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AOF Business in a Global Economy

Lesson 5International Trade

Student Resources

Resource Description

Student Resource 5.1 Defining Format Frame: How and Why Countries Manage Trade

Student Resource 5.2 Reading: How and Why Countries Manage Trade

Student Resource 5.3 Research: Trading Simulation

Student Resource 5.4 Reference: Trade Needs Memo

Student Resource 5.5 Template: International Trade Treaty

Student Resource 5.6 Reading: International Trade Agreements

Student Resource 5.7 Assignment: Memo to the President

Copyright © 20092016 NAF. All rights reserved.

AOF Business in a Global EconomyLesson 5 International Trade

Student Resource 5.1

Defining Format Frame: How and Why Countries Manage Trade

Student Names: Date:

A defining format frame can help you organize your thoughts about a particular topic’s characteristics. An example is provided below.

Term Category Characteristics

attentiveness is a way of acting that shows customers you are listening is polite enhances a customer’s experience

Now that you see how it works, use the information from the presentation to complete the frames below. List between two and five characteristics in the space provided.

Term Category Characteristics

barter is a form of trade that

tariff is an import restriction that

quota is an import restriction that

subsidy is an export encourager that

protectionism is a government policy that

trade balance is a statistic that




Reading: How and Why Countries Manage Trade

Whenever you purchase something, you have to make choices. Even buying a tube of toothpaste requires choosing from different brands, different prices, and different features.

But have you ever thought about where the products you buy are made? Are they local, or do they come from thousands of miles away? Were they transported on a huge ship, truck, or train and then on to the store you bought them from? Perhaps the products you buy consist of parts or ingredients made in one country and assembled in another. Chances are good that the governments of the countries the products come from have encouraged their export in some way.

Trade is global, with trillions of dollars’ worth of goods and services moving between businesses from one country to another. But why do governments seek to manage international trade, and what are the risks and benefits of managing trade?



Trade is the exchange of goods or services between two or more parties. It has existed in some form since the beginning of human history. You have probably been trading for much of your life. Even as a kid you might have swapped a peanut butter and jelly sandwich for a turkey one.

Trading one thing for another is called bartering. Bartering is how people exchanged things before money existed. Each side had to agree on how much of one thing was equal in value to another to make the trade fair, meaning it was attractive and acceptable to both parties. For instance, if the blacksmith wanted to trade milk for horseshoes, he and the farmer would have to agree on how much milk was equal in value to how many horseshoes.

Although the principles of trade are basically similar today, there are some big differences between modern trade and bartering. Now, of course, we use money. We buy or sell items or services rather than barter for them. Also, in olden times, most deals occurred face to face. Now, in a global market with modern modes of shipping and communication, a business in one country can send or receive goods from another company thousands of miles away without the people making the trade actually meeting in person.

In some cultures, face-to-face meetings are very important and can generally help to build trust and rapport. Skype and Internet communications have allowed for a personal experience without hours of travel time, which could help to increase efficiencies and build stronger relationships.



Governments influence trade in many different ways. They may enter into bilateral or multilateral trade agreements (also called trade treaties or pacts).They may undertake protectionist measures or limit imports through tariffs and quotas. A tariff is a tax on businesses importing a specific product. For instance, the US government collects a 2.5% tariff on imported cars, which tends to make the foreign cars more expensive than similar domestically made cars. A quota is a limit on how much of an item is allowed to be imported.

Governments regulate trade for a variety of reasons. Poorer countries use tariffs as a major revenue source, because tariffs are generally easier to collect than other taxes or to protect domestic industries they think are at risk. Sometimes a government restricts trade with another country for political reasons; a ban on imports from a specific country (and/or exports to it) is called an embargo.

To increase the exports by a specific industry, governments sometimes grant export subsidies, payments to certain businesses encouraging them to export or to keep certain industries competitive against foreign competition.



Factors of production are what companies use to make goods and provide services. They are the building blocks of the economy. Economists put these factors into different categories. Land, labor, and capital are three of the main categories.

