International Trade A Globalized World

Section 1 Benefits and Issues of International Trade Not all nations have the resources available to compete in all the markets they choose They use a mix of economic patterns to decide what areas they will specialize in They look at the Four Factors of Production Land, Labor, Capital, and Entrepreneurship

Nations that do not have the natural resources to compete in a certain market look to other nations to supply them with resources Economic Interdependence- producers in one nation rely on others to provide goods and services they do not produce U.S. computer technology to India

Theory of Comparative Advantage Created by David Ricardo English Economist, believed if one nation could make one product better than another, they should trade with another nation that makes a product that is better than what they can make. This is the law of comparative advantage

Comparative Advantage This is the ability of a trading nation to make a good or service for less opportunity cost than that of another nation Law of Comparative Advantage states, countries gain when they produce items they are most efficient at producing and are at the lowest opportunity cost Ex. Labor costs in the U.S. vs. India Due to this nations gain through trading goods and services

Absolute Advantage Ability of one trading nation to make a product more efficiently than another trading nation Comparative advantage is better, the cost of making your good or service is less than another nation that may make it a little more efficiently. The lower the cost to make, the better the value

Exports and Imports Exports- goods produced in one nation and sold to other countries Imports- goods and services produced in another country and brought into your own What items does the U.S. import and export?

Exports Can Affect Prices and Quantity Supplied Ex. Lets say the U.S. does not trade with other nations. All of a sudden we decide to export American cars. Other nations will begin to buy our cars, increasing both supply and demand. This will create more jobs here, more income, and the price of cars will go up. But, the raise in income by our people will outweigh the costs or paying more for cars.

Imports Affect on Price and Quantity Now that the U.S. is exporting cars, we allow the Chinese to sell microwaves in the American market. This provides more choice for the American consumer, pushes our microwave companies to work harder to compete, and drives the price of microwaves down due to competition

Trade Affects Employment Today, U.S. manufacturing is on the decline. Most products sold here are from overseas EX. Collapse of the Steel Industry But, we lead the way in technology, which has created more jobs in that field. What are the advantages and disadvantages of this change?

U.S. In The World Economy We are the leading exporter in the world Computers, machinery, cars, industrial supplies, consumer and agricultural goods and services are heavily exported We import oil, petroleum, machinery, cars, and raw materials

Continued U.S. imports more than we export, but we export more services than we import. These services add to our economy They include, travel and tourism, transportation, architecture, construction, and information systems Our largest trading partners are Canada, Mexico, China, and Japan. They make up half of all of our trades internationally.

Section 2- Trade Barriers Nations set trade laws to protect domestic jobs and industries. Politics and Foreign Policy dictate these trade laws. Trade Barriers- any law that limits free trade with other nations

5 Types of Trade Barriers 1. Quotas- limit on the amount of a product that can be imported ex. U.S. quota on foreign textiles Only so many textiles were allowed into the U.S. per year. Quotas kept prices higher with a limited supply. This quota expired in 2005, and China flooded the market with cheaper textiles. This caused supply to go up and prices to fall, hurting our textile industry.

This action taken by China is called dumping, selling a product at a lower price than the domestic producer. This action helps the consumer, but hurts the domestic textile industry.

2. Tariff A fee charged foreign goods when brought into a country Two types of tariffs Revenue Tariff- tax levied on imports to specifically raise money Protective Tariff- tax on a foreign good or import to protect domestic producers Tariffs raise prices on the imported goods, which are usually cheaper than goods made in the U.S.

3. Voluntary Export Restraint Countries self imposed restriction on exports. Countries do this to avoid setting a quota or tariff on foreign goods. This is done to even out the playing field without upsetting foreign traders in our market. Nations usually threaten us with higher tariffs if we impose tariffs on them

4. Embargo A law that cuts of trade with a specific country. Ex. USA with Cuba Usually done for political reasons or pressure on the foreign nation

Informal Trade Barriers These are Environmental, Health, and Safety Measures Ex. We make it harder for nations to sell goods in the U.S. market by imposing tough health codes to protect the consumer.

Sometimes trade barriers can create trouble between nations and cause a trade wars, back and forth barriers laid down by two trading nations to one up each other. Trade Barriers have two major impacts They create higher prices and sometimes lead to trade wars There ultimate goal is to protect their domestic producers

Protectionism This is the use of trade barriers to protect domestic producers and jobs Protectionists argue that trade barriers protect jobs and promote infant industries Infant Industries- small businesses that do not have the capability to compete with larger companies They are mostly seen in developing nations. Businesses in Africa usually can’t compete with larger American and European competitors

Trade Barriers Protect National Security Industries that are vital to our national security, energy and port security are protected to ensure that foreign companies do not control them. Ex. Dubai shipping company in American Ports

Section 3 Modern International Institutions Regional and World Trade Organizations With our new globalized economy, trade barriers are being reduced or eliminated Free Trade Zones- a region in which trade between nations takes place without protective tariffs Ex. NAFTA Customs Unions- agreement that abolishes trade barriers among its member and establishes uniform tariffs for all trading non-members Ex. European Union

European Union

European Union or EU Originally known as the Common Market (1957) six member nations 1993, re-named the European Union Now has 27 member nations and operates as an economic and governing body Accounts for 20% of global exports and imports, making it the worlds largest trader

All member nations use the Euro Mark as money. EU has the worlds lowest tariffs Member countries take turns heading the Union All operations are based out of Brussels, Belgium

North American Free Trade Agreement NAFTA- Free Trade Zone The world’s largest free trade zone U.S., Canada, and Mexico Went into effect in 1994 Eliminated half of the tariffs on American and Mexican goods and services within 15 years Set up to compete with the EU and to create specialization, jobs, and efficiency for member countries

Other Trade Organizations MERCOSUR- promotes movement of goods and people in South America Formed in 1995 Eliminated 90% of tariffs between Brazil, Argentina, Paraguay, Uruguay, and Venezuela World’s Fourth Largest Trade Organization

ASEAN Association of South East Asian Nations Established in 1967 Members- Indonesia, Philippines, Singapore, Thailand, Vietnam, Laos, Cambodia, and others

APEC Asia-Pacific Economic Cooperation Trade organization of Pacific Rim Nations Members- Australia, U.S., Russia, China, Thailand, Papua New Guinea, Chile

OPEC Organization of Petroleum Exporting Countries This is a cartel- group of producers that regulate the production, pricing, and marketing of a product Formed in 1960

Very strong organization that sets the price of oil Politics and demand lead to pricing of oil and the power that the group has Members- Iran, Iraq, Venezuela, Saudi Arabia, Kuwait, Qatar, Indonesia, Libya, Ecuador, Algeria, Angola, Nigeria, and UAE

World Trade Organization Originally set up by allied nations at the end of WWII to stimulate economic growth in war torn nations. 149 members today Actions- negotiate and administer trade agreements, monitor trading policies of member nations, and provide support for developing nations. Promotes equal trade among its members.