International Trade

Chapter 17

Facts about Int. Trade

0The world trades due to necessity0The key to trade is Specialization0US is a highly specialized country:

0 New York: Financial hub0 Florida (S.E.) & California: citrus & fruits, wine0 Midwest & high plains: farming0 Detroit: auto industry0 Northwest: Tech based0 Texas & southwest: oil & cattle

Facts about int. trade cont..

0 If you want to see what your country specializes in, just look at their exports

0So, why trade?0 Because we believe what we get far exceeds the value of

what we give up in return!0 Without Int. trade, many products we use would not be

available0Ex. Banana, coffee, shoes, clothing, oil etc…

0 In many cases, it is cheaper for a country to import than to manufacture

Absolute v. Comparative advantage!

0Absolute adv.: when all factors of production are running effectively who is out producing who0 If US wanted to and put all resources towards being the

#1 exporter of bananas, could they do it?0Comparative adv.: which country can produce any

product with the lowest opportunity cost0 At what cost could US become the #1 exporter of

bananas? Is it worth it? Something else we do better where we give up less?

0 http://www.youtube.com/watch?v=Vvfzaq72wd0`

Abs. v comp. adv. Cont.

0The assumption here is:0 Everyone will be better off producing the product they

produce relatively best0 It will increase total world output

Restrictions on Trade!

Trade Restrictions

0Trade can be restricted in three main ways:0 1. Embargo: a full trade blockage (Cuba, Iran, N. Korea)0 2. Tariffs: a tax placed on imports; increases the price of

foreign good vs. domestic good (protection)0 3. Quotas: a limit placed on quantities of products that

can be imported (if good really cheap, tariff not helping)

Who in favor/against trade restrictions?

0Protectionists (restrict trade): favor trade barriers to protect domestic businesses/jobs

0Free-Traders (open trade): favor fewer or no trade restrictions

0Main arguments:01. National Defense02. Promoting infant industries03. Protecting domestic jobs04. Keeping the money @ home05. Balance of payments0 http://www.youtube.com/watch?v=65UcSx_LrZI (Free Trade Agreement)

The Move Towards Free-Trade

0 Result of: Smoot-Hawley Tariff Act of 1930s shutting down all trade causing tensions & eventually WWII

0 Reason: we would have less conflict, tension and can be friendlier towards each other, help each other

0 Reciprocal Trade Act: passed by US lowering tariffs over 50% if other countries did as well0 GATT: (General Agreement on Tariffs & Trade, 1947): give assistance, lower

barriers, less tension more friendliness0 WTO: (World Trade Organization, 1991) updated GATT with courts for

dispute & Tech assistance0 NAFTA (North American Free Trade Agreement, 1993): Mexico, USA &

Canada, lowered barriers, lost jobs0 EU (European Union, 1993) 27 countries, one currency, no barriers,

friendliness!0 http://www.youtube.com/watch?v=O37yJBFRrfg (EU explained)

Exchange Rate & Trade

0Trade between countries like people, but different currency makes it challenging due to some with less value, some with more

0The country you trade with wants its money in its home currency:0 A. Foreign Exchange: currencies from trading countries

are bought & sold in the foreign exchange market0 B. Foreign exchange rate: the price of one country’s

currency in terms of another country’s currency0For example: 1 British Pound = $1.58 or 0.6329 Pound = $10http://www.youtube.com/watch?v=xwtgByffoUw (exc r)

Imbalance of Trade

0The Flexible Exchange Rate: 0 Defined: Rate on currency is based on supply & demand

0The more demand for your currency the higher the value and vice versa

0 What does this mean toward trade?0When country X exports more to us than we export to them

they get more of our currency than us of theirs, making their supply of $ exceed demand, driving value down & vice versa!

Imbalance of Trade

0 Trade deficit vs. surplus:0 Trade deficit: when value of goods imported exceeds value of goods

exported (unfavorable, drag on GDP!)0 Trade Surplus: when value of exports exceeds imports (favorable,

what every country wants)0 Ramifications of Trade-Deficit:

0 1. Makes value of your currency go down0 2. causes unemployment to go up in industries involved in exporting

trade0 3. But helps out industries involved in importing of goods0 4. Eventually things will reverse as other currencies rise in value

making their goods more expensive and American products cheaper etc.

Move Towards Free-Trade

03. North American Free Trade Agreement (NAFTA) 1993:0 Open up trade between Mexico, US, Canada0 It lead to loss of some industries and jobs due to cheaper

competition

Move Towards Free-Trade

04. European Union (EU) 1993:0 Economic & political union of 27 member mainly

European countries0 Lowering most trade restrictions0 A huge market with one currency (Euro) to make trade

easier for all members

Move Towards Free-Trade

01. General Agreement on Tariffs & Trade (GATT) 1947: 0 Signed by 23 countries0 It extended tariff reductions & do away with import

quotas0 Way of bringing countries together for prosperity & not

war!

Move Towards Free-Trade

02. World Trade Organization (WTO) 1991:0 Updated GATT after 44 years0 Carries out all GATT agreements, but also:

0Settles trade disputes between governments0Organizes trade negotiations0Provide technical assistance to developing countries

Who in favor/against trade restrictions? Cont.

0 2. Promoting infant industries:0 Protectionists: new or emerging business have to be protected against foreign

trade0 Free-Traders: only if eventually removed

0 3. Protecting domestic jobs:0 Protectionists: not letting businesses out source to other parts of world0 Free-Traders: not to interfere, survival of fittest should make economy efficient

0 4. Keeping the money at home:0 Protectionists: invest in made in the USA and money stays at home0 Free-Traders: money comes back as those countries get things they need from

America0 5. Balance of payments:

0 Protectionists: make imports fall and exports rise good for GDP0 Free-Traders: however, money coming back will stop and hurt other US industries