GLOBALIZATION International Trade

Why Do Countries Trade With Each Other? Trade maintains and improves relations between countries Trade allows countries to acquire goods and services Natural Resources Raw Materials Allows countries to obtain products that other countries may produce more efficiently (less costly)

"What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not therby be diminished... but only left to find out the way in which it can be employed with the greatest advantage." Adam Smith, 1776

“Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically… It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.” David Ricardo, 1817

Over the past 70 years, nations all over the world have increased imports and exports Lower costs Reduced trade barriers Increased specialization

Terminology Imports: goods or services that a nation buys from other nations What does the U.S. import the most of? Electronics, machinery, vehicles, oil, pharmaceuticals Exports: goods or services that a nation produces and sells to other nations What does the U.S. export the most? Machinery, electronic equipment, aircraft, vehicles, oil Specialization: when a nation (or business) focuses on producing the goods and services they are most efficient at

More Terminology Trade Balance: the difference between a nation’s total exports and total imports Trade Surplus: a positive trade balance where a nation exports more than it imports Trade Deficit: a negative trade balance when a nation imports more than it exports Free Trade: the absence of barriers such as tariffs or quotas Protectionism: the use of barriers such as tariffs, quotas, or embargoes

Even More Terminology Absolute Advantage: the ability to produce a good or service at a lower cost per unit than anyone else Comparative Advantage: the ability to produce a good or service at a lower opportunity cost than other countries or businesses

Comparative & Absolute Advantage Explained

Trade Players & Pacts North American Free Trade Agreement Eliminates trade barriers between USA, Mexico, Canada Trade has more than doubled for all 3 countries European Union 27 nations, 20% of global imports/exports World Trade Organization (WTO) International organization that facilitates trade agreements Also works to resolve trade disputes Trans-Pacific Partnership Free Trade Agreement Includes twelve nations comprising 40% of the global economy Negotiated by President Obama, awaiting Congressional approval

Arguments For and Against Protectionism Protects domestic jobs Allows new industries to grow until competitive Protects national security Free Trade Lowers prices Allows for a greater variety of goods Improves economic welfare Access to new markets