage of the price of the import).
 8.1 MEASURES USED FOR
IMPLEMENTING TRADE BARRIERS
ii) Import quota: It is the restrictions on the quantity of goods that can be imported into a
country. The essence is to impose restrictions on exact quantity of a commodity which can be
imported with the intention of reducing excessive imports. For example, the country needs 4
million bags of rice. The country is able to produce 3 million bags, it will allow import quota for
1 million bags of rice to supplement its production. Import quotas may be accompanied by
customs duties.
Iii)Exchange rate control: This limits how much foreign currency is made available to
importers (financial quotas). The essence to limit the citizens access to foreign currencies to
reduce imports, with the aim of addressing adverse effect of unfavourable balance of payments.
iv)Embargo: Embargo is the total ban of imports or exports in a country. It is normally used by
government to cut off importation of harmful products like strong alcoholic drinks, pornographic
images and pictures.
 8.1 MEASURES USED FOR
IMPLEMENTING TRADE BARRIERS
v) Import licensing: Import license is the right or document given to a person within
country to import goods. This right is permitted by government which sometimes
indicates the quantity of goods one can import. For example: In Philippines,
importers need import clearance certificate from the Bureau of Internal revenue
before they can import into the country.
vi) Subsidies: It is a direct or indirect payment granted by government which absorbs
part of the cost of production for producers. The usage of subsidy increases domestic
production and makes the product cheaper both in the domestic and international
market. This means that, this will protect domestic producers against the foreign
imports. For example, during Donald Trump’s administration U.S accused France of
subsidizing their producers of wine to take advantage of U.S market.
 8.1 MEASURES USED FOR
IMPLEMENTING TRADE BARRIERS
vii) Devaluation: It is a deliberate reduction in the value of a country’s currency. This
makes the country’s imported goods expensive whiles their exports become cheap. This
helps them to take advantage of trade. When citizens demand for imported products is
elastic, the increase in the price of import will reduce their demand of these products. For
example, in 2015, People’s Bank of China surprised the markets with three consecutive
devaluations of the Chinese yuan knocking over 3% off its value.
viii)Administrative control: With this method, the country uses several imposition of
health, safety and environmental regulations and rules to make importation very difficult.
If the product does not meet these standards it cannot be imported. For example, UK can
set a high health standard for medical drugs export into the country. Countries that
cannot meet that standard will not be allowed to export medical drugs into the country. In
so doing, they can cut down importation of medical drugs into the country.
 8.2 ARGUMENTS IN FAVOUR OF
RESTRICTING TRADE
1) The infant industry argument: Some industries in a country may be in their infancy but have a
potential comparative advantage. This is particularly likely in developing countries, such industries
are too small yet to have gained economies of scale. Their workers are inexperienced, they lack
back-up facilities such as communications networks and specialist suppliers. They may have only
limited access to finance for expansion. Without protection, these infant industries will not survive
competition from abroad. Protection from foreign competition will allow them to expand and
become more efficient. Once they have achieved a comparative advantage, the protection should be
removed to enable them compete internationally.
2) Increases domestic employment: As the consumption of local goods increases, so does the
production. In order to satisfy the growing consumer demand, domestic producers have to produce
more products. This according to the Economic Policy Institute (Washington-based non-profit think
tank) it leads to the creation of more jobs. With more jobs available, unemployment rates will go
down and previously unemployed people will have income they can use to improve their welfare.
 8.2 ARGUMENTS IN FAVOUR OF
RESTRICTING TRADE
3)Enlarged National Revenue: Levying tariffs on imported goods and services is a strategy
governments use to increase national revenue. The duties from importers goes directly to the
government’s revenue collection agency. Although tariffs are generally designed to
discourage importation, it increases the government’s revenue collected. When the
government raises tariffs on goods that were previously imported free of duty, it collects
more revenue.
4) Improved Consumer Protection: The government sets import regulations on some
consumer goods to ensure that they are safe for domestic use or consumption. When
importing foods, medicines or cosmetics into US, for instance, importers must ensure the
manufacturers, producers or handlers of these products are registered with the U.S. Food and
Drug Administration. The imports must also be inspected by the FDA before they are
allowed into the country.
