Chapter 6: The United States in the Global Economy Several economic flows link the US economy with that of other nations: Goods & Services Capital & Labor (Resource) Information & Technology Financial

U.S. & World Trade U.S. is the world’s leading trading nation U.S. depends on imports for many food items; raw silk; diamonds; natural rubber; oil U.S. exports agricultural, chemical, aircraft, machine tools, coal & computer products U.S. imports >> exports: TRADE DEFICIT

U.S. Trading Partners Most U.S. trade is w/ industrialized countries Canada is largest trading partner Sizeable trade deficits: Japan China

U.S. Trade Deficits Must be financed by borrowing or earning foreign exchange Selling U.S. assets through foreign investment in the U.S. U.S. borrows from citizens of other countries U.S. is world’s largest debtor nation

Trade Growth Factors Transportation technology improvements Communication technology allows traders to make deals in trade & global finance very easily Trade barriers have decreased since WWII Trend toward free trade continues

Comparative Advantage David Ricardo: It benefits a person/country to specialize & exchange even if that person/nation is more productive than potential trading partners in all economic activities. Specialization should take place if there are RELATIVE cost differences in production of different items A nation has a comparative advantage in some product when it can produce that product at a lower opportunity cost than a potential trading partner Specialization & trade can have the same effect as an increase in resources or technological progress

Government & Trade Protective Tariffs: Excise taxes or duties on imported goods used to protect domestic producers, making foreign goods more expensive Import Quotas: Maximum limits on number or total value of specific imports. Nontariff Barriers: Licensing requirements; unnecessary, bureaucratic “red tape” Export Subsidies: Promote sale of products abroad.

Why do governments enact trade barriers? Misunderstanding the Gains from Trade Don’t understand benefits from trade Only see damage in domestic industries that can’t compete successfully w/ imports Political considerations Costs to Society: Harm domestic consumers with higher than world prices for protected goods.

World Trade Organization (WTO) WTO oversees trade agreements & rules on trade disputes for 140 nations. Criticized for having rules crafted to expand trade & investment at expense of workers & environment Praised for promoting free trade as means of elevating output, income, and higher SOL

European Union Initiated as Common Market in 1958 Now has 25 member nations (as of May 2004) Trade Bloc: Group of countries having common identity, economic interests, and trade rules Euro: common currency among most EU countries

North American Free Trade Agreement (NAFTA) Free Trade Zone established in 1993 between Canada, U.S. & Mexico Critics feared loss of American jobs to cheaper Mexico Results: Increased domestic employment Reduced unemployment Increased SOL

Chapter 6 Study Questions 2: U.S. & World Trade 10: Multilateral Trade Agreements