Countries can gain from the exchange of goods with the rest of the world.

The Case of Finland a) Finland is a country in Northern Europe; it shares a border with Russia to the East, Sweden to the West and Norway to the North. Finland became a member of the European Union in 1995, an organizations that ensures free trade amongst its 27 current members Until the end of the 1st World War in 1918 Finland was under the control of Russia, after autonomy the Finns would go on to fight the Russians during the 2nd World War in some of the bloodiest battles of the war. Nowadays relations are more genteel with their easterly neighbour and the 2 countries enjoy mutually beneficial trade. Finland has large amounts of untouched forest areas and as such a major export commodity is timber and timber products such as pulp and paper, however Finland has been on the fore front of technological advances housing many electrical and optical innovators, most notably the phone company Nokia which claimed 31% of the new phone market in the last quarter of 2010. Finland relies heavily on imports of goods particularly arable goods that are inefficient to grow in the harsh climate of Northern Europe; this inability to cover the populations needs efficiently leads Finland to engage in trade with the rest of the world, in Fig1 below we can see Finlands 10 main trading partners and their share of Finlands export/import business compared with the rest of the world. Fig1.
Germany 12%

Rest of World 36%

Russian Federation 12%

Sweden 10%

Norway 3%

United Kingdom 6% Italy 3% France China 5% United States 5%

3% Netherlands 5%

The pie chart shows that in total Finlands 10 largest trading partners account for 64% of Finlands total trade, but why is trade with some of these countries so desirable to Finland and vice versa? Dissecting Finlands 10 main trading partners we can see that all bar 4, the United States, Russia, China and Norway, are members of the European Union. Furthermore we can see that all 3 countries that border Finland, Russia, Sweden and Norway are amongst Finlands favourite trading partners. The reason why 6 out of 10 of Finlands most popular trading partners are members of the European Union is that trading with fellow members of this customs union has advantages. When exporting to another member state of the EU an EU country will not incur charges, otherwise known as tariffs, on the value of the export, this effectively reduces costs. The EU imposes a common external barrier on trade which means any country outside of the EU incurs a single charge when exporting to any EU country. This is in order to protect industries within the EU who would otherwise suffer were cheap imports allowed into the union. Opponents to the EUs common external barriers argue that they serve only to protect inefficient domestic producers whilst harming more efficient overseas producers as well as domestic consumers who are forced to pay a higher price due to the existence of the tariffs. Russia, Sweden and Norway all border Finland and are also all in the top 10 countries Finland trades with, this is because costs associated with transport are minimised by trading with a geographically close country. These links are also heightened by a sharing in part of culture, Finland being a former state of Russia and of Sweden before that, this leads to increased demand for the same goods such as cuisine. The United States and China are neither members of the European Union nor are they geographically close to Finland, so what can account for their high volume of trade with the country? As mentioned before Finland has difficulty producing arable foods due to the long winters and mild summers, it is possible to only grow the fastest ripening vegetables as well as frost resistant foods. The United States meanwhile is efficient at producing grains on large scale farms and can therefore produce it at a much lower cost than in Finland. Unable to compete with the comparative advantage of US grain production the Finnish people increasingly turned to meat and dairy farming, in summer the cows could graze and in winter the cows were fed on cheaply imported grain. China meanwhile is not a net exporter of food to Finland; its exports comprise of fabrics and low end electrical products produced at low prices by relatively cheap labour. Fig2 shows Chinas total trade with Finland in the 10 years to 2006, the figures are in millions of 2006 US$, we cam see that trade increased rapidly during this period. Fig2.
China 1997 3,700 1998 4,207 1999 3,848 2000 4,554 2001 4,153 2002 4,282 2003 5,392 2004 7,115 2005 8,017 2006 10,939

During this time period China was undergoing rapid growth as evidenced by the increase in trade with foreign countries. Not only was production in China increasing leading to higher imports from other countries but Chinese consumers were finding themselves with more disposable income which allowed China to itself import more goods, the exact amount of which is shown in table1 in the appendices.

Fig3.
20

18

16

14 Germany Russia Sweden United Kingdom China United States Netherlands France Italy Norway

12

10

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Fig3 show that during the same period all of Finlands top 10 trade partners increased their trade dramatically, this is due partly to the steady increase in GDP experienced by most countries in this time allowing more disposable income to be spent on foreign goods. It is important to remember that Finlands import/export amount is not entirely based on the production/consumption within Finland but rather on changes within the countries it does business in.

b) The Single European Market, of which Finland is a member, employs common external barriers to trade such as tariffs and quotas. Tariffs are charges levied on importing certain items into the European Union customs union from outside the union. Quotas are limitations on the amount of an item that can be imported into the customs union. In 1993 the Single European Market was set up in order to increase competitiveness in the EU by protecting businesses that were inefficient compared to extra-EU businesses. Fig4.

