World Trade and Free Trade Copeland AP Human Geography Unit 6: Development and Industry

Why All Should Benefit from Trade The underlying economic theory of free trade agreements is that of "comparative advantage," which originated in an 1817 book entitled "On the Principles of Political Economy and Taxation" by British political economist David Ricardo. Put simply, the "theory of comparative advantage " postulates that that in a free marketplace, each country/area will ultimately specialize in that activity where it has comparative advantage (i.e. natural resources, skilled workers, agriculture-friendly weather, etc.) The result should be that all parties to the pact will increase their income. "... the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact there may be significant losers... The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers."

Comparative Advantage and Trade Agreements An example of Comparative Advantage U.S. Mexico Food Clothing Food Clothing A A B B C C D D

If countries follow Rostow’s Model and “Take-off” through trade… The Four Asian Dragons. South Korea, Singapore, Taiwan and Hong Kong are known as “Four Asian Dragons” (some refer to as Four Asian Tigers). These areas essentially had no natural resources, yet were able to promote development by concentrating on producing manufactured goods, especially electronics. Low labor costs allowed these countries to sell products inexpensively in developed countries. Petroleum-Rich Arabian Peninsula States. Escalating petroleum prices in the 1970s allowed these countries (Saudi Arabia, Bahrain, Oman and United Arab Emirates) to essentially become overnight success stories. Several of these countries used petroleum revenues to invest in other areas of their economy (housing, highways, hospitals, airports, hotels, universities and telecommunications networks. They also used oil revenue to boost steel and aluminum production as well.

International Trade Triumphs! As trade increased around the world, wealth also increased. Other countries have recently started to follow the example of the MDCs around the world and adopt the international trade model. Eastern Europe China India These areas focused on consumer demand and preferences around the world, not just their own country. As a result, foreign countries (U.S. especially) set up factories in these areas of the world. Tariffs and restrictions of imports and exports were reduced.

World Trade Organization The World Trade Organization (WTO) was established in 1995 in order to promote development through international trade around the world. The WTO works to reduce barriers to trade (eliminate tariffs or quotas). The WTO also exists to ensure that one country does not violate trade agreements as established by treaties between two trade partners. Critics of WTO WTO is “anti-democratic” saying the organization only promotes the interests of large corporations WTO compromises the power and sovereignty of individual countries because it can regulate the practice of certain countries if deemed too powerful within the trade market.

Stimulants to Trade Developing countries sometimes lack the money, capital or resources to get production started in what they have decided to produce or specialize in. Therefore, many countries depend on other countries or corporations from other countries for… 1) Foreign Direct Investment-investments made by a foreign company to another country to stimulate production; usually done by transnational corporations; only 1/3 of FDI went to LDCs in last five years. Of the 500 largest FDI corporations, 203 were from the U.S., 32 from China, 211 were from other MDCs 2) Loans from World Bank or International Monetary Fund (IMF). Most of money loaned from World Bank goes to Semi-peripheral countries. The IMF typically lends to smaller countries who have a trade deficit. ***Both institutions were conceived at the Bretton Woods United Nations Conference in 1944 in New Hampshire.

What is it? Benefits Active Agreements Arguments Against FREE TRADE What is it? Benefits Active Agreements Arguments Against

What Is a Free Trade Agreement? A free trade agreement is a pact between two countries or more in which they both or all agree to lift most or all tariffs, quotas, special fees and taxes, and other barriers to trade between the entities. The purpose of free trade agreements is to allow faster and more business between the two countries/areas, which should benefit both.

Recent U.S. Trade Agreements The U.S. signed a free trade agreement with Israel, and took effect on September 1, 1985. The agreement, which has no expiration date, provided for the elimination of duties for goods, except for certain agricultural products, from Israel entering the U.S. The U.S.-Israeli agreement also allows American products to compete on an equal basis with European goods, which have free access to Israeli markets. The U.S. free trade agreement, signed in January 1988, with Canada, was trumped in 1994 by the complex and controversial North American Free Trade Agreement (NAFTA) with Canada and Mexico, signed with much fanfare by President Bill Clinton on September 14, 1993. The Trans-Pacific Partnership (TPP) is a trade agreement among twelve Pacific Rim countries concerning a variety of matters of economic policy, about which agreement was reached on 5 October 2015 after 7 years of negotiations. The agreement's goal had been to "promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in our countries; and promote transparency, good governance, and enhanced labor and environmental protections." Among other things, the TPP Agreement contains measures to lower trade barriers such as tariffs, and establish an investor-state dispute settlement mechanism (but states can opt out from tobacco-related measures)

