International Trade Your pencil contains: Graphite from Sri Lanka Mississippi mud Mexican carnauba wax Canadian wood Lacquer made from Mexican castor beans Australian zinc or Michigan copper Rubber from Malaysia Pumice (derivative of rapeseed oil) from Indonesia Trade isn’t very important, now, is it?

Is Trade Good or Bad? Depends on who you ask UAW Worker: Trade bad Economist: Trade maximizes economic efficiency Defense Secretary: Jeopardizes national security if you ship high-powered computers or B-2s. Average consumer: Trade is wonderful, lowers prices and improves quality Without international trade, many products would not be available on the world market

Trade Activity

Myths about Trade #1: International Trade is “Different.” #2: International Trade is about competition between nations #3: Exports are the goal of international trade #4: High productivity is the key to competition. #5: International Trade destroys jobs. #6: “We need a new partnership between business and government.” When’s the last time the US competed with another country? Nations don’t compete—firms do Michael Dell and Bill Gates destroyed the auto industry—we’re too good at producing other stuff—comparative advantage VW Beetle made in Mexico creates jobs in U.S. export industries. Japanese voluntary restrictions to avoid tariffs under Reagan hurt U.S.

Resource Distribution and Trade Each country of the world possesses different types and quantities of land, labor, and capital resources. By specializing in the production of certain goods and services, nations can use their resources more efficiently. Specialization and trade can benefit all nations.

David Ricardo & Comparative Advantage David Ricardo (1772-1823) was a Classical Economist who opposed England’s Corn Laws. The Corn Laws, in force between 1815 and 1846, were import tariffs ostensibly designed to "protect" British farmers and landowners against competition from cheap foreign grain imports. They were repealed by PM Robert Peel after the Irish potato famine. A person or nation has an absolute advantage when it can produce a particular good at a lower cost than another person or nation. Korea has absolute advantage in producing cars. Comparative advantage is the ability of one person or nation to produce a good at a lower opportunity cost than that of another person or nation. South Korea can make cars and t-shirts cheaper than the U.S., but it is more productive at cars. The law of comparative advantage states that nations are better off when they produce goods and services for which they have a comparative advantage in supplying.

Key Assumptions of Ricardo There are no transport costs. Costs are constant and there are no economies of scale. There are only two economies producing two goods. The theory assumes that traded goods are homogeneous (ie identical). Factors of production are assumed to be perfectly mobile. There are no tariffs or other trade barriers. There is perfect knowledge, so that all buyers and sellers know where the cheapest goods can be found internationally.

Imports and Exports of the United States Major Imports and Exports of the United States Exports 80 70 60 50 40 30 20 10 Chemicals Industrial machinery Electrical machinery Data-processing equipment Airplanes and parts Vehicles:parts Power-generating machinery Vehicles: cars and trucks Scientific instruments Telecommunications equipment Source: Statistical Abstract of the United States The United States is the world’s largest exporter. Vehicles: cars and trucks Crude oil and petroleum preparations Electrical machinery Data-processing equipment Clothing Industrial machinery Telecommunications equipment Vehicles; parts Power-generating machinery Chemicals Dollars per year (in billions) Imports 80 70 60 50 40 30 20 10 The United States is also the world’s largest importer The United States’ main trading partners are Canada, Mexico and Japan. See handouts for trade deficits/surpluses between the U.S. and other countries

Trade and Employment As nations begin to specialize in certain goods, dramatic changes in the nation’s employment patterns also occur. Workers who lose their jobs due to specialization face three options: Unemployment: inability to adapt and find a new job Relocation: moving to where current skills meet current jobs Retraining: gaining new human capital to meet the demands of specialized labor markets

Section 1 Review 1. Trade benefits both wealthy and poor countries because (a) self-sufficiency is too costly. (b) both wealthy and poor countries increase their wealth if they specialize. (c) both wealthy and poor countries lack human resources. (d) without trade neither wealthy nor poor countries could increase their wealth. 2. What is the law of comparative advantage? (a) A country is better off producing goods in which they have a comparative advantage in supplying. (b) A country that supplies things for others has a comparative advantage in trade. (c) A country has a comparative advantage if it produces goods for export. (d) A country’s greatest advantage is in the import of goods that it cannot produce.

Trade Barriers A trade barrier is a means of preventing a foreign product or service from freely entering a nation’s territory. Import Quotas--An import quota is a limit on the amount of a good that can be imported. Voluntary Export Restraints--a self-imposed limitation on the number of products shipped to a certain country. Best example: Japanese car companies and President Reagan Tariffs--a tax on imported goods, such as a customs duty. EX: Bush 30% import steel tax. Tariffs can be protective or revenue tariffs. Other Barriers to Trade--include high government licensing fees and costly product standards.

The Effects of Trade Restrictions: (Arguments AGAINST) Increased Prices for Foreign Goods Tariffs and other trade barriers increase the cost of imported products, making domestic products more competitive. EX: American cars were forced to improve by Japanese competition Although manufacturers of many products may benefit from trade barriers, consumers can lose out. Trade Wars When one country restricts imports, its trading partner may impose its own retaliatory restrictions.

