Economic systems:
Protection and free trade
(globalisation)
Discussion of protectionism and free trade; evaluating the South African
international trade policies and major protocols in terms of...
 Export promotion
 Import substitution
 Protectionism (the arguments)
 Free trade (the arguments)
 A desirable mix
Export promotion: any incentives provided by gov. to encourage firms to
increase their exports.
Reasons for export promotion
 Promotes export-led economic growth
 Greater employment
 More workers gain experience and training
 Greater volume of production leads to economies of scale
Methods of export promotion
enables producers to sell goods
at reduced prices in foreign countries.
reductions in taxes on profits
and volumes exported and refunds of taxes paid
in the foreign country.
grants to compensate exporters
for the extra costs incurred in exporting.
information about possible
markets, setting up trade shows, organising trade
missions to other countries, and making trade
agreements.
Increased domestic production.
Real cost concealed by subsidies - may
never be able to compete in an open
market.
Increased employment opportunities
Below cost prices charged - forces out
sustainable businesses.
World market is very large
Dumping pushes out local producers .
Leads to increased tariffs and quotas.
Balance of payments equilibrium
Developed countries protect labourwithout need for exchange control and intensive industries in which developing
quantitative restrictions (quotas etc.)
countries have comparative
advantage.
Production according
to comparative advantage.
Now complete Activity 2 on page 121
Import substitution: policy whereby goods that were
previously imported are replaced by locally manufactured
goods whenever possible.
 Done to promote local industry and create economic
growth.
 Done by using protective measures (tariffs & quotas).
 Enforcing tariffs & quotas easier than forcing developed
countries to lift trade barriers against developing
countries.
 Promotes development of industries as imports made
more expensive.
 More self-sufficient.
 Increases employment and training of local workers.
 Import duties source of tax revenue.
1. Import or customs duties
Import or customs duties: taxes added to price of goods
from other countries.
Import duties can be charged in two ways:
 Ad valorem - according to value of the goods.
Eg.40% on imported TV sets
 Specific tax - according to the weight, number or size.
Eg. import tax on carbonated drinks = R7,53 per litre
Import duties charged for the following reasons…
Raise revenue for the state.
Protect local industry.
Eg, ad valorem customs duty of 36% on motor
cars.
Prevent dumping.
Eg. in 2012, anti-dumping customs duty of
104% on steel screws from China and 30% on
imported kitchen sinks.
2. Import deposits
 Importers must deposit with SARS a % of the value of the
goods to be imported before products come into
country.
3. Import quotas
 Reduces quantity of imports
 Can reduce supply and increases prices.
4. Import restrictions
 Prevents certain goods (banned products) from entering
the country.
More local businesses established.
Can become inefficient.
Domestic manufacturing expands.
Increased prices because of a lack
of competition.
Increased employment.
Distorts the natural flow of trade.
Countries with competitive
advantage don’t always trade.
Greater variety of businesses
increases self sufficiency.
Efficient producers can be forced
out of the market.
Complete Activity 3 on page 125
Protectionism: policy where goods/services are not allowed to flow freely
between countries but are restricted by various regulations.
Allows new industries to be established
Prevents dumping (activity 4 – page 126)
Promotes industrial development
Prior to 1930 62% of SA’s exports were gold
Provides employment and job security
Improves the balance of payments
Provides revenue for the state
 Countries retaliate (export subsidy met with import duty)
 Consumers are disadvantaged by high prices and poor
quality
 Inefficiency in production is fostered…
 no reason to produce at the lowest cost per unit
 profits only while they are isolated from foreign competition
 most modern technology not utilised
 unable to compete with foreign goods when tariffs removed
 Only a small number of producers benefit
 Misuse of protection destroys developing economies
Now answer Activity 5 on Page 129
Free trade: occurs where there are no barriers to the importing and exporting
of goods and services.
Trade is liberalised, for the following reasons…
 No trade-distorting policies, that give local producers advantage over
foreign ones or vica versa.
 Free movement of labour and capital
Leads to globalization.
 Globalisation: free movement of goods/services, labour and capital without
regard to national boundaries.
Countries can specialise
Productivity is boosted due to greater
competition
Economic efficiency
maximises economies of scale
Lower prices for consumers
Allows consumers wider variety of goods
 Free trade creates unemployment and reduces wages
 Balance of payments problems arise
 1995 - trade surplus R685mill
 2003 - trade deficit R9,9bill
 Countries become vulnerable due to over specialisation
Now answer Activity 6 on page 131
Protection needed for new industries to
develop in short-term.
Efficiency & high productivity needed to
compete on world markets longer term.
Reduce protection gradually
 Local industries have time to adapt to greater efficiency of production.
Most-favoured nation status
Most-favoured nation (MFN): establishing equality of trading opportunity
among states by guaranteeing that, if one country is given better trade terms
by another, all other states must get the same terms.
 Allow nations to export products without duties.
 Provides trade equality among partners.
 Once importing country grants concession to one country - must be given
to all other countries.
Control free trade
 Currently no watchdog to control international trade.
Causes following problems…
 Imported products inspected, but no info. on working
conditions/wage rates known.
 NO info on environmental impact/sustainability of
products. (Greenpeace advert)
 Low prices may force local industries to close.
 Vulnerable if imports are necessities. (Russia - Ukraine gas
battles)
Difficult for WTO to reach agreement among countries
about removal of protection.
Use of trade blocs
Free trade area (FTA)
• A form of economic integration.
• Member countries remove tariffs between them.
• Can keep trade protection against non-member countries.
• Example: The North American Free Trade Agreement (NAFTA)
Customs union
• Member countries remove trade barriers among themselves.
• Impose common external tariff (CETs) on non-member countries.
• Example: Argentina, Brazil, Paraguay and Uruguay (Mercosur)
Common market
• Same as customs union + free flow of FOP (labour, capital, etc.)
• Example: The European Union (EU)
Economic union
• Same as common market + co-ordinates social, fiscal and monetary policies.
• Example: Eurozone
 Please would you make brief notes on pages 134 – 140 to cover this section
over the long weekend.