 8.2 ARGUMENTS IN FAVOUR OF
RESTRICTING TRADE
5) Improves balance of trade: Some countries experience imbalance in their trade with the
rest of the world. If they are importing too many goods they may correct a temporary
problem by imposing tariffs on imports. A suitable tariff policy can create and maintain a
favourable balance of trade. The restrictions on imports for the purpose of protection will
create a surplus in the balance of trade of the country.
6) Withstand against unfair foreign competition: Countries follow the policy of protec­
tionism against unfair foreign competition. ‘Unfair’ competition can take a variety of forms.
Sometimes, foreign governments can subsidize their export industries. This means that,
domestic industries cannot compete fairly. Similarly, foreign firms may ‘dump’ their
products overseas, either because they cannot be sold on their domestic market or in order to
destroy competitor. They could then reduces their prices and make large profit. Given this
situation, the imposition of tariff will help to deal with this problem.
 8.2 ARGUMENTS IN FAVOUR OF
RESTRICTING TRADE
7) Retaliatory measure: They are sometimes use as a way of retaliation to the imposition of
similar restriction by the other country on their products. It is a sort of bargaining weapon to
persuade other countries to reduce its imports tariff. When import tariff is used in the process,
it is referred as tariff war. Example in 2019, US imposed tariff on roughly US$350 billion of
Chinese exports whiles China retaliated with tariff on US$100 billions on US goods exported
to China.
8) Diversify the economy: Trade restrictions can also be used to diversify the economy. With
trade restrictions, the country reduces its depends on foreign products and embark on home-
grown policies. This helps them to diversify their trade opportunities in other grey sectors of
the economy. For example: Chile through the investment in import-substitution industries and
trade restrictions. They have diversified their economy exporting more than 2,800 distinct
products to more than 120 countries according to the World Bank report in 2017.
 8.3 ARGUMENTS AGAINST
PROTECTIONISM
1) Reduces world production and consumption: It creates obstacles or
barriers to free multinational trade. Due to high tariffs imposed by other
countries, a country is not able to produce goods in which it has cost
advantage. Protectionism reduces the world’s production and con­sumption of
internationally traded goods.
2)Protectionism gives shelter to weak home industries: When these trade
barriers become permanent, home industries would not get any incentive to
compete freely with their foreign counterparts. This will not help them to
develop efficient and advanced method of production.
 8.3 ARGUMENTS AGAINST
PROTECTIONISM
3)International retaliation: Other countries tend to retaliate to these trade barriers.
For instance, if Spain impose high tariff on commodities that come from Italy, Italy
will retaliate by also imposing high tariff on commodities that come from Spain.
This adversely affects production and employment. This is known in international
economics as tariff war.
4)Unemployment ultimately rises: There is a higher possibility of creating high
unemployment in the exporting countries. Trade barriers against countries tend to
reduce the volume of trade and production of goods and services especially in the
exporting country. Typical example is the ban of importation of tobacco in some
countries. It can completely lead to shut down of firms that engage in such
production leading to unemployment.
 8.3 ARGUMENTS AGAINST
PROTECTIONISM
5) Corruption by tax officers: whenever the tariffs are too high for importers, they resort
to finding a way of bringing their products into country without paying the exact amount of
tariff. In the case of African countries, this is a common practise where migration officers at
borders, tax officers and custom officers at port and harbour are engage in such an act,
causing financial haemorrhage to the national purse.
6)Higher monopoly power: Free trade promotes competition among different countries,
which forces local companies to keep product prices at a reasonable level. Trade barriers
have the opposite effect. They increase monopoly power and limit competition allowing
producers to charge higher prices. Additionally, limiting the competition leads to increase in
price causing a decline in the standard of living. It might also stifle innovation, since
protectionism provides no incentive for a company to invest in technological advancement.
Since there is less incentive to provide superior products, quality will decline over time.
 8.3 ARGUMENTS AGAINST
PROTECTIONISM
7) Higher cost of living of the citizenry: In most cases,
especially in developing and low-middle income countries .