Land actually means any natural resource that comes from the land as well as land itself. Water, oil, natural gas, and forests fall in this category. They are the raw materials of the production process. In countries with fertile soil, farmers can produce more crops than their country needs; this surplus can be traded for other goods. Saudi Arabia, has a much larger supply of oil than its citizens can use and therefore trades oil for income.

Labor is the human effort used in production. If you have ever received a paycheck, you have contributed labor to the production of goods or services. Everyone from waiters to engineers to pilots contribute to this category. Some countries have become hubs for firms that specialize in providing specific kinds of labor, such as India with its call centers or China with its manufacturing.

Capital refers to human-made goods that are retained over time and used in producing other goods and services. Capital includes machines, tools, and buildings. Capital to a doctor includes tools of the trade, such as stethoscopes; for teachers it includes books and desks. Capital depreciates, or loses value, over time but is not used up in production like electricity or raw materials are.



Specialization occurs when an industry in a certain country is able to produce a particular good or service more efficiently than it can be produced in any other place. Specialization is based on the costs of the land, labor, and capital. The most efficient producers are often those with access to the most favorable combination of these factors of production. That is why they are able to provide the product at the lowest price.

If it's cheaper to import a part from another country, a company trying to maximize its profits should do it. If, on the other hand, it costs less to purchase the part from a local company, that's what the business should do.

If a country’s firms are more efficient than those in any other country in producing a particular good, then that country’s firms are said to have an absolute advantage with that product.



It's easy to see why companies would want to send their goods to other markets. For one thing, exporting increases the amount of goods a firm can sell. If you're an automaker, you may have hit the maximum number of cars you can sell in your home country. But selling cars to other countries opens up whole new markets with many new consumers. This allows you to make and sell more cars.

Another reason to export is that a business can sometimes get higher prices in a foreign market. At home, there might be several companies making a product, and the competition forces prices down. But that same product might be scarce in other countries, so a business can charge more for it.

Making a huge amount of something can make production more efficient—faster and cheaper. So, many companies use large-scale production to make more of something than they can sell at home. Examples include Korean car manufacturers, growers of certain types of food, and companies that mine the iron ore that is used in making iron and steel. Countries can grow their economies by producing on a large scale, exporting products and services they can make very efficiently and importing the rest.



It may seem strange that a country, especially one rich in resources like the United States, would buy products from other nations. What's the advantage to buying something from another country when you can make it at home? In fact, there isn't much imported into this country that businesses in the United States cannot produce themselves, yet we import a tremendous amount of goods into this country.

Up until 2014, the United States imported more oil than it produced at home. But today, better fuel efficiency, alternative forms of energy, and innovation in the way we produce oil have all brought our dependence on foreign oil down.

In other cases, goods or services are imported for reasons that have nothing to do with a lack of them at home. There are products that other countries can produce more cheaply. For instance, developing countries often have cheaper labor, and if a company pays its workers less, it can produce an item—say, a plastic toy—more cheaply. Or, a country may specialize in a product and make it very efficiently compared with many other countries. We may specialize in making a particular kind of vehicle that we export, but import one that we don’t specialize in—a sports car, for example. Finally, even when the home country produces a product competitively, consumers may prefer the foreign version. For instance, although the United States makes a huge selection of cars, some people prefer Japanese or German automobiles.



A country's trade balance measures the difference between its exports and its imports. If a country’s exports exceed its imports, the country has a trade surplus—the country’s firms take in more money selling goods and services to other countries than that country spends on buying imported goods and services. The opposite of a trade surplus is a trade deficit, in which a country’s firms and households spend more on imports than firms in that country take in from selling exports. The United States, which does more trade than any other country, has a huge trade deficit. In 2015, the United States made $1.505 trillion from exporting goods around the globe. It bought $2.3009 trillion worth of imported products. In 2015, the trade deficit was 44.7 billion dollars.

