The Dynamic Environment of International Trade Chapter 2

Balance of Payments The system of accounts that records a nation’s international financial transactions is called its balance of payments. Receipts from other countries (plus side): Export sales Money spent by foreign tourists Foreign investments into your own country Foreign government payments Payments to other countries (negative side): Imports Spending by your local citizens in overseas New overseas investments Cost of economic and military aid All countries have money which flows into and out of them. The BoP is the system of accounts which keeps track of them. Must always balance!

Balance of Payments Three types of accounts Current account Capital account Reserves account If a country’s expenditures > income, its citizens must reduce standard of living, or its money will lose value against other countries’. Deficit= Loss of value for the dollar Current- Record of all merchandise exports, imports, and services plus transfers of funds Capital- Record of direct investment, portfolio investment, s-t capital movements Reserves- Imports and exports of gold, increases or decreases in foreign exchange, increases or decreases in liabilities to foreign exchange

Balance of Payments (cont..) Current Account: A record of all merchandise exports, imports, and services plus unilateral transfer of funds. Capital Account: A record of direct investment, portfolio investment, and short- term capital movements to and from countries. Reserve Account: A record of exports and imports of gold, increase or decrease in foreign exchange, and increase or decrease in liabilities to foreign central banks.

Protectionism Acts to “protect” a country’s markets from foreign competitors Why? Infant industry National defense Industrialization of underdeveloped countries

Protectionism Tariff Quota A tax on imported goods Quota A unit or dollar limit placed on a good Sometimes paired with tariffs Voluntary Export Restraint: Restriction on the volume of exports. Boycott: An absolute restriction against the purchase and importation of certain good/service from other countries. Embargo: Refusal to sell to a specific country. VER- A country agrees to only export a certain number of a product. Done in order to prevent quotas or tariffs. Japan and US with cars Boycott- Government refuses to buy from a certain country. Embargo- A country refuses to sell to a certain a country.

Protectionism Monetary Barriers Standards Antidumping Penalties Blocked currency Differential exchange rate Government approval to secure foreign exchange Standards Antidumping Penalties Refuse to allow importers to exchange their currency into sellers’ currency DER- Get different exchange rates on different products. For example, give a better rate for desirable products, GAtSFE- Requires permission to exchange domestic currency for foreign currency Set standards so high that they cannot be met- thus, restrict trade (knotholes in lumber going to Japan) Dumping- Selling for less than its costs in order to gain marketshare. Also helps to get rid of excess products.

Easing Trade Restrictions Market access Allows US to retaliate against protectionism Export expansion Easier to gain an export license Government responsible for exporter needs Import relief Offers assistance to companies impacted by imports

Easing Trade Restrictions General Agreement on Tariffs and Trade U.S. and 22 other countries Reduces tariffs Set up an organization to monitor trade Resulted in deep cuts of tariffs

Easing Trade Restrictions World Trade Organization Began in 1995 Governs trade Settles disputes and issues penalties against countries practicing protectionism

Easing Trade Restrictions International Monetary Fund Stabilize exchange rates Lends money to member countries Special drawing rights Average base of value to counter fluctuations in world gold values Helps to tie down values

Easing Trade Restrictions World Bank Group Lend money and provide assistance to developing countries Mediate between investors and foreign governments