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You are here: Home > Current Topics > Mind your Business > 15 September 2003 |
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On Biz/ed, we have reported on the meeting of the World Trade Organisation (WTO) in Cancun, Mexico. The meeting involves representatives from 146 countries and is aiming to come to an agreement on the lifting of barriers to trade. The issue is highly complex and will not be easily resolved. The main areas of conflict centre on agriculture and drugs. Many Western Countries - notably the USA and the EU have systems to support agriculture in order to protect the industry, encourage production and maintain farmer's incomes. The effects of such protection mean that farmers from developing countries (DCs) find in difficult to sell their products in these markets. The EU spends around $100 billion ((£60 billion) on agricultural support whilst reports suggest that DCs could earn around $40 billion (£24 Billion) in export earnings if they had freer access to western markets. The other main issue is medicinal drugs. Reports from the World Health Organisation indicate that tuberculosis (TB), AIDS and Malaria are together responsible for the deaths of, in excess of, 5 million people worldwide. A large proportion of these deaths could be prevented if DCs had access to drugs to treat such diseases. The problem however, is that many of the western companies who have developed these treatments have taken out patents to protect their investment. Other manufacturers could produce these items at a cheaper price but are prevented from doing so as they risk being sued for breaking the patents by companies in the west. The result - DCs are unable to buy the quantities of medicines they need because they simply cannot afford them; the possibilities of acquiring them (or even producing a version of these drugs themselves) is denied them. |
There are two main theories that relate to these issues. One is the theory of comparative advantage and the other relates to barriers to entry. Comparative Advantage: The theory that two (or more) countries can gain mutual benefits from trade if they specialise in those products in which they have a comparative advantage in production (a lower opportunity cost meaning that they sacrifice less by switching resources to those products in which they have the advantage) and then trading. Let us look at an example. It is possible for the UK to produce oranges. We could invest in glasshouses, thermostats and heating to control temperature, irrigation systems to provide the right amount of moisture, lighting devices to provide the right amount of light necessary for growth and production of fruit. However, a country like Spain has a natural climate that is far more conducive to growing this fruit without the capital investment that would be required in the UK. The opportunity cost to the UK of growing oranges therefore is the number of goods that could be produced using the resources that have been taken up in producing oranges. If the UK specialises in producing products in which it has a comparative advantage - say barley - and Spain focuses its resources on producing oranges then we can trade surpluses and both benefit.
In reality, many countries will not want to forego the production of every product because you are then reliant on world politics to ensure trade continues unaffected. This could cause problems. For example, if the UK relied only on Iraq for its supply of oil it could face difficulties of accessing its supplies following the outbreak of hostilities. The existence of agricultural markets in the west therefore does not fully follow the principle of comparative advantage. For farmers in the USA and Canada, who rely on wheat production for their livelihoods, the theory may have little relevance to them - it may be difficult for them to simply change their livelihoods and use their resources for some other purpose - they may not, amongst other things, have the knowledge, expertise or machinery to produce something like linseed or soya beans or peanuts! This highlights a key problem with our theory of markets - resources do have alternative uses but often the ease with which resources can be transferred from one use to another is not as easy as the theory would imply.
Barriers to Entry: These are factors that restrict the entry of a business to an industry. In theory, if profits in an industry are rising, this is a signal that demand is healthy and that goods can be provided at a cost that generates a return. There will therefore be an incentive for firms to enter this industry to gain a share of these profits. As new firms enter the industry, supply rises and prices fall. Hence, a competitive environment has led to demand being met and prices falling. In reality there may be a number of reasons why firms are not able to simply enter a market to compete and take advantage of the profits that may exist. Barriers to entry can take the form of the following:
Such barriers to entry - and the strength of these barriers - may depend on the degree of market power that a business possesses. This market power depends on the degree to which they can influence the market in terms of controlling supply, demand or price. Where barriers do exist, prices may be higher than under more competitive conditions, choice may be limited and firms in the industry may be making substantial profits - well in excess of normal profit.
The marks awarded for this piece of work will relate to the ability of the student to meet the demands of the structure given. This structure should enable the student to demonstrate knowledge and understanding of key concepts (15% of the marks), application of real world examples to these key concepts (20% of the marks), analysis - the ability to highlight the key issues that contribute to the issue and offer some developed explanation of these key factors (35% of the marks) and evaluation of the points raised - the ability to make supported judgements about the relative importance of the issues raised (30%).
Educators can determine the length of the report - 500 words or a 1000 words might be appropriate lengths - and the focus - some students may wish to investigate the issue related to drugs others on agriculture - this degree of flexibility should be allowed. The aim is to emphasise the importance of moving away from knowledge driven content to higher order skills although the suggested weightings can be altered according to personal preference.
