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Creating and Maintaining an Acceptable Standard of Living

Nations constantly face the problem of generating enough wealth to meet the needs & wants of its people.

The amount of resources available in any nation is always limited (finite) and with very few exceptions is always less than the demand for those resources.

In some cases the resources necessary to produce an important product may be missing altogether.

Why Do Nations Trade?

No nation is the same as another nation. Every nation has its own combination of resources (land, labour, & capital) which can be arranged in different combinations (entrepreneurship) to produce a unique product or service.

It follows then that some products can be more efficiently produced in certain nations than in other nations.

If regions are allowed to specialize in producing a surplus of those things they do well, they can then trade for those things they either cannot produce or produce much less efficiently.

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The Gains from Specialization

Countries vary in the amount and variety of the factors of production they are able to use in producing goods and services.

There are a variety of ways to produce a given product depending on the situation.

For instance, an agricultural product may be efficiently produced either by using small amounts of land and capital and large amounts of labour (labour intensive), or by using large amounts of land and capital and small amounts of labour (capital intensive).

Some combinations of the factors of production are more efficient for a given situation either because they produce a quality product, or greater quantities while using fewer resources at competitive costs.

A nation (or region) which can find a combination of resources that is more efficient in producing a product than other regions has an advantage over other regions.

The region with the advantage will likely find that its product is in greater demand and will be able to sell its surplus product and use that money to buy other products which it cannot produce as well.

By engaging in this kind of specialization and trade, nations find that their standard of living is increased even though they are not doing any more work.

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The Gains from Large Scale Operation

In the production of goods it is cheaper to produce a large quantity of a given good than it is to produce small quantities.

In large scale operations, cost savings occur because:

• it is often not much more expensive to set up and operate larger and more productive machines than smaller machines.
• it is often worth hiring and using specialized labour and capital equipment which are more productive.
• it is worth organizing production for continuous mass production in order to use automated machinery or to get more productivity from the labour being used.
• it is worth purchasing and transporting raw materials in bulk to gain cheaper costs.
• it is worth investing in the necessary research to improve all the processes involved in the production of the commodity.

Large countries such as the United States may have large enough markets to support economies of scale, but smaller countries such as Canada cannot develop a large enough market unless they are able to export the surplus production to other countries.

Small countries, if they attempt to be self-sufficient in everything they produce would find that their runs would be very small with the result that most products they wanted to produce would have very high average (or unit) costs.

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The Case for Free Trade

By trading, nations (or regions) are able to have more goods than they would if each tried to be self-sufficient.

Free trade allows world production to be maximized because of the effects of specialization and economies of scale. This makes it possible for every household to consume more goods then it could without free trade.

Agriculture is an example of the effects of economies of scale.

Agriculture in Canada and particularly in Saskatchewan was able to increase its productivity significantly by varying all factors of production.

In recent years this phenomenon has occurred in other parts of the world with the result that the production of food has outstripped the demand for food.

There have been three consequences of this success story:

• many countries are producing surpluses of agricultural products which they would like to sell somewhere;
• with the result that the price of food has been driven down;
• resulting in strong competition between nations for a share of the available market for agricultural products

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National Concerns About Free Trade

A nation which uses economic advantage as the criterion to determine what kinds of economic production to engage in finds that it may have to limit itself to the production of a small number of commodities.

Most nations have not been prepared to allow the free market to be the only determinant of what types of economic activity their society can engage in.

Governments are often reluctant to accept this because:

• there are risks in depending on only a few sources of income particularly if some kind of change might affect their economic advantage;
• the incomes derived from the production of a few commodities may fluctuate a great deal as the international market price of these commodities rise and fall; and
• citizens often want a wider range of occupations and opportunities;
• there are some commodities which are so basic to the well being of a society, that governments are reluctant to depend only on outside sources for their supply.

International Trade & Protectionism Content Teaching & Evaluation Strategies Concepts(Knowledge Objectives) Skills/Abilities Values Grade Ten Unit Four Table of Contents

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International Trade & Protectionism

The conflict between maximization of output and protection of local industries and traditional lifestyles can be clearly seen in the reluctance of many governments to allow the international market place to determine who should be the food producers for the world and who should specialize in some other economic activity.