Economists debate whether having a deficit is detrimental to a country's economy. Many argue that it isn’t. Others argue that it's negative to be too dependent on other countries for needed goods and services, especially for essential resources. Critics of free trade feel it hurts job growth and workers at home when workers in other countries are paid to produce belongings that could be made at home. Spending a lot of money in other countries weakens the home economy and makes it more susceptible to a financial crisis.

Economists also see benefits to a trade deficit. For instance, since one of the reasons for importing goods is that they are cheaper, people in countries with trade deficits enjoy lower prices as a result, and this contributes to a higher standard of living. Some see a trade deficit as a sign of a healthy economy because people and companies have money to spend on both foreign and domestic goods.



Trading has a long history. Whether it's old-fashioned bartering or making deals over the Internet in this modern global economy, trading has its risks.

Each nation’s government administers its trade policy by weighing the costs and benefits of its firms producing goods and services domestically versus importing them. There are advantages to importing items, even for a wealthy nation. For instance, a US business can offer cheaper products by having some parts of a product—or all of it—made in another country where workers make less than the American workers would make doing the same job. Or, the productivity or quality in making that particular part is higher. As it considers trade policy, the government needs to examine whether the loss in domestic jobs is worth the cost savings to its consumers. If there are any unfavorable results, the government needs to consider policies to change those results.

In the end, each country’s government has the power, to some degree, to influence its trade balance and to weigh the advantages and disadvantages of its trade policies. Does an economy get weaker when it relies on importing a large amount of goods and services at a lower price? Does it make the marketplace more competitive when consumers have the option of buying goods from all over the world? Should governments influence consumers on what they can buy and from whom? In today’s global marketplace, these are questions businesses and governments must consider.




Research: Trading SimulationStudent Names:_______________________________________________________ Date:___________

Directions: Working with your group, answer the following questions to prepare for the International Trading Conference.

1. What is the name of your country?

2. What advantages and disadvantages does it have where land is concerned?

3. What advantages and disadvantages does it have where labor is concerned?

4. What advantages and disadvantages does it have where capital is concerned?

5. What needs does it have? Which countries could potentially provide these needs through trade?

6. What surplus factors of production does it have that it could trade?

7. Which country would you like to begin trade negotiations with in the next class period? Why? (What do you have that they need, and what do they have that you need?)

8. Which country would be your second choice for trade and why?

9. Which country would be your third choice for trade and why?




Reference: Trade Needs MemoTo: All Trading Delegates

From: Madje Bjornson, President, International Trade Conference

Thank you for representing your country at the trade conference today. Please be aware that by the end of trading today, each country must have at least one treaty signed. Each signed treaty will have two components:

#1: TRADE AGREEMENT: This section will outline the agreement to exchange goods with one other country. Use the research you and your group did to choose which country to start negotiating with. Make sure you meet your country’s needs while obtaining what you need.

#2: PROTECTIONISM: This section will outline an import restriction or export subsidy on one of the goods or services being traded. Make sure that your protectionist measure helps your economy.

Use the guidelines below to help you negotiate. Once you have reached a mutual agreement, fill out the International Trade Treaty template (Student Resource 5.5) and submit it to your teacher. Pursue another agreement with another country if time permits.

Negotiating Tips Be polite. This deal may or may not work out, but it is important not to burn bridges. You never

know when you will be working with this country again.

Do your research. Make sure you respect the culture of the country you are dealing with. Address people by their names and use the data available to bolster your negotiations.

Stay calm: remember, the goal of negotiating is to reach a mutual agreement. Think about how you can both gain from the deal and focus on the gains. Don’t get emotionally involvedif the deal doesn’t work out, there are plenty more countries to trade with.

Present your ideas clearly. Think about what you want and why. Choose the most important goal for the negotiation and clearly state the idea and the reasons behind it.

Know that successful import and export restrictions fall at under 10%. Negotiate for the lowest or highest restrictions to benefit your country financially. Weigh the pros and cons of any trade restriction. For instance, a tariff on imported goods may help a government raise money, and it could also benefit domestic industries. However, other countries may not wish to trade items with a tariff. Remember, all trade agreements are compromises.

