International Trade Voluntary Trade Creates Wealth

Reasons for International Trade Possession of special resources Raw materials, skilled labor, geography Economic advantages Comparative & Absolute Advantage Politics Trade organizations, agreements OPEC, NAFTA

Possession of special resources Unique Climate or Terrain Hawaii – pineapple, Wisconsin - cheese Valuable Raw Materials Middle East – Oil, South Africa - Diamonds Skilled Labor Force U. S. – Engineers, India – Software writers Capital Resources Developed Countries, Tools - inventions Favorable Geographic Location Resources, Harbors, Transportation

International Trade Economic Advantages Comparative Advantage Do what you are best at. Absolute Advantage When best at compared to others. ideas of David Ricardo

Hatfields vs McCoys Should they Trade? Corn 8 hours Cloth 10 hours McCoys Corn 15 hours Cloth 12 hours Who has an absolute advantage in CORN production? Who has an absolute advantage in CLOTH production? Who has a comparative advantage in CORN production? Who has a comparative advantage in CLOTH production? If the Hatfields and McCoys specialize & trade will they both gain?

Trade Specialization raises standard of living Specialization makes us interdependent

Top Trading Partners 2010 Merchandise Trade - Billions $ thru Oct Country Exports Imports Total Percent Canada 207.4 229.4 436.8 16.6 China 72.3 299.0 371.3 14.1 Mexico 134.0 190.0 323.9 12.3 Japan 49.9 98.0 147.8 5.6 Germany 39.5 67.7 107.2 4.1 U.K. 40.5 41.1 81.6 3.1 S. Korea 32.2 39.9 72.1 2.7 France 21.8 31.6 53.4 2.0 Taiwan 20.9 29.4 50.3 1.9 Brazil 29.3 19.7 49.0

Top Trading Partners 2008 Country Exports Imports Total Percent Canada $225.2 $293.3 $518.5 17.7% China $61.0 $284.4 $345.5 11.8% Mexico $129.4 $186.2 $315.6 10.8% Japan $56.9 $119.4 $176.3 6.0% Germany $46.5 $83.3 $129.7 4.4% U.K. $46.6 $50.6 $97.2 3.3% S. Korea $30.5 $41.2 $71.7 2.4% France $24.7 $37.3 $62.0 2.1% Saudi Arabia $9.8 $49.6 $59.3 2.0% Venezuela $10.3 1.9%

Top Trading Partners 2007 Country Exports Imports Total Percent Canada 248.9 313.1 562.0 18.0% China 65.2 321.5 386.7 12.4% Mexico 136.5 210.8 347.3 11.1% Japan 62.7 145.5 208.1 6.7% Germany 49.7 94.4 144.0 4.6% United K 50.3 56.9 107.2 3.4% Korea, S 34.7 47.6 82.3 2.6% France 27.4 41.6 69.0 2.2% Taiwan 26.4 38.3 64.7 2.1% Netherlands 33.0 18.4 51.4 1.6%

Top Trading Partners 2006 Country Exports Imports Total Percent Canada $192.8 $254.8 $447.6 18.6% China $45.2 $235.8 $281.0 11.7% Mexico $112.3 $166.0 $278.3 11.6% Japan $49.6 $122.7 $172.4 7.2% Germany $34.0 $73.5 $107.5 4.5% U.K. $38.0 $44.6 $82.6 3.4% S. Korea $26.9 $38.3 $65.1 2.7% France $20.4 $30.8 $51.2 2.1% Taiwan $18.9 $31.9 $50.8 Malaysia $10.9 $28.2 $39.1 1.7%

International Trade Politics and Mechanics

Protectionism The viewpoint that trade with a foreign country will do harm to the national economy. Must “protect” country from foreign competition. Difficult to apply standards of one country to another.

