International Trade

A Globalized World

Section 1 Benefits and Issues of International Trade

Not all nations have the resources available to compete in all the markets they choose

They use a mix of economic patterns to decide what areas they will specialize in

They look at the Four Factors of Production Land, Labor, Capital, and Entrepreneurship

Nations that do not have the natural resources to compete in a certain market look to other nations to supply them with resources

Economic Interdependence- producers in one nation rely on others to provide goods and services they do not produce

U.S. computer technology to India

Theory of Comparative Advantage

Created by David Ricardo 1772-1823

English Economist, believed if one nation could make one product better than another, they should trade with another nation that makes a product that is better than what they can make.

This is the law of comparative advantage

Comparative Advantage

This is the ability of a trading nation to make a good or service for less opportunity cost than that of another nation

Law of Comparative Advantage states, countries gain when they produce items they are most efficient at producing and are at the lowest opportunity cost

Ex. Labor costs in the U.S. vs. India Due to this nations gain through trading

goods and services

Absolute Advantage

Ability of one trading nation to make a product more efficiently than another trading nation

Comparative advantage is better, the cost of making your good or service is less than another nation that may make it a little more efficiently.

The lower the cost to make, the better the value

Exports and Imports

Exports- goods produced in one nation and sold to other countries

Imports- goods and services produced in another country and brought into your own

What items does the U.S. import and export?

Exports Can Affect Prices and Quantity Supplied

Ex. Lets say the U.S. does not trade with other nations. All of a sudden we decide to export American cars.

Other nations will begin to buy our cars, increasing both supply and demand.

This will create more jobs here, more income, and the price of cars will go up.

But, the raise in income by our people will outweigh the costs or paying more for cars.

Imports Affect on Price and Quantity

Now that the U.S. is exporting cars, we allow the Chinese to sell microwaves in the American market.

This provides more choice for the American consumer, pushes our microwave companies to work harder to compete, and drives the price of microwaves down due to competition

Trade Affects Employment

Today, U.S. manufacturing is on the decline. Most products sold here are from overseas EX. Collapse of the Steel Industry But, we lead the way in technology, which

has created more jobs in that field. What are the advantages and disadvantages

of this change?

U.S. In The World Economy

We are the leading exporter in the world Computers, machinery, cars, industrial

supplies, consumer and agricultural goods and services are heavily exported

We import oil, petroleum, machinery, cars, and raw materials

Continued

U.S. imports more than we export, but we export more services than we import.

These services add to our economy They include, travel and tourism, transportation,

architecture, construction, and information systems Our largest trading partners are Canada, Mexico,

China, and Japan. They make up half of all of our trades internationally.

Section 2- Trade Barriers

Nations set trade laws to protect domestic jobs and industries.

Politics and Foreign Policy dictate these trade laws.

Trade Barriers- any law that limits free trade with other nations

5 Types of Trade Barriers

1. Quotas- limit on the amount of a product that can be imported

ex. U.S. quota on foreign textiles Only so many textiles were allowed into the

U.S. per year. Quotas kept prices higher with a limited supply. This quota expired in 2005, and China flooded the market with cheaper textiles. This caused supply to go up and prices to fall, hurting our textile industry.

This action taken by China is called dumping, selling a product at a lower price than the domestic producer.

This action helps the consumer, but hurts the domestic textile industry.

2. Tariff

A fee charged foreign goods when brought into a country

Two types of tariffs Revenue Tariff- tax levied on imports to

specifically raise money Protective Tariff- tax on a foreign good or

import to protect domestic producers Tariffs raise prices on the imported goods,

which are usually cheaper than goods made in the U.S.

3. Voluntary Export Restraint

Countries self imposed restriction on exports. Countries do this to avoid setting a quota or

tariff on foreign goods. This is done to even out the playing field without upsetting foreign traders in our market.

Nations usually threaten us with higher tariffs if we impose tariffs on them

4. Embargo

A law that cuts of trade with a specific country.

Ex. USA with Cuba Usually done for political reasons or pressure

on the foreign nation

Informal Trade Barriers

These are Environmental, Health, and Safety Measures

Ex. We make it harder for nations to sell goods in the U.S. market by imposing tough health codes to protect the consumer.

Sometimes trade barriers can create trouble between nations and cause a trade wars, back and forth barriers laid down by two trading nations to one up each other.

Trade Barriers have two major impacts They create higher prices and sometimes lead to

trade wars There ultimate goal is to protect their domestic

producers

Protectionism

This is the use of trade barriers to protect domestic producers and jobs

Protectionists argue that trade barriers protect jobs and promote infant industries

Infant Industries- small businesses that do not have the capability to compete with larger companies

They are mostly seen in developing nations. Businesses in Africa usually can’t compete with

larger American and European competitors

Trade Barriers Protect National Security

Industries that are vital to our national security, energy and port security are protected to ensure that foreign companies do not control them.

Ex. Dubai shipping company in American Ports

Section 3 Modern International Institutions

Regional and World Trade Organizations With our new globalized economy, trade barriers are

being reduced or eliminated Free Trade Zones- a region in which trade between

nations takes place without protective tariffs Ex. NAFTA Customs Unions- agreement that abolishes trade

barriers among its member and establishes uniform tariffs for all trading non-members

Ex. European Union

European Union

European Union or EU

Originally known as the Common Market (1957) six member nations

1993, re-named the European Union

Now has 27 member nations and operates as an economic and governing body

Accounts for 20% of global exports and imports, making it the worlds largest trader

All member nations use the Euro Mark as money.

EU has the worlds lowest tariffs

Member countries take turns heading the Union

All operations are based out of Brussels, Belgium

North American Free Trade Agreement

NAFTA- Free Trade Zone The world’s largest free trade zone U.S., Canada,

and Mexico Went into effect in 1994 Eliminated half of the tariffs on American and

Mexican goods and services within 15 years Set up to compete with the EU and to create

specialization, jobs, and efficiency for member countries

Other Trade Organizations

MERCOSUR- promotes movement of goods and people in South America

Formed in 1995 Eliminated 90% of tariffs

between Brazil, Argentina, Paraguay, Uruguay, and Venezuela

World’s Fourth Largest Trade Organization

ASEAN

Association of South East Asian Nations

Established in 1967 Members- Indonesia,

Philippines, Singapore, Thailand, Vietnam, Laos, Cambodia, and others

APEC

Asia-Pacific Economic Cooperation

Trade organization of Pacific Rim Nations

Members- Australia, U.S., Russia, China, Thailand, Papua New Guinea, Chile

OPEC

Organization of Petroleum Exporting Countries

This is a cartel- group of producers that regulate the production, pricing, and marketing of a product

Formed in 1960

Very strong organization that sets the price of oil

Politics and demand lead to pricing of oil and the power that the group has

Members- Iran, Iraq, Venezuela, Saudi Arabia, Kuwait, Qatar, Indonesia, Libya, Ecuador, Algeria, Angola, Nigeria, and UAE

World Trade Organization

Originally set up by allied nations at the end of WWII to stimulate economic growth in war torn nations.

149 members today Actions- negotiate and administer trade

agreements, monitor trading policies of member nations, and provide support for developing nations. Promotes equal trade among its members.