Ask for more than you expect. Remember that negotiating is a process and each party must ultimately compromise or meet in the middle. Have a minimum number you won’t go below, but start much higher so that you have room to compromise.

When estimating your starting point and minimum acceptable values for the negotiation, try to estimate what the other country needs and what the potential benefit would be at each level of trade. This will help you to understand their point of view and will likely lead to a more favorable outcome (and a stronger relationship) for both countries.

Work for a win-win situation. Countries trade to better their circumstances. Be creative and find a way to make both countries benefit from the trade.




Template: International Trade TreatyStudent Names:_______________________________________________________ Date:___________

Directions: Work with your team to fill out this template to reflect the trading agreement(s) you successfully made.

The following agreement outlines a trading agreement between the countries of __________________

and ___________________.

Section 1: Trade Agreement

__________________ shall provide _____________________________________________________

country goods or services

in exchange for ______________________________________________ from ___________________.

goods or services country

Section 2: Protectionist Measures

__________________ shall impose an import restriction in the form of __________________________country tariff/quota

on ______________________________________ at the rate of _______________________________

goods % of sales or cost/item

because ____________________________________________________________________________.

reason country needs this measure

__________________ shall require an export subsidy on _____________________________________

country goods

at the rate of ________________________________ because _________________________________.

% of sales or cost/item reason country needs this measure

Signed by____________________________ ________________________________

_____________________________ ________________________________

_____________________________ ________________________________



country delegates country delegates




Reading: International Trade AgreementsThe global economy is complicated. There are many countries involved, and their economies have become intertwined through international trade. Because of global trade, one government’s economic decisions can affect others. For instance, in 1930, the US government responded to the Great Depression by raising tariffs on imports. This caused a chain reaction as other countries also began to increase their tariffs. This ended up stifling international trade, making the depression worse.

After World War II, the world’s governments wanted to prevent such situations from happening again, so they created trade organizations. These organizations worked together to reduce trade barriers in order to encourage more world trade. Through these agreements, governments committed to not imposing tariffs or taking other actions that would hurt their trade partners. They would not do so, even if their country was suffering an economic downturn. This helped ensure that countries did not pass on their economic problems to others.

After World War II, governments sought to liberalize trade. This means that they wanted to reduce trade barriers and gradually move toward free trade. Free trade is trade done without much interference from governments. International trade organizations have encouraged a movement toward free trade. They have been helping governments of member countries make trade agreements that define agreed rules for trade between the members.

In 1947, many countries came together to form a trade organization called the General Agreement on Tariffs and Trade, or GATT. It was a multilateral agreement, which means it was an agreement among many different countries around the world. Such agreements are very difficult to achieve. There are so many countries involved, and each one is watching out for its own interests. Yet, once all the countries do sign off on a trade agreement, it can have a huge impact on world trade and the countries’ economies. GATT sought to promote free trade in order to encourage trade worldwide and improve the economies of the countries involved.

GATT member countries continued to meet over the decades to work on trade agreements. In the 1990s, the members of GATT created a new organization to replace GATT, called the World Trade Organization (WTO). The mission of the WTO is to continue creating and administering new trade agreements. It is also to prevent trade issues between member nations and help solve such problems if they do arise. Currently, there are 159 member countries in the WTO.

In addition to participating in the WTO, many countries are also involved in regional trade agreements. Whereas a global agreement involves nations from around the globe, a regional agreement involves a smaller group of countries that are geographically close to one another. (A bilateral agreement is one that's between just two countries.)

The purpose of these organizations is similar to that of the WTO: to promote free trade. Regional trade organizations do have some advantages over multilateral ones. For instance, because these countries are close together, they often share similar languages and cultures, making it easier for them to get things done. Also, because there are fewer countries in these organizations and fewer interests that must be appeased, it is often easier to get trade agreements passed by each country.

There are regional trade organizations around the world. The United States is part of NAFTA, or the North American Free Trade Agreement. This is a regional trade organization that comprises the United States, Mexico, and Canada. Like many regional trade agreements, NAFTA gets rid of most of the tariffs on items traded between the three member countries.