Fig4 shows the effect of a tariff on imports. We have to assume that there is a perfectly elastic world supply, which means that a small change in price results in a large change in quantity demanded/supplied, at price Pw. The supply and demand curves in Finland are given by Sd and Dd respectively. With no imports the demand within Finland would be at 0Q2 whilst the supply would be at 0Q1. If the government of Finland or in this case the EU deems it necessary to protect their economies from cheap extra-eu imports then it can impose a tariff, in this case of size Pw to Pw which shifts the supply curve vertically upwards above the world price. This higher price will lower demand in the economy for the good from Q2 to Q4 whilst simultaneously increasing domestic supply of the good from Q1 to Q3. The domestic consumer surplus, which is the measure of utility

of consumers in the economy, will decline by the area 1+2+3+4. This means that consumers will not be able to afford as many items as if there were free trade. This is partially offset by the domestic producer surplus rising by area 1 and the government receiving tax revenue the size of area 3, but despite this we can clearly see that the effect of introducing this tariff has caused a net welfare loss of areas 2+4. This is a welfare loss to those inside the economy or in this case customs union so this does not take into account losses felt by producers abroad. In this case the tariffs imposed by the EU has led to lower utility for domestic consumers and lower earnings for foreign producers, the only positive result is that inefficient domestic producers are protected. Whereas this tariff may benefit residents of Finland by protecting jobs Finlands presence in the EU is likely to reduce trade with exterior trade partners such as the US, China and Russia. Trade allows Finland to concentrate on the industries it has a comparative advantage in, production and exportation of timber and high value electronics is favoured by Finland in exchange for a lack of domestically produced food. Finland can see greater returns on its workforce and resources when applied to these industries and in turn Finland imports large amounts of grain from Russia and the US who with large open spaces are able to cultivate larger areas of land and reap the benefits of economies of scale in that industry, scales that Finland would not be able to achieve. The data shows that Finland, being a member of the Single European Market, is incentivized to trade with other members by the imposition of tariffs that are indeed designed to cause this. However for the necessities that Finland requires eg. grain and wheat, it needs to trade outside of the customs union with countries that have a comparative advantage in production. The emerging large market of China is offering Finland and many other countries a new area to trade with due to increases in quality of life and disposable income within China. Increasingly Finland, as with much of Europe, will be looking there for new markets.

References

ESDS 2012. Finland (1988-2006) Vol 2007 [online] ESDS. Available at: < http://esds80.mcc.ac.uk/wds_oecd/TableViewer/tableView.aspx> [Accessed 15 February 2012]. World Bank 2011. Real interest rate [online] World Bank. Available at: <http://data.worldbank.org/indicator/FR.INR.RINR?page=2> [Accessed 15 February 2012]. Chamberlin, G and Yueh L, 2006. Macroeconomics, Thomson Learning Pentecost, E, 2000. Macroeconomics, an open economy approach. St. Martins Press. Griffiths, A and Wall, S., 2007. 11th ed. Applied Economics. Pearson Education. Hardwick, P, Langmead J and Khan, B., 1999. 5th ed An Introduction to Modern Economics. Pearson Education. Eurostat. Wages and labour costs [online] Eurostat. Available at: < http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Wages_and_labour_costs> [Accessed 15 February 2012]. iastate.edu. The Heckscher-Ohlin Trade Model Available at: < http://www2.econ.iastate.edu/classes/econ355/choi/ho.htm> [Accessed 15 February 2012]. Laborsta. Main statistics (annual) - Economically active population[online] Laborsta. Available at: < http://laborsta.ilo.org/applv8/data/c1e.html> [Accessed 15 February 2012].

Appendices Table1 Finlands total exports + imports in 2006 US$

1997 Partner Germany Russia Sweden United Kingdom China United States Netherlands France Italy Norway 8914174812 5215585080 7709672742 6440581838 1279662702 5088195728 2890920554 3173745412 2426217854 2272922095 1998 9887995406 4633776938 7802373277 6247282447 1857000453 5774586294 3268512611 3714149333 2955626000 2488684006 1999 10116990497 3934942450 7595010647 5815984613 1760045516 5750363548 3022683842 3475896281 2714823172 2243207739 2000 10433749842 5136518225 7677335957 6282221520 2354541770 5789147030 3042330631 3614989196 3039740502 2474546744 2001 9790160271 5509770583 6808699929 6100931109 2093993105 6238823928 2744359979 3336592899 2629223462 2065198971 2002 10280659377 6239557175 7612015154 6215413696 2307352885 6082929131 3250120340 3403796993 2771634665 2080912736 2003 12161940225 8779517180 9633559316 6325808194 3207149852 6081432214 3973593299 3884931337 3570692177 2322361111 2004 13620096676 11899636116 11903114155 6466960141 4847881870 6020187586 5050411162 4360434714 3538564916 2997985407 2005 15511431475 15195530885 13109349335 6930937088 5419165610 6147823491 5411120476 4292937173 4050590137 2918719377 2006 17799164406 17469639358 14772162138 8145927038 7615280137 7349269305 6945475015 4723041282 4714184281 4114226045

