Global Interdependence and Trade Essential Question: Why do nations trade with each other? how can the government play a role in promoting and hindering international trade?

Why do nations trade? Most people are not able to produce everything they need to live. So we engage in trade with others. Imagine how hard (or boring) life would be if you had to grow all of your own food, make your own clothes, build you own home and car, and come up with all of your own entertainment. Most nations deal with this same problem. The USA cannot produce enough bananas to satisfy our demand, so we have to purchase them from other countries. Most nations cannot produce their own cars and airplanes, so they have to buy them from us.

Why do nations trade? Goods that we purchase from other countries are called imports. Goods we sell to other countries are called exports. Because of international trade, we are all globally interdependent: Each nation needs other nations in order to provide all the different goods and services needed for its citizens.

What should nations trade? The USA could produce all of the goods that we need, but we choose to trade because it is cheaper. Nations specialize in certain goods based on comparative advantage: when a nation can produce a good cheaper than another nation can. China and Vietnam can produce sneakers and t-shirts at a lower cost than we can because their labor costs and taxes are less. It is cheaper for Americans to buy shoes and shirts produced in these countries than for us to produce them ourselves.

What should nations trade? Certain items like cars and planes use very expensive equipment and technology to produce. The US has this technology, so we produce cars and sell them to China and Vietnam. China and Vietnam have the comparative advantage in t-shirts, and the USA has comparative advantage in cars.

Balance of Trade We should have a favorable balance of trade. Trade Surplus – when the value of a country’s exports is higher than the value of the country’s imports Trade Deficit – when the value of a country’s imports is higher than the value of the country’s exports Currently, we have been buying more foreign goods than we’ve been selling to other countries. (Trade Deficit = not good!) Balance of Trade

Government Impact on International Trade National governments can have a major impact on domestic production and international trade. Government subsidies: payment for production of a specific good. Allows specific goods to be produced at a lower cost and in higher quantities. Tariffs: Taxes on imports Quotas: Maximum number of a specific good allowed into a country. Quotas and tariffs are designed to protect domestically produced goods.

Government Impact on International Trade Trade Sanctions: Specific goods that are not allowed to be purchased from a specific country. Trade Embargos: When a nation refuses to purchase anything from a specific country. Sanctions and embargos are used to punish a nation for a political or military action. Free Trade Agreements: When two or more nations agree to trade without any restrictions (no tariffs or quotas). Examples: NAFTA, European Union

Potential Problems of Interdependence Political and environmental problems in one country can cause major problems in the United States. Example: If there is a serious hurricane in the Caribbean, sugar and banana crops could be destroyed, causing shortages and higher prices here. Free trade agreements can hurt domestic industries. Example: A major criticism of NAFTA is that companies have moved their factories to Mexico, where labor is cheaper. Americans who worked for these companies lost their jobs.