INTERNATIONAL TRADE Chapter 17 Section 2 Trade Barriers and Agreements

INTERNATIONAL TRADE So far our discussion of trade has assumed that international trade is not subject to government regulations. Many people argue that governments should regulate trade in order to protect certain industries and jobs from foreign competition.

INTERNATIONAL TRADE Trade Barriers: Most countries have some form of trade barriers that hinder free trade. Trade Barriers – a means of preventing a foreign product or service from freely entering a nation’s territory. Trade Barriers are also trade restrictions. Trade Barriers take three common forms.

INTERNATIONAL TRADE Trade Barriers: 1. Import Quotas > It is a limit on the amount of a good that can be imported. > US limits the amount of raw cotton coming into the country. 2. Voluntary Export Restraints > an import quota is a law. > V.E.R. is a self-imposed limitation on the number of products that are shipped to a particular country.

INTERNATIONAL TRADE Trade Barriers: 3. Tariffs > If you travel to a foreign country, you sometime have to pay a customs duty – a tax on certain items purchased abroad. > Sometimes you see “duty free” stores at places like airports. You can purchase items at these places without having to pay any duties on them. > Customs duty is one form of a tariff – a tax on imported goods. US collects taxes on imported goods.

INTERNATIONAL TRADE Other Barriers to Trade: Governments sometimes uses less formal methods to limit imports. 1. Governments will require foreign companies to obtain a license to sell goods in that country.  High licensing fees or slow licensing processes act as informal trade barriers. 2. Health and safety regulations  Fruit treated with chemicals may not be allowed in some foreign countries, even if that chemical is allowed in other countries.

INTERNATIONAL TRADE Effects of Trade Barriers: Trade barriers have a number of effects, some negative and some positive. Trade barriers limit supply. Increased Prices for Foreign Goods Producers benefit from trade barriers, but the consumer is the one to lose out. Trade barriers result in higher prices. IF US taxes foreign car imports by 10%, a car costing $20,000 now costs $ 22,000. US auto will be more competitive.

INTERNATIONAL TRADE The bad thing about the tax is that consumers now have to pay more for a car than they would have without a tax on the import. American manufacturers lose the economic incentive to become more efficient and produce their cars less expensively.

INTERNATIONAL TRADE Trade Wars: Escalating economic conflict is another possible outcome of trade barriers. When one country restricts imports, its trading partner may impose its own restrictions against the first country. Such a cycle of increasing trade restrictions is known as a trade war.

INTERNATIONAL TRADE Trade wars lead to a substantial decrease in trade for both countries. This decrease in trade hurts both countries.

INTERNATIONAL TRADE Some of the many tariffs in US history that have led to trade wars and a negative effect on the US economy. Smoot-Hawley Tariff of 1930 US increased its average tariff to 50% on all goods, trade partners retaliated with higher tariffs on US goods coming into their country. Caused decreased international trade and deepened the worldwide depression of the 1930s.

INTERNATIONAL TRADE Chicken Tariff of 1963 European Economic Community (EEC) imposed a large tariff on frozen chickens coming from the US. This tariff cut American chicken exports in half. US retaliated by increasing its tariffs on expensive brandies from France, potato starch from Holland, and light trucks from Germany.

INTERNATIONAL TRADE Pasta Tariff of 1985 US imposed tariffs on pasta from the European Economic Community (EEC). The EEC retaliated by increasing tariffs on lemons and walnuts from the US.

INTERNATIONAL TRADE Beef Tariff of 1999 US imposed tariffs on European clothing and specific foods, including certain cheeses, meats, and mustards. In response, the EEC, banned hormone-treated beef from the US.

INTERNATIONAL TRADE Arguments for Protectionism Why does a country impose trade barriers? The three main arguments that support protectionism… 1. protecting jobs 2. protecting infant industries 3. safeguarding national security

INTERNATIONAL TRADE 1. Protecting Jobs… This shelters worker who would be hurt by foreign competition. East Asia and their textile industries---put a tariff on those goods, so that domestic producers can compete better with the Asian companies.

