International Trade “Did you ever stop to think that you can't leave for your job in the morning without being dependent on most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that's handed to you by a Pacific islander. You reach for a bar of soap, and that's given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning, and that's poured into your cup by a South American. And maybe you want tea: that's poured into your cup by a Chinese. Or maybe you're desirous of having cocoa for breakfast, and that's poured into your cup by a West African. And then you reach over for your toast, and that's given to you at the hands of an English speaking farmer, not to mention the baker. And before you finish eating breakfast in the morning, you've depended on more than half of the world. This is the way our universe is structured; this is its interrelated quality. We aren't going to have peace on earth until we recognize this basic fact of the interrelated structure of all reality.” ~Dr. Martin Luther King, Jr. Christmas Sermon on Peace 1967

International Trade Absolute Advantage: when a country can easily produce more of a particular product than another country Comparative Advantage: when a country has a lower opportunity cost when giving up production of a product in order to produce another product

Barriers to Trade Tariff: A tax added to imported goods Example: A tax of 2.5% tariff makes imported cars from S. Korea more expensive than an equivalent car made in the U.S.

Quota Limits the amount of a good allowed to be imported into the country. Example: Korea may import only 25,000 automobiles a year from the U.S.

Embargo The government completely prohibits the import of a good/service. The U.S. currently has an embargo against Iran, N. Korea, Syria, and Sudan.

Standards Standards are usually intended to ensure safety of imported goods and make sure that goods comply with local laws. Example: lead-based paint—allowed in some other countries, but not in the U.S.

Subsidies Government makes payments (a subsidy) to a local supplier in order to reduce the production costs of the supplier. Example: The sugar industry asks the government to provide financial assistance to make it possible to sell its products overseas at a lower price that will compete well in other countries.

Balance of trade The value of exports minus imports. A trade deficit occurs when imports are greater than exports. A trade surplus occurs when exports are greater than imports.

Is a trade deficit a problem? When we have a trade deficit, the value of imports is higher than the value of exports, so we’re supplying a lot of dollars around the world. When the supply of dollars increases and the demand for dollars remains the same, the dollar depreciates (goes down).

Trading Blocs and Trade Agreements NAFTA: trade agreement between U.S., Canada, and Mexico to encourage free trade (few, if any, barriers) among these countries before trading with other countries, if possible. EU: European Union—trade agreement between 28 European nations with the addition of a common currency—the Euro. ASEAN: Association of Southeast Asian Nations

Trade Agreements: Good or Bad? NAFTA ↓

Jobs Loss due to NAFTA

Foreign Exchange Appreciate: one nation’s currency strengthens against another nation’s currency $1 = .49£ (year 1) $1 = .52£ (year 2) Depreciate: one nation’s currency weakens against another nation’s currency $1 = .69€ (year 1) $1 = .67€ (year 2)

For example… If the exchange rate between the dollar and the peso goes from 10 pesos/dollar to 15 pesos/dollar, the dollar is appreciating and the peso is depreciating. If the exchange rate between the dollar and the peso goes from 10 pesos/dollar to 5 pesos/dollar, the dollar is depreciating and the peso is appreciating.

What makes the value of currency change? If a nation’s currency is in demand, the value of the currency will rise. Why would a nation’s currency be in demand? Other nation’s need the currency to buy that nation’s goods (exports) If a nation is spending a lot of its currency on imports, there will be a lot of that currency on the world market (supply). What will happen to its value if the currency isn’t in demand? How is this related to trade deficits and surpluses?