The United States had hoped to expand free trade throughout the Western Hemisphere. The hope was to create a regional trade agreement—the Free Trade Agreement of the Americas—which would have included all the countries in Central and South America. However, this agreement has been on hold since



2006. Part of the reason is that some believe the agreement would actually increase poverty in the poorer countries involved. Venezuelan president Hugo Chávez was among many vocal opponents to the agreement.

ASEAN (Association of South East Asian Nations) is a regional organization dealing with trade that has some similarities to NAFTA. It formed in 1967 with five member countries: Singapore, Malaysia, Thailand, the Philippines, and Indonesia. Since then it has expanded to 10. The member countries formed this organization to grow their economies and to help maintain peaceful relations between them. For example, all 10 countries have ratified a treaty banning nuclear weapons in the region. Additionally, by joining together, these countries hope to balance the economic strength of their neighbors, China and Japan.

Other trade agreements include:

African Free Trade Zone (AFTZ): a group of countries with natural resources, huge markets, and a young population.

The European Union (EU): a federal union that has achieved completely free trade among all member countries. Along with some neighboring countries, the EU has made an agreement called the European Economic Area (EEA). There is free movement of goods, labor, services, and capital between all EU and EEA countries.

Commonwealth of Independent States Free Trade Agreement (CISFTA): seeks agreements on trade, finance, law and law enforcement, and security among participating countries.

Latin American Integration Association (LAIA): promotes the establishment of an area of economic preferences within the region. The goal is to create a Latin American common market via regional tariff preference, and partial and full-scope agreements.

Transpacific Strategic Economic Partnership (P4): aims to reduce all trade tariffs between its members to zero; includes both goods and services.

So what have these organizations and trade agreements done for world trade? For one thing, the amount of trade has increased significantly. Some economists argue that this growth in trade has also increased the standard of living throughout the world. More free trade has allowed many developing countries to transform their economies. Before, their economies produced only raw materials. Now their economies engage in manufacturing and other economic activities. These add value to raw materials and can support higher incomes. It has also allowed consumers to benefit from inexpensive imported goods.

Others argue against free trade agreements. These agreements may allow firms to move production to places where environmental protections are lower, which may hurt local citizens. For instance, those against NAFTA in the United States think that free trade with countries like Mexico—whose workers earn much less money—hurts American workers because companies move jobs to these partner countries.




Assignment: Memo to the PresidentStudent Name:_______________________________________________________ Date:___________

Directions: The president of the country you represent as a delegate is finding himself or herself overwhelmed by an economic crisis. The effects of the trade agreement have yet to be felt. Unemployment has soared to 12.3%, the highest in the nation’s history. The country has a trade deficit, and its citizens blame the newly negotiated trade pact. Citizens are demanding the president fix these problems, even if it means canceling the trade pact you helped broker.

The president is preparing a speech to address these issues and would like to hear your expert opinion about a few key issues. He or she has made a list of questions for you. Use the information you know about the benefits of international trade and the resources from this lesson to address the questions. Once you have shared your answers with a partner and refined them, write a memo to the president with your answers.

Questions from the president: Why is having a trade deficit not all bad?

Based on our unique situation, what, if any, protectionist measures would help our economy? Why?

Will encouraging specialization help our economy? What industry would be a good choice for specialization based on our factors of production?

What should I say to the newly unemployed who are angry and think that their jobs have been replaced with cheaper labor? How will their situations improve because of free trade?

Is free trade worth the costs?

Make sure your assignment meets or exceeds the following assessment criteria: It thoughtfully considers the country’s trade issues.

It clearly communicates the benefits of free trade.

It displays understanding of protectionist measures and their effects.

It carefully considers the factors of production.

The tone of the memo is professional.

The memo is neat, legible, and presentable, and uses proper spelling and grammar.


Documents

curriculum.naf.orgcurriculum.naf.org/packaged/assets/downloads/financ… · Web viewNow that you see how it works, use the information from the presentation to complete the frames