Can/should we apply our standards or moral viewpoint to other countries? ethnocentrism

Protectionism Arguments National Security Self-sufficient in military & defense goods Agricultural Self-sufficiency Nation should feed itself Employment Protection Prevent job loss to imports

Protectionism Arguments Infant / Emerging Industry New industries need help until they become efficient Wage Protection Competition from “cheap foreign labor” Diversified Economy Don’t want to be dependent on single product

Trade Barriers Used to “protect” domestic economy imposition of some sort of cost on trade that raises the price of the traded products When two or more nations repeatedly use trade barriers against each other a trade war results. Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency

Trade Barriers Tariff Tax on imports

Trade Barriers Tariff Tax on imports Raises Price Lowers Quantity

Trade Barriers Quota Limits the number of imports Raises prices

Trade Barriers Embargo No trade at all Specific country Cuba, North Korea Specific products - imports/exports Military Goods –Arms ITAR - International Traffic in Arms Regulations (UN) Endangered Species Drugs, narcotics Technology

Current US Trade Embargoes Cuba Iran North Korea Sudan Syria Burma/Myanmar Belarus Zimbabwe Ivory Coast Congo State Dept list

Trade Barriers Product standards Quality control on imports Customs and cultural mores Electric power system Driving on right side of road

Trade Barriers Subsidy Aid to domestic producers Lowers cost to consumer Preserves jobs

Most Favored Nation Normal Trade Relations 1998 Gives country the lowest trade barriers. Reciprocal or bilateral agreement WTO members Exceptions are made Political tool

Trade Organizations World Trade Organization (WTO) International governing body – main treaty Regional Organizations NAFTA, European Union World regions Product Organizations OPEC, Coffee Exporters

Current US Free Trade Agreements NAFTA – Canada & Mexico Australia Bahrain Chile Costa Rica Dominican Republic El Salvador Guatemala Honduras Israel Jordan Morocco Nicaragua Singapore Pending Peru Columbia Oman Panama South Korea Need Congressional Approval

Foreign Exchange Exchange rate One dollar = 2 Euros How much of one currency another buys One dollar = 2 Euros Units of Measure One Mile = 1760 yards = 5280 feet

Foreign Exchange Fixed Exchange Rates Floating Exchange Rates Bretton Woods – Gold Standard Pegged or Tied Exchange Rates Floating Exchange Rates Supply & Demand in World Market Stronger – can buy more units of currency Weaker – can buy less units of currency Change in relative position not good/bad

Dollar vs French Franc Current Exchange Rate 4.58 Date Ex Rate S/W? Jan ’80 4.04 Feb ’85 10.09 Dec ’96 5.23 Dec ’07 4.55 Nov’08 5.15 Oct’09 4.37 Stronger Weaker

Dollar vs British Pound Current Exchange Rate .6219 1 British Pound Equals $1.61 Date Ex Rate Jan ’80 .441 Feb ’85 .915 Dec ’96 .601 Dec ’07 .495 Nov’08 .665 Oct ’09 .603 Stronger Weaker

Dollar vs Euro Current Exchange Rate .6984 One Euro Equals $1.43 Date Ex Rate Dec ’96 .804 Dec ’07 .693 Nov’08 .786 Oct ’09 .6668 Weaker Stronger

Dollar vs Yen Current Exchange Rate 90.936 Date Ex Rate Jan ’80 237.88 Feb ’85 260.48 Dec ’96 113.91 Dec ’07 113.36 Nov’08 97.07 Oct’09 89.95 Weaker Stronger

Dollar vs Mexican Peso Current Exchange Rate 12.82 Date Ex Rate Jan ’80 22.84 Feb ’85 236.05 Mexico devalues it’s currency Dec ’96 7.85 Dec ’07 10.82 Nov ’08 13.84 Oct ’09 12.96 Stronger Weaker

Dollar vs Canadian Dollar Current Exchange Rate $1.06 Date Ex Rate Jan ’80 1.16 Feb ’85 1.35 Dec ’96 1.36 Dec ’07 1.02 Nov’08 1.22 Oct ‘09 1.04 Weaker Stronger

Benefit from Strong or Weak $ ? FARMERS U.S. TOURISTS abroad CLOTHES BUYERS CAR BUYERS AUTOWORKERS ENTERTAINERS JOB SEEKERS WEAK STRONG DEPENDS