International Trade Please listen to the audio as you work through the slides.

The United States in the Global Economy Examine trade flows and the financial flows That pay for them. What is the extent and pattern of International trade? How much has it grown?

Learning objectives Students should be able to thoroughly and completely explain: 1.The relative position of the United States in the global economy and how the U.S. is linked to the rest of the world. 2.Why the rapid growth in trade of the past 4 decades. 3.The depreciation of the dollar and its impact on U.S. GDP. 4.The appreciation of the dollar and its impact on U.S. GDP. 5.The types of trade barriers and the evolution of trade since 1930.

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The Circular Flow Revisited Resource Market Product Market BusinessesHouseholdsGovernment Goods & Services Goods & Services Net Taxes Expenditures Goods & Services Resources 4-5 Rest Of the World Import & export Money flows

International Linkages United States Economy Other National Economies Goods & Services Capital & Labor Information & Technology Money 5-6

World Trade Volume of trade as a percentage of GDP – Larger for small countries – Larger for countries with limited resources (Japan and oil) Implications of dependence on world markets – Lack key resource – secure sources – Sell surplus goods – at what price? 5-7

World Trade Trade deficit – Imports exceed exports – Borrow from foreigners to obtain foreign currencies – Sell real assets to foreigners to earn foreign currency Trade surplus – Exports exceed imports – Lend to foreigners 5-8

U.S. Imports and Exports Billions of dollars, 2007 Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical Equipment Fuels and Lubricants Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Chemicals Aircraft Exports Imports Source: Department of Commerce Data $ $ We depend on foreign markets to buy our - Rice, wheat, cotton, tobacco We depend on others to provide us with – bananas, cocoa, coffee, nickel, tin, natural rubber

U.S. Imports and Exports Goods by area – 2007 in billions of dollars Canada $250 European Union 242 Mexico 136 China 65 Japan 61 OPEC countries 49 All other 346 TOTAL $1149 Canada $347 European Union 356 Mexico 214 China 322 Japan 146 OPEC countries 174 All other 436 TOTAL $1965 Exports to Imports from Source: Survey of Current Business, April 2006 Value Imports Exceed Exports by $816 Billion 5-10

Why the rapid trade growth?

Transportation – Standard size shipping containers Global transportation costs fell, made it more economical to move Production to foreign countries and import the finished goods.

Communications Technology – High bandwidth Internet – Greatly contributes to the shift of jobs from U.S. Participants developed more to sell – US, Japan, Canada, Russia, France, Germany, Italy, UK, (G8 countries) Multinational Corporations General Decline in Tariffs Growing Participants – China, Taiwan, South Korea, Singapore, Indonesia, India Collapse of Communism Why the rapid trade growth?

Basic Principle – specialization helps nations reduce the cost of getting the goods & services they desire. Comparative Advantage – producing a product at lower opportunity cost than a trading partner Absolute Advantage – A country uses fewer resources to produce a good than another country does. Gains from Specialization & Trade – economic growth and improved resource allocation Specialization and Comparative Advantage

Exchange Rates One U.S. dollar will buy Indian rupees.51 British pounds 1.01 Canadian dollars Mexican pesos 1.12 Swiss francs.68 European euro Japanese yen South Korean won 6.42 Swedish kronors January

The Foreign Exchange Market Countries and others buy and sell currency – why? Dollar – Yen Market P Q Quantity of yen Dollar price of 1 yen.01 QeQe DyDy SySy Exchange Rate: $.01=¥1 5-20

A Competitive Market – large # of sellers and buyers, standard product (currency) Linkages to All Domestic and Foreign Prices Dollar-Yen Market – you want to be paid in your own currency. Dollar price of yen Yen price of dollars Changing Rates: Increased US demand for Japanese goods increases the demand for yen and raise the dollar price of yen. The Foreign Exchange Market

Important Macroeconomic Relationship GDP = C + I + G + Net Exports, where – C = Consumption spending – I = Investment spending – G = Government Spending Net Exports = Exports – Imports When Net Exports increase – GDP increases When Net Exports decrease – GDP decreases

Depreciation of the dollar vs. the yen Increase in U.S. demand for Japanese goods & services leads to increased demand for yen Dollar price of yen rises (depreciation of the dollar) Takes more dollars to buy yen. International value of the dollar declines Japanese goods become more expensive (bad 4 them / good 4 us) US consumers shift spending to less expensive sources US goods become cheaper to Japan and Their purchases of US goods go up (good for us / bad for them) Imports decrease and Exports increase = Net Exports rise! Dynamic process! The Foreign Exchange Market

Appreciation of the dollar vs. the yen An increased Japanese demand for US goods leads to increased supply of yen to pay for the goods. The dollar price of yen declines (appreciation of the dollar) Takes fewer dollars to buy yen Japanese goods become less expensive to US (good for them) US imports of Japanese products go up US exports to Japan go down. (bad for us) Imports increase and Exports decrease – Net Exports fall! Again a dynamic process! The Foreign Exchange Market

Depreciation of the dollar vs. the yen = Appreciation of the yen vs. the dollar – Takes more dollars to buy yen – U.S. imports from Japan go down and exports to Japan go up – U.S. net exports go up – Takes fewer yen to buy dollars – Japanese imports from U.S. go up and exports to the U.S. go down – US net exports go up – US gdp goes up Appreciation of the dollar vs. the yen = Depreciation of the yen vs. the dollar – Takes fewer dollars to buy yen – U.S. imports from Japan go up and exports to Japan go down – Takes more yen to buy dollars – Japanese imports from U.S. go down and exports to the U.S. go up – US net exports go down (US gdp goes down)

Some International Trade Issues to Consider Oil is currently traded primarily in U.S. Dollars – You are Peruvian, and in charge of buying oil for your country, what happens when the dollar depreciates relative to your currency? US net exports rise (imports fall / exports rise) Peruvian net exports fall (imports rise / exports fall) Oil prices rise, (sellers raise their prices to protect their profits) your costs of production rise, output falls, etc. – What if oil were to trade in another currency?

