The United States & The Global Economy Chapter 6

Economic Interdependence The U.S. economy is linked with other nations in a number of ways The U.S. economy is linked with other nations in a number of ways Flows of goods & services Flows of goods & services Capital & labor (resource flows) Capital & labor (resource flows) Information & Technology Information & Technology Financial flows Financial flows

The U.S. & Trade Data Trade deficit overall is 44 billion Trade deficit overall is 44 billion Trade deficit w/ China is 21.5 billion Trade deficit w/ China is 21.5 billion U.S. Oil Imports estimated billion for 2010 U.S. Oil Imports estimated billion for 2010 U.S. Oil Imports from OPEC 133 billion estimated for 2010 U.S. Oil Imports from OPEC 133 billion estimated for 2010

U.S. Trade Partners 1. Canada 1. Canada 2. China 2. China 3. Mexico 3. Mexico 4. Japan 4. Japan 5. Germany 5. Germany 6. Great Britain 6. Great Britain 7. South Korea 7. South Korea 8. France 8. France 9. Taiwan 9. Taiwan 10. Netherlands 10. Netherlands

Trade Tendencies The United States trades more in terms of volume than any other country in the world although not as dominant as they previously had been. Other countries are increasing on their own and narrowing the gap. The United States trades more in terms of volume than any other country in the world although not as dominant as they previously had been. Other countries are increasing on their own and narrowing the gap.

Moving Towards a Global Economy Trade has increased greatly since World War II. The attitude of the U.S. and the world in general has moved from isolationist at times to full blown dependence. Tariff legislation is written to favor trade and we are seeing economic summits and other organizations that clearly promote a global economy. Trade has increased greatly since World War II. The attitude of the U.S. and the world in general has moved from isolationist at times to full blown dependence. Tariff legislation is written to favor trade and we are seeing economic summits and other organizations that clearly promote a global economy.

Specialization & Comparative Advantage Adam Smith (1776) “Wealth of Nations” - Concept of Absolute Advantage – If cheaper, trade. Adam Smith (1776) “Wealth of Nations” - Concept of Absolute Advantage – If cheaper, trade. David Ricardo (Early 1800’s) Expands on this idea w/ concept of “Comparative Advantage” – Trade regardless. The underlying benefits will outweigh any marginal cost. David Ricardo (Early 1800’s) Expands on this idea w/ concept of “Comparative Advantage” – Trade regardless. The underlying benefits will outweigh any marginal cost.

Foreign Exchange Markets Countries require that their goods be purchased with their own currency. It is then necessary to have an “exchange” where countries can engage in trading their own currency for that of the trading partners. Countries require that their goods be purchased with their own currency. It is then necessary to have an “exchange” where countries can engage in trading their own currency for that of the trading partners. Exchange Rates – The link between each countries currency. Exchange Rates – The link between each countries currency.

Government & Trade Protective Tariffs – enacted to protect domestic interests, tax on foreign goods. Protective Tariffs – enacted to protect domestic interests, tax on foreign goods. Import Quotas – same basic principle, slightly less harsh than a protective tariff Import Quotas – same basic principle, slightly less harsh than a protective tariff Nontariff barriers – License requirements, basic red tape requirements that might hinder trade Nontariff barriers – License requirements, basic red tape requirements that might hinder trade Export Subsidies – Done in attempt to boost exports Export Subsidies – Done in attempt to boost exports

Reasons for Barriers Protectionist philosophy at home due to political or social pressure may cause some countries to enact such legislation. Protectionist philosophy at home due to political or social pressure may cause some countries to enact such legislation. Essentially, these barriers are still harmful towards the consumer as it limits competition. Essentially, these barriers are still harmful towards the consumer as it limits competition.

Trade Milestones Smoot-Hawley (1930) – Reaction to the Great Depression, now blamed for being a major cause of the Depression. Smoot-Hawley (1930) – Reaction to the Great Depression, now blamed for being a major cause of the Depression. Reciprocal Trade Agreement Acts – Enacted to give President power to reduce tariffs, Favored Nations Clause Reciprocal Trade Agreement Acts – Enacted to give President power to reduce tariffs, Favored Nations Clause G.A.T.T. – 1947 – 1993 G.A.T.T. – 1947 – 1993 N.A.F.T.A N.A.F.T.A W.T.O – Current global organization that promotes trade W.T.O – Current global organization that promotes trade

E.U. (European Union) 15 Member Industrial Block comprised of the following: United Kingdom United Kingdom France France Germany Germany Italy Italy Belgium Belgium Netherlands Netherlands Spain* Spain* Greece* Greece* Austria Austria Finland Finland Sweden Sweden Luxembourg Luxembourg Ireland* Ireland* Denmark Denmark Portugal* Portugal*

Results of the E.U. For the E.U., it has been positive by achieving greater efficiency through geographic specialization. For the E.U., it has been positive by achieving greater efficiency through geographic specialization. Trade partners however face tariffs even though their exports to the E.U. have increased. Trade partners however face tariffs even though their exports to the E.U. have increased. Great Britain, Sweden, & Denmark continue to use own currency however. Great Britain, Sweden, & Denmark continue to use own currency however.