INTERNATIONAL TRADE 2. Protecting Infant Industries… New industries need time and practice to become more efficient producers. Tariffs and other protection policies are often defended on the grounds that they protect new industries in the early stages of their development. A new industry is called an Infant Industry. After the industry grows up a little, the tariffs are reduced so they have to work harder to compete with the foreign companies.

INTERNATIONAL TRADE 3. Safeguarding National Security… Certain industries may require protection from foreign competition because their products are essential to defending the United States. In the event of a war, the US would need steel, and other heavy industries. It would also need industries that provide energy and advanced technologies. For this reason, the government wants to ensure that these industries remain active in the US.

INTERNATIONAL TRADE International Cooperation and Agreements Recent trends in the world have favored lowering trade barriers and increasing free trade. Many argue that free trade is the best way to a pursue comparative advantage, results from cooperation between at least two countries to reduce trade barriers and tariffs and to trade with each other.

INTERNATIONAL TRADE To increase free trade, a number of international free trade agreements have developed. An international free trade agreement results from cooperation between at least two countries to reduce trade barriers and tariffs and to trade with each other.

INTERNATIONAL TRADE The Reciprocal Trade Agreement Act History of free trade goes back to the 1930s. The US began to promote international trade, which had dwindled due to the Smoot-Hartley tariff. This act passed in 1934, gave the president the power to reduce tariffs by as much as 50%. The act allowed Congress to grant most-favored nation (MFN) status to trading partners with the US.

INTERNATIONAL TRADE World Trade Organization In 1948, GATT, the General Agreement on Tariffs and Trade, was established to reduce tariffs and expand world trade. World Trade Organization (WTO-1995) – founded to ensure compliance with GATT. Negotiate new trade agreements and to resolve trade disputes. From 1930 to 1995, the average US tariff dropped from 59% down to 5%.

INTERNATIONAL TRADE WTO also acts as a referee enforcing the rules agreed upon by the member countries. With the beef and bananas war between the US and Europe, the WTO was called in and settled the dispute by ruling in favor of the US.

INTERNATIONAL TRADE In recent years, many countries have formed customs unions – agreements that abolish tariffs and trade restrictions among union members, and that adopt uniform tariffs for nonmember countries. European Union (EU) Started in 1957 by six nations. EU has grown since 1957 and now has its own anthem, flag, and celebrates Europe Day on May 9 th. They have a single currency called the “EURO”

INTERNATIONAL TRADE NAFTA North American Free Trade Agreement A free-trade zone or region It will eliminate all tariffs and other trade restrictions between the US, Canada, and Mexico by Provisions…  1. Tariffs on all farm products and some 10,000 other goods are to be eliminated over 15 years.  2. Automobile tariffs are to be phased out over 10 years.  3. Special judges have authority to resolve trade disputes.  4. The agreement cannot be used to override national and state environment, health, or safety laws.  5. Trucks are to have free access across borders and throughout the three member countries.

INTERNATIONAL TRADE Fear with NAFTA is that many American companies will relocate to Mexico where wages are lower and government regulations are less strict. Result would be a loss of jobs in the US. Supporters say it will create more jobs in the US because of the increased exports to Mexico and Canada. This was ratified on January 1, 1994.

INTERNATIONAL TRADE In 1997, a study on the effects of NAFTA were A. Some jobs have been created, while an almost equal number had been eliminated. B. Trade between the US, Mexico, and Canada had significantly increased. C. US exports to Mexico increased by $ 30 million. D. Imports from Mexico to the US doubled to $ 40 million. E. US exports to Canada increased by a 1/3. F. US imports from Canada increased by a 1/3.

INTERNATIONAL TRADE Other Regional Trade Agreements: 1. APEC – Asia-Pacific Economic Cooperation Includes US, Mexico, Canada, and the countries along the Pacific Rim. Signed a nonbinding agreement to reduce tariffs. 2. MEKCOSUR – Southern Common Market like the European Union. Members include Brazil, Argentina, Paraguay, and Uruguay 3. CARICOM The Caribbean Community and Common Market. Members included South American and the Caribbean.

INTERNATIONAL TRADE Multinational Corporations also contribute to international trade. Production facilities in a foreign country benefits both the multinational corporation and the host nation. There are also downfalls to a multinational corporation that we have discussed in a previous chapter.