Table2 Finlands total exports in 2006 US$

TIME PARTNER Germany Sweden Russia United Kingdom United States Netherlands China France Italy Estonia Norway Spain Belgium Denmark 1997 4416496341 3963381433 2951256868 4019789523 2822039724 1644960873 730103004 1687270529 1181143193 1290981304 1175424107 844982707 1242613282 1998 4980163551 4009991596 2541689116 3896551479 3132125614 1899836122 1265880445 2142868777 1617712368 1411334709 1390211014 1036748759 1193761706 1999 5289787761 4066105784 1674329647 3727148254 3261549465 1743126314 1032749418 2140107019 1533680819 1254807140 1142578971 1059274919 1033033180 1164699898 2000 5589502058 4164041358 1950588393 4081984803 3375502164 1737998170 1333301436 2300622692 1950436198 1395183124 1169621271 1118326076 972980555 1141311005 2001 5152774250 3537497217 2454997050 4041745460 4042314284 1581424919 1118286884 1907946018 1491302887 937800675 1056048234 990817853 1006694459 1028208769 2002 5174910864 3818916271 2896607311 4240446443 3881259399 1959133899 1135269921 1998419640 1462670764 1151163718 1035132055 1067105566 1168343784 1070554541 2003 6028411151 5087573656 3862075544 4140575072 4149123698 2339437755 1432309051 1892303365 2014078603 1270734712 1223533226 1392422831 1385382811 1147770560 2004 6266712180 6526965369 5308606190 4199794262 3711878622 2961658333 2426882558 2070402956 1738360044 1677478938 1791407147 1534286937 1523906065 1324794745 2005 6800766330 6981888299 7070632393 4332728716 3721667617 3077684532 1927224376 2209759259 1971204246 1685015501 1624716656 1581115380 1489527391 1535619709 2006 8188457261 8051309058 7718849114 4821511041 4764121456 3883778732 2469238921 2467283560 2365577481 2215512976 1982358419 1818462348 1657436260 1616014420

Table3 Finlands total imports in 2006 US$

TIME PARTNER Russia Germany Sweden China United Kingdom Netherlands United States Italy France Denmark Norway Japan Estonia Belgium Korea 1997 2264328212 4497678471 3746291309 549559698 2420792315 1245959681 2266156004 1245074661 1486474883 1053126608 1097497988 1655266024 421470435 135861570 1998 2092087822 4907831855 3792381681 591120008 2350730968 1368676489 2642460680 1337913632 1571280556 1153955011 1098472992 1831048327 570780101 208602457 1999 2260612803 4827202736 3528904863 727296098 2088836359 1279557528 2488814083 1181142353 1335789262 1158192595 1100628768 1976281817 575107556 757039245 284032141 2000 3185929832 4844247784 3513294599 1021240334 2200236717 1304332461 2413644866 1089304304 1314366504 1313406350 1304925473 1816252702 952192538 715757926 414323584 2001 3054773533 4637386021 3271202712 975706221 2059185649 1162935060 2196509644 1137920575 1428646881 1163136358 1009150737 1378332689 1054829629 740423473 213713871 2002 3342949864 5105748513 3793098883 1172082964 1974967253 1290986441 2201669732 1308963901 1405377353 1448481121 1045780681 1467667083 901201291 827973816 214876354 2003 4917441636 6133529074 4545985660 1774840801 2185233122 1634155544 1932308516 1556613574 1992627972 1741059281 1098827885 1704399182 1162971377 986374131 372426678 2004 6591029926 7353384496 5376148786 2420999312 2267165879 2088752829 2308308964 1800204872 2290031758 1739996996 1206578260 1865175860 1242449222 1171380020 526732400 2005 8124898492 8710665145 6127461036 3491941234 2598208372 2333435944 2426155874 2079385891 2083177914 1845076760 1294002721 1916467919 1835970992 1278650224 857389725 2006 9750790244 9610707145 6720853080 5146041216 3324415997 3061696283 2585147849 2348606800 2255757722 2179625225 2131867626 1998632714 1591977989 1505446867 1102078373