Please listen to the audio as you work through the slides. 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? The United States in the Global Economy

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

Interesting book about the implications of European Union regulations on the US Economy. Exposed: The toxic Chemistry of Everyday Products And what’s at stake for American Power. By Mark Schapiro

The Circular Flow Revisited Import & export Resource Market Money flows Money Income Costs Resources Input Factors Expenditures Resources Goods & Services Goods & Services Rest Of the World Businesses Government Households Net Taxes Net Taxes Goods & Services Expenditures Goods & Services Goods & Services Import & export Money flows Product Market Revenue Consumption 4-5

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

U.S. Imports and Exports Billions of dollars, 2007 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 Exports Imports Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical Equipment Fuels and Lubricants $94.1 70.9 77.6 50.2 42.9 41.5 43.6 48.6 32.0 47.7 Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Chemicals Aircraft $331.0 133.8 112.1 104.0 115.7 86.3 94.7 55.0 56.2 34.4 Source: Department of Commerce Data 5-9

U.S. Imports and Exports Goods by area – 2007 in billions of dollars Exports to Value Imports from Value 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 Imports Exceed Exports by $816 Billion Source: Survey of Current Business, April 2006 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.

Why the rapid trade growth? 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) Growth of Multinational Corporations General Decline in Tariffs Growing Participants – China, Taiwan, South Korea, Singapore, Indonesia, India Collapse of Communism

Specialization and Comparative Advantage 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

Exchange Rates One U.S. dollar will buy January 2008 39.17 Indian rupees .51 British pounds 1.01 Canadian dollars 10.94 Mexican pesos 1.12 Swiss francs .68 European euro 109.87 Japanese yen 937.38 South Korean won 6.42 Swedish kronors 5-19

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

The Foreign Exchange Market 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.

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

The Foreign Exchange Market 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 Dollar gets weaker relative to other currency 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 Dollar gets stronger relative to other currency 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)

Protect domestic producers Government & Trade 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. http://www.tradebarriers.org/ntb/non_tariff_barriers Export Subsidies Government pays domestic producers Lowers their production costs so they can lower their prices and sell more exports. U.S. Farmers, who else?

Multilateral Trade Agreements Free-trade Zones Government & Trade Trade issues Multilateral Trade Agreements Free-trade Zones Smoot-Hawley Tariff Act - 1930

Government & Trade 1930 - Smoot-Hawley Tariff Act The growth of trade 1930 - Smoot-Hawley Tariff Act Lead to high global tariffs and higher U.S. unemployment rates 1934 - 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 1947 - 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.

Government & Trade 1986 Uruguay Round of GATT WTO Mission 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.

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.

Five Years of Reasons to Resist Corporate Globalization 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 1993 The European Union (EU) 27 countries 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 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 1) Andorra 2) Austria 3) Belgium 4) Cyprus 5) Estonia 6) Finland 7) France 8) Germany 9) Greece 10) Ireland

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?

Key Terms multinational corporations comparative advantage 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) 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