Domestic consumers demand for imported products is inelastic.
Hence, the imposition of tariff does not reduce their demand for
such products.
But instead worsen their standard of living due to higher prices
of these goods. A typical example can be seen in Ghana for
products like rice, chicken, sugar, fish and other products.
9.0 PREFERENTIAL TRADING/TRADING
BLOCS/ECONOMIC INTEGRATION
The world economy has seen the formation of series of trading blocs/economic
integration. These have often been based upon regional groupings of countries,
such as the European Union (EU) or the North American Free Trade Agreement
(NAFTA) and others. Such trading blocs are examples of preferential trading
arrangements. These arrangements involve trade restrictions with non-members
and no trade restrictions among members.
Although trading blocs clearly encourage trade among their members. Many
countries outside the blocs complain that, it benefits its members at the expense
of the rest of the world. Many developing economies need easy access to most
prosperous nations in the world to develop.
9.1 TYPES OF PREFERENTIAL TRADING
ARRANGEMENT
i)Free trade area: A free trade area is where member countries remove
tariffs and quotas among themselves but retain trade restrictions with
non-member countries.
ii) Custom union: With custom union, beyond the free trade area
member countries maintains common external tariff with non-member
states of the trading bloc. Customs unions are established through trade
pacts where the participant countries set up common external trade
policy. Purposes for establishing a custom union normally include
increasing economic efficiency, establishing closer political and cultural
ties among member countries.
 9.1 TYPES OF PREFERENTIAL TRADING
ARRANGEMENT
iii)Common market: is a formal agreement which is an extension of the custom
union concept, its additional feature deals with free movement of labour and capital
among the members. An example was the Benelux common market until it was
converted into an economic union in 1959. Simply put, a common market goes
beyond the free movement of products and services and allows free movement of
labour and capital among the members of the group.
A full common market includes the following features;
a) A common system of taxation: In the case of a perfect common market, this
involves identical tax rate in all member countries.
 A full common market includes the following
features;
b) A common system of laws and regulations governing production,
employment and trade: In a perfect common market, there would be a single set
of laws governing issues such as product specification (e.g. permissible artificial
additives to foods or levels of exhaust emissions from cars), employment and
dismissal of labour, mergers and takeovers, and monopolies and restrictive
practises.
c) Free movement of labour, capital and goods and services: In a perfect
common market, this involves a total absence of border controls between member
states. The freedom of workers to work in any member country and the freedom of
firms to expand into any member state.
9.1 TYPES OF PREFERENTIAL TRADING
ARRANGEMENT
iv) Economic union: It denotes a common market in which
members agree to harmonize their economic policies, as is the
case with the European Union. The purpose is to work towards
using one currency. By harmonizing their economic policies,
they achieve economic convergence for this objective.
v) Monetary union: It denotes the extended form of economic
union where member countries adopt one currency for trading
among themselves. A typical example is the use of Euro by the
European union.
 9.2 EXAMPLES OF TRADING BLOCS
(1)EU –The European Union: The European Union (EU) began in the 1950s as
the ‘European Economic Community', with six member states; Belgium, Germany,
France, Italy, Luxembourg and the Netherlands. It was later joined by Denmark,
Ireland and the United Kingdom in 1973, Greece in 1981, Spain and Portugal in
1986. Reunification of Germany in 1990 brought in the East German Länder.
It was expanded in 1995 to include; Austria, Finland and Sweden. Later on the
inclusion of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Malta, Poland, Slovenia and Slovakia in 2004. Bulgaria and Romania joined in
2007. Croatia, the former Yugoslav Republic of Macedonia and Turkey are
currently members. The Eurozone (members that accept Euro as their medium of
exchange) use Euro as a common currency.
 9.2 EXAMPLES OF TRADING BLOCS
2) MERCOSUR: This is South America's leading trading bloc and it is known as the
Common Market of the South. It has the motive of achieving free movement of goods,
capital and services among member states. Member states include; Argentina, Brazil,
Paraguay and Uruguay with associate members being Bolivia, Chile, Colombia, Ecuador
and Peru. The bloc has total population of more than 250 million people and accounts for
more than 75% of the economic activities in the continent. The combined GDP of the bloc
is US$ 1.1 trillion as at 2011.