Nations will resort to various forms of protection such as tariffs and import quotas to reduce the demand for imported goods and services.

Governments argue that their policies should look after economic development from the perspective of the long run rather than accept the short run judgments of the market place.

Nations are reluctant to allow their agricultural sectors to disappear for a number of reasons:

• agriculture is a way of life that has many traditional values and beliefs associated with it that many people do not wish to see lost from their society.
• the rural farm pressure groups in many nations are powerful because they can often hold the political balance of power within society;
• many nations do not want to lose their agricultural industry because they have learned through bitter experience that they should not depend on some other country for their food supply; and

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For all of these reasons, many nations are prepared to subsidize the production of food within their nation even if it does represent a burden on the taxpayer and increases the price of food for the consumer.

The Record of Protectionism as an Effective Social Policy

Protectionism has had a mixed record of successes and failures.

Canada and Japan have maintained tariffs as a means of stimulating the development of national industries that can compete in world markets.

• Canada's record has seen the development of many "branch plant" industries while continuing to rely on exporting raw materials as a source of income.
• Japan's record has been to develop large industries in steel production, ship building, electronics, etc. which have been able take markets away from established firms in other countries.

Nationalistic economic policies which advocated higher and higher tariffs in response to foreign tariffs seriously limited the amount of international trade. This in turn cut economic activity (standard of living) causing heavy unemployment and a world wide depression.

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Maintaining Free Trade among Nations

After World War II, there was a wide spread agreement that international trade had to be freed from the trade barriers which had caused so many problems prior to the war.

The General Agreement on Tariffs and Trade (GATT) is a multinational organization established in 1947 to promote the expansion of international trade by accepting three principles:

• equal non-discriminatory treatment for all member nations;
• general reduction of tariffs; and
• the elimination of non-tariff barriers (eg. subsidies) to trade.

• the "Kennedy Round" reached in 1967 an agreement to cut existing tariffs by an average of 35%;
• the "Tokyo Round" of 1973-74 which committed the major industrial nations to cut tariff rates by a further one-third over eight years beginning in 1980.

A number of regional free trade areas on common markets have been created.

One of the important examples is the European Common Market. In 1957 the Treaty of Rome joined France, West Germany, Italy, Netherlands, Belgium, and Luxembourg in the European Economic Community (EEC) now known as the European Community (EC). In 1973 Great Britain, the Republic of Ireland, and Denmark joined the EC, Greece joined in 1983, and Spain and Portugal have since joined.

The objectives of the EC were to:

• eliminate barriers of trade among the member nations; and
• bring about complete mobility of all the factors of production among the member nations;
• to provide a common trading policy toward the rest of the world.

In the early 1980's the EC entered a state of crisis because of the agricultural policies it had been following. (These were adopted from France's agricultural policies.)

The EC had been stabilizing the incomes of their farmers by paying them more than the free market prices would have paid.

• Farmers' production increased faster than the demand for their produce with the result that the EC began to accumulate large surpluses of subsidized agricultural products.
• The EC needed to dispose of this large surplus in some way.

• So the Europeans were determined to protect their farmer industry against any foreign competition which could produce food more cheaply than European farmers.
• To do this Europeans have had to accept high taxes to pay the farm subsidies and high food prices to cover the extra expense of producing food in Europe.

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Resurgence in Protectionism

The slowing down of economies in the 1980's has led to a resurgence of protectionism. This 'new protectionism' involved devices other than tariffs such as:

• import licensing procedures;
• local content requirements; and
• subsidization of domestic industries.

The United States has countered this move by the EC with its own large subsidies to the agricultural sector and is selling its agricultural commodities at extremely low prices on world markets also in order to protect its market share.

The result has been to drive world agricultural prices to an extremely low levels making it difficult for non-subsidized farm economies to survive.

The current round (Uruguay Round) of the GATT negotiations have not been successful in reducing trade barriers.

It has been particularly difficult to reach agreement on how to reduce subsidies to agriculture.

A number of proposals have been suggested to find a compromise that is acceptable to all side to the dispute. Because the current conception of agricultural trade sees the gain of trade to one region as the loss of trade to another region, no government has been able to accept a compromise that would mean hardship for some of its citizens.

Table of Contents: Grade Ten Unit Four