NAFTA Overall, the states with the most job losses have been: California (82,354 jobs lost), Michigan (46,817 jobs), New York (46,210 jobs), Texas (41,067 jobs), and Ohio (37,694 jobs). Within the states, job losses by industry reflect the geographic distribution of major industries in the United States. For example, employment in motor vehicles and equipment has been particularly hard hit by NAFTA in Michigan (25,912 jobs lost), Ohio (9,826), Indiana (7,119), Tennessee (3,658), Illinois (3,468), and California (3,002). The electronic equipment sector has also suffered, with large losses in California (14,332 jobs lost), Indiana (9,721), Illinois (8,316), New York (6,288), Texas (6,170), and Pennsylvania (5,042). The textiles and apparel industry is concentrated in Los Angeles, New York City, and the South, with major job losses in North Carolina (10,781 jobs lost), California (10,756), New York (7,901), Alabama (5,126), Tennessee (4,982), Georgia (4,900), Pennsylvania (4,869), and Texas (4,733). The lumber and wood products sectors have lost jobs in the Northwest and Southern states (some of the latter are hard hit by job losses in furniture production). Hard-hit states in this industry include Oregon (3,427 jobs lost), California (3,337), North Carolina (2,592), Texas (2,376), Washington (2,324), and Alabama (1,991).

Maquiladoras NAFTA helped to create “maquiladoras” in Mexico. 3 Day Blinds 20th Century Plastics Acer Peripherals Bali Company, Inc. Bayer Corp./Medsep BMW Canon Business Machines Casio Manufacturing Chrysler Daewoo Eastman Kodak/Verbatim Eberhard-Faber Eli Lilly Corporation Ericsson Fisher Price Ford Foster Grant Corporation General Electric Company JVC GM Hasbro Hewlett Packard Hitachi Home Electronics Honda Honeywell, Inc. Hughes Aircraft Hyundai Precision America IBM Matsushita Mattel Maxell Corporation Mercedes Benz Mitsubishi Electronics Corp. Motorola Nissan Philips Pioneer Speakers Samsonite Corporation Samsung Sanyo North America Sony Electronics Tiffany Toshiba VW Xerox Zenith Maquiladoras NAFTA helped to create “maquiladoras” in Mexico. A maquiladora is an assembly plant that imports materials and equipment on a duty-free and tariff-free basis. Maquiladoras receive raw materials from companies in the U.S. to assemble and export back as finished products. Maquiladoras are generally owned by U.S. companies that are incentivized to build maquiladoras in Mexican border towns in return for low-cost labor and savings . 

Maquiladoras

Claims that 21st Century Free Trade Doesn't Benefit All Critics from both sides of the political aisle contend that free trade agreements often don't work effectively to benefit either the U.S. or its free trade partners. One angry complaint is that more than three million U.S. jobs with middle-class wages have been outsourced to foreign countries since 1994.: "Globalization is tough to sell to average people. Economists can promote the very real benefits of a robustly growing world: when they sell more overseas, American businesses can employ more people. "But what sticks in our minds is the television image of the father of three laid off when his factory moves offshore." What are your thoughts? Practice free trade and help the world, while helping America or forget trading and keep jobs here in America?

Bruceton, TN

NAFTA Is the end of this trade agreement near? Will Trump’s tariffs on certain foreign-made products backfire on America?

Development Challenges What should a country do if they experience a severe economic downturn due to lack of demand for their product(s) or trade deficits? Stimulus Strategy -during a downturn, a government should stimulate the economy by spending more than its collecting, putting citizens to work with public service projects (roads, bridges, etc.). Once economy recovers, government raises taxes to pay off the debt. Austerity Strategy -government should significantly reduce taxes so that citizens have greater wealth to spend on consumer goods. Thus stimulating the economy through job growth due to increased demand. Some countries seek assistance from other countries through structural adjustment programs –economic reforms or adjustments that countries must implement to allow their economies to recover. Ex. Spend only what you can afford, direct benefits to poor, divert military spending to health and education, encouraging more private sector (entrepreneurship), reforming the government (more transparency to the people). Do these structural adjustment programs work? What about microfinance?