3) ASEAN –The Association of Southeast Asian Nations: ASEAN is made up of ten
countries; Burma, Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Philippines,
Singapore, Thailand and Vietnam. The bloc focuses on accelerating economic growth,
social progress, cultural development, promote regional peace and stability with strong
adherence to principles of the United Nations Charter.
 9.2 EXAMPLES OF TRADING BLOCS
4)BRIC: BRIC is not an official trading bloc, but an abbreviation that
represents Brazil, Russia, India and China which constitutes over 42%
of the world's population. Examples of their trade agreements are;
In the first six months of 2009, China became Brazil’s biggest single
export market for the first time.
In 2010, China Development Bank and Sinopec (Chinese oil
company) gave Brazil’s state-controlled oil company (Petrobras) $10
billion. In return for 200,000 barrels of crude oil per day for the ten
years.
 9.2 EXAMPLES OF TRADING BLOCS
5)ECOWAS: The Economic Community of West African States (ECOWAS) is a
regional economic union of fifteen countries located in West Africa. The union
was established on 28 May 1975, with the signing of the Treaty of Lagos. With the
mission of promoting economic integration across the region. The treaty was later
revised, agreed and signed on 24 July 1993 in Cotonou.
ECOWAS also serves as a peacekeeping force in the region, with member states
occasionally sending joint military forces to intervene in member countries in
times of political instability and unrest. The most recent ones are interventions in
Ivory Coast in 2003, Liberia in 2003, Guinea-Bissau in 2012, Mali in 2013 and
Gambia in 2017.
 9.2 EXAMPLES OF TRADING BLOCS
6) Africa Continental Free Trade Area (AfCFTA): is a free trade area
founded in 2018 and its operation commenced on 1 January, 2021. It was
created by the African Continental Free Trade Agreement among 54 of the 55
African Union nations. The free-trade area is the largest in the world in terms
of the number of participating countries since the formation of the World
Trade Organization. Ghana serves as the Secretariat of AfCFTA.
The agreement was brokered by the African Union (AU) and was signed by
44 of its 55 member states in Kigali, Rwanda on March 21, 2018. The
agreement initially requires members to remove tariffs of 90% on goods,
allowing free movement of goods and services across the continent.
 10.0 WORLD TRADE
ORGANISATION(WTO)
The World Trade Organization (WTO) is an intergovernmental
organization that regulates and facilitates international trade.
Governments use the organization to establish, revise and enforce the
rules that govern international trade. It officially commenced operations
on 1st January 1995, pursuant to the 1994 Marrakesh Agreement. Thus
replacing the General Agreement on Tariffs and Trade (GATT) that had
been established in 1948. The WTO is the world's largest international
economic organization, with 164 member states representing over 98%
of global trade and global GDP.
 10.0 WORLD TRADE
ORGANISATION( WTO)
The WTO facilitates trade in goods, services and intellectual property
among participating countries. By providing a framework for negotiating
trade agreements, which usually aim to reduce or eliminate tariffs, quotas
and other restrictions. These agreements are signed by representatives of
member governments  and ratified by their legislatures.
The WTO also administers independent dispute resolution for enforcing
participants' adherence to trade agreements and resolving trade-related
disputes. The organization prohibits discrimination between trading
partners, but provides exceptions for environmental protection, national
security and other important goals.
 10.0 WORLD TRADE
ORGANISATION( WTO)
The WTO is headquartered in Geneva, Switzerland. Its top decision-
making body is the Ministerial Conference which is composed of all
member states and usually convenes biennially. Consensus is
emphasized in all decisions. Day-to-day functions are handled by the
General Council, made up of representatives from all members.
A secretariat of over 600 personals led by the Director-General and four
deputies, provides administrative, professional and technical services.
The WTO's annual budget is roughly 220 billion USD which is
contributed by members based on their proportion of international trade.
THE END OF THE LECTURE