Arguments FOR Protectionism Protectionism is the use of trade barriers to protect a nation’s industries from foreign competition Balance of Payments Argument—keep them favorable Protecting Jobs Protectionism shelters workers in industries that would be hurt by specialization and trade. Protecting Infant Industries Protectionist policies protect new industries in the early stages of development. Safeguarding National Security Certain industries may require protection from foreign competition because their products are essential to the defense of the United States. Not as needed as you might think—some people are always betting on war.

International Competition Recent trends have been toward lowering trade barriers and increasing trade through international trade agreements. In 1948, the General Agreement on Tariffs and Trade (GATT) was established to reduce tariffs and expand world trade. In 1995, the World Trade Organization (WTO) was founded to ensure compliance with GATT, to negotiate new trade agreements, and to resolve trade disputes.

Global Trade Agreements Many nations have formed regional trade organizations. These organizations establish free-trade zones--regions where a group of countries agree to reduce trade barriers among themselves.

Section Review--Protectionism 1. Protectionism does not (a) protect immigrant labor. (b) protect domestic jobs. (c) protect infant industries. (d) safeguard national security. 2. Members of regional trade organizations generally work together to (a) abolish free-trade zones. (b) limit commerce between member states. (c) establish centrally planned economies. (d) eliminate trade barriers.

Measuring Trade—Topics to Examine How do exchange rates affect international markets? How do exchange rate systems vary? What is a balance of trade? What is the United States trade deficit?

Exchange Rates and International Markets The value of a foreign nation’s currency in relation to your own currency is called the exchange rate. An increase in the value of a currency is called appreciation. A decrease in the value of a currency is called depreciation. Multinational firms convert currencies on the foreign exchange market, a network of about 2,000 banks and other financial institutions

Activity: Exchange Rates

Types of Exchange Rate Systems Fixed Exchange-Rate Systems Are a currency system in which governments try to keep the values of their currencies constant against one another Flexible exchange-rate systems Allow the exchange rate to be determined by supply and demand. AKA “Floating system”

Reading an Exchange Rate Table Foreign Exchange Rates U.S. $ Australian $ U.K. £ Canadian $ ¥en Euro Mexican nuevo peso Chinese renminbi 1 1.541 0.6252 1.478 114.3 0.9516 9.33 8.28 Aust $ U.K. £ Canadian $ ¥en Euro Mexican NP Chinese renminbi 0.6489 1 0.4057 0.9593 74.19 0.6175 6.06 5.37 1.599 2.465 2.365 182.9 1.522 6.3 13.25 0.6764 1.042 0.4229 77.34 0.6436 5.6 0.01 0.01293 0.08 0.07 1.051 1.62 0.657 1.554 120.2 9.81 8.7 0.11 0.17 0.16 12.24 0.1 9.8 0.12 0.19 0.18 13.81 1.13

A Strong Dollar is….hmmm Not good for US business overseas, and definitely bad for the U.S. balance of trade Overseas goods are cheaper with a strong dollar. American goods are more expensive with a strong dollar. A strong dollar, however, is good for financial markets and for Americans traveling abroad. So either way, the U.S. wins

Balance of Trade The relationship between a nation’s imports and its exports is called its balance of trade. When a nation exports more than it imports, it has a trade surplus. When a nation imports more than it exports, it creates a trade deficit.

The United States Trade Deficit DO NOT confuse with National Debt or budget deficit The Trade Deficit The United States has run a trade deficit since the early 1970s. Why the Trade Deficit? Imports of foreign oil as well as Americans’ enjoyment of imported goods account in part for the large American trade deficit. Reducing the Trade Deficit Quotas and other trade barriers can be used to raise prices of foreign-made goods and urge consumers to buy domestic goods. But should we try to reduce it??????

Section Review—Net Foreign Trade 1. When a nation imports more than it exports, economists say it has a (a) trade insufficiency. (b) trade deficit. (c) balance of payments. (d) trade surplus. 2. When an economist says that a currency has become stronger, he or she means that (a) it will buy less foreign goods. (b) it can be exchanged for more of a foreign currency. (c) services, unlike goods, can be exported freely. (d) there are very few things that the currency cannot buy in a foreign market.

Sneaker Check! Nike= Destroys families and communities New Balance/Adidas: Sweatshops Brand X: Slave labor Nike hurt by activist protests, Sweatshops good, slave labor morally repugnant. Let’s see how!

The Good, the Bad, & the Ugly Sweatshops: Low wages, poor working conditions, long hours, few government protections Slave labor: involuntary exchange, no pay, universally condemned Child labor: Semi-voluntary (under 10 involuntary), helps family stay together, takes away “childhood”

Why are Minimum Wages Bad? Remember that all trade is based on voluntary exchange Higher wagesCompany must CUT BACK on hiring, benefits, or change locations altogether. That’s BAD. Business will shift to more capital-intensive methods of production. Even more jobs lost  Destroys Communities: “Squatters’ Villages” are set up all around factory. With this much nearby labor, company and management can treat employees EVEN WORSE THAN BEFORE

Critical Thinking Questions How does resource distribution affect trade? What are the differences between absolute and comparative advantage? What are the major imports and exports of the United States? How does trade affect employment?