China currently holds a large quantity of U.S. Debt (Securities). – What if they reduced substantially their holding of our debt? Some International Trade Issues to Consider

The U.S. dollar is currently held by other countries as their Reserve Currency. – What is the impact of this on the U.S. Economy? If you were in charge of managing Peru’s exchange rate and your currency came under attack by speculators (they sold your currency), what would you do? Some International Trade Issues to Consider

Equals Dollar price of foreign currency rises International value of dollar falls (dollar depreciates) Foreign currency price of dollar falls International value of foreign currency rises (foreign currency appreciates) Currency Appreciation and Depreciation The Foreign Exchange Market

Trade Impediments Protect domestic producers Protective Tariffs Shield domestic producers from foreign Competition. Import Quotas Limits on quantities imported Nontariff Barriers (watch this later) Any law of policy that is not a tariff, but affects trade. Product quality, environmental, health, labor standards that might negatively impact businesses involved in international trade. Export Subsidies Government pays domestic producers Lowers their production costs so they can lower their prices and sell more exports. U.S. Farmers Government & Trade

Misunderstanding of the Gains From Trade Export sector – new jobs Import sector – lost jobs It’s more about using resources efficiently to maximize output and increase growth globally. Political Considerations Protect domestic industries Costs To Society Tariffs and quotas help producers and hurt consumers. Spillover costs often hidden

Government & Trade Trade issues Multilateral Trade Agreements Free-trade Zones Smoot-Hawley Tariff Act

Government & Trade The growth of trade Smoot-Hawley Tariff Act Lead to high global tariffs and higher U.S. unemployment rates Reciprocal Trade Agreements Act Negotiating Authority to the President Lead to Generalized Tariff Reductions Most-Favored-Nation Clauses Agreements to treat each other equally

Government & Trade General Agreement on Tariffs and Trade (GATT) – 23 nations – A forum for trade negotiations – Reduced tendency for war – Many trade agreements were created 1979 Tokyo Round of GATT – More focus on “nontariff barriers” Onerous customs procedures, mountains of paperwork required to import goods, subsidies for domestic industries, etc. Expanded “nontariff barriers to include environmental laws, food-safety regulations, etc.

1986 Uruguay Round of GATT – World Trade Organization (WTO) 145 nations – 157 members on 24 August 2012 – New direction, new focus WTO Mission The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. Government & Trade

World Trade Organization Rules – Agreements signed by members Governing trade in goods, services, intellectual property, etc. Countries agree on issues: antidumping, subsidies, product standards, intellectual property, etc. Dispute resolution process – Rules, procedures, etc. – Appeals process Impact on U.S. policy – Internal policy must adhere to the WTO agreements – Loss of freedom

A Case that impacted American Citizens Case: U.S. weakens clean air rule to implement WTO Order Challenge by Venezuela and Brazil. WTO dispute panel ruled in 1996 that U.S. Clean Air Act regulations were in violation of WTO rules. U.S. instructed by the WTO to amend its gasoline cleanliness regulations, which it did!

A Case that impacted people in the EU U.S. pressures EU to abandon high standards for curtailing Electronics Industry Pollution The American Electronics Association (3000 member companies) used the WTO to attack a proposed EU directive to control electronics industry pollution. Would force electronics companies to be responsible for their pollution. Summer of 1999, the EU proposed to revise the directive, eliminating Key provisions on recycling and reversing the bans on some hazardous substances.

The WTO: Five Years of Reasons to Resist Corporate Globalization By: Lori Wallach, Michelle Sforza Amazon and BN A very readable book for those interested in learning more.

This is a crude measure of success and failure; it doesn't address the relative importance of the different cases, or the nature of the negotiated solutions.

Government and Trade The growth of trade 1993 The European Union (EU) 27 countries The EU Trade Bloc – Free trade zone The Euro (23 countries use the Euro) ECB – European Central Bank

Countries Using the Euro 1) Andorra 2) Austria 3) Belgium 4) Cyprus 5) Estonia 6) Finland 7) France 8) Germany 9) Greece 10) Ireland 11) Italy 12) Kosovo 13) Luxembourg 14) Malta 15) Monaco 16) Montenegro 17) Netherlands 18) Portugal 19) San Marino 20) Slovakia 21) Slovenia 22) Spain 23) Vatican City

European Union Countries

Government and Trade 1994 North American Free Trade Agreement (NAFTA) – Canada, US, Mexico free trade zone – Implications Regional Trade Agreements – The European Union – North American Free Trade Agreement, – FTAA – Free Trade Area of the Americas – Association of Southeast Asian Nations – South Asian Association for Regional Cooperation – Common Market of the South (MERCOSUR), – Australia-New Zealand Closer Economic Relations Agreement, – CAFTA – Central America Free Trade Agreement

Government and Trade 2001 The Doha Round of the WTO (Qatar) – Agriculture focus Increased Global Competition Globalization – good or bad thing?

multinational corporations comparative advantage terms of trade foreign exchange market exchange rates depreciation appreciation protective tariffs import quotas nontariff barriers export subsidies Smoot-Hawley Tariff Act Reciprocal Trade Agreements Act most-favored-nation clauses General Agreement on Tariffs & Trade (GATT) World Trade Organization (WTO) Doha Round European Union (EU) trade bloc euro North American Free Trade Agreement (NAFTA)