1. The Export-Import Sector
Chapter 8
The Export-Import Sector

2. Learning Objectives In this chapter we’ll cover:
The basis for international trade.
U.S. imports and exports.
A summing up: C + I + G + Xn.
Specialization and exchange.
The world’s leading trading nations.
World trade agreements and free-trade zones.
Outsourcing and off-shoring.

3. The Basis for International Trade
The basis for international trade is if country A can produce a commodity, product, or service for country B at a lower cost than country B can, country B produces something else and buys the product from country A.
In other words, if you can buy it cheaper than you can make it you buy it.
This maxim is true for individuals and nations.
This is called specialization and exchange.

4. Specialization and Exchange
We have been a major exporter of wheat, corn, and soybeans since colonial times.
Initially, we had an abundance of land.
Eventually we came to have a tremendous stock of farm equipment.
We used to be a major exporter of steel and textiles.
Now other nations produce these more cheaply.
After WWII, we produced more than 60% of the world’s oil supply and exported much of this.
Now, we have exhausted most of our easily extractible reserves and import more than 60% of our oil.
If we didn’t import oil, gasoline could easily be $10 a gallon.
Today, we are a major exporter of computer software and entertainment goods and services.

5. Examples of Specialization and Exchange
Production of Trains and Planes before Specialization
Table 1
Trains
Planes
Algeria 5 10
Zaire
Production of Trains and Planes with Specialization
Table 2
Trains
Planes
Algeria 20
Zaire
Consumption of Trains and Planes with Specialization
Table 3
Trains
Planes
Algeria 10
Zaire
When each country makes what it makes best and trades it, it expands its consumption possibilities.

6. Questions for Thought and Discussion
Can you think of an example of how specialization results in trade?
Can you make three charts illustrating this relationship and show the potential gains from trade?
Are there circumstances that would make specialization a bad idea?

7. U.S. Imports and Exports as percentage of GDP, 1970–2007
Source: Economic Report of the President, 2008.

8. U.S. Balance of Trade, 2005 (in billions of dollars)*
*Numbers may not add up due to rounding.
Source:

9. Outsourcing and Off-Shoring
When a company in the U.S. contracts some of their jobs to other firms in the U.S.
There is no job loss or job gain.
Off-Shoring
When a company in the U.S. contracts some of their jobs to firms outside the U.S.
When jobs are transferred out of the U.S., the unemployment rates goes up.

10. Outsourcing and Off-Shoring (continued)
Since 1970
At least 5 million relatively high paying jobs have been off-shored.
Today, close to 85% of our labor force is employed in the service sector.
Today, less than 1% of American jobs are sent off-shore.
This is something most Americans can live with.
If your job in in this 1%, then this is a different story.

11. A Summing Up: C + I + G + Xn Net Exports = Xn Xn = Exports – Imports
If imports increase or exports decrease, the Xn factor of GDP will be reduced.
If imports decrease or exports increase, the Xn factor of GDP will increase.
Bigger GDP generally means lower unemployment.

12. C + I + G +Xn = GDP
When exports are increased or imports decreased, GDP will grow.
Higher GDP reduces unemployment with a risk of inflation.

13. Questions for Thought and Discussion
How is outsourcing like trade? Are there any differences? Why do people fear outsourcing? Is this economically rational?
Explain and show how exports and imports work in the Keynesian model. Are exports good for GDP? Are imports good for GDP?

14. World Trade Agreements and Free Trade Zones
The North American Free Trade Association (NAFTA)
The Central American-Dominican Republic Free Trade Agreement (CAFTA)
The European Union (EU)
Mercosur
The General Agreement on Trade and Tariffs (GATT)
The World Trade Organization (WTO)

15. CAFTA, The Central American-Dominican Republic Free Trade Agreement
CAFTA includes the Dominican Republic as well as Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.
CAFTA will eventually eliminate all tariffs among these seven nations.

16. NAFTA: The North American Free Trade Agreement
NAFTA was ratified by Congress in 1993.
NAFTA created a free trade area that includes Canada, the United States, and Mexico.
Trade barriers in industrial goods were dismantled.
Agreements on services, investment, intellectual property rights, agriculture, and strengthening of trades rules were included.
There were also side agreements on labor adjustment provisions, protection of environment, and import surges.

17. The European Union (EU)
This free trade association of 15 nations was formed in 1992.
Freight was now able to move anywhere within the EU without checkpoint delays and paperwork.
So-called quality codes were ended.
Workers from any EU country could work in any other member country.

18. The European Union (EU) (continued)
In 1999, 11 EU countries formed the European Monetary Union (now 12 member nations).
The euro was established as a common currency.
Initially, the euro existed along with each country’s own currency.
In 2002, new euro coins and paper money replaced each country’s own national currencies.
This common currency is expected to make trade easier to conduct among participating member nations.

19. Mercosur
Includes, Argentina, Brazil, Paraguay, and Uruguay and associate members Bolivia, Peru, and Chile.
It is the fourth largest market after NAFTA, the EU, Japan, and China.
It was formed in 1991.
It has succeeded in eliminating all internal tariffs while imposing a common external tariff on goods imported from countries outside the union.
However, some trade restrictions still exist, especially between Brazil and Argentina.

20. World Trade Agreements
The General Agreement on Trade and Tariffs (GATT)
GATT was drafted in 1947 and has since been signed by more than 146 nations.
The latest version was ratified by Congress in 1994.
GATT
Reduces tariffs worldwide by an average of 40%.
Lowers other barriers to trade such as quotas on certain products.
Provides patent protection for American software, pharmaceuticals, and other industries.

21. Protecting Intellectual Property and Opening Markets for Services
Will GATT help or hurt the United States?
GATT will, for the first time, protect intellectual property rights like patents, trademarks, and copyrights.
GATT will also open markets for service industries such as accounting, advertising, computer services, and engineering.
These are fields in which Americans excel.

22. Opening Agricultural Markets
Will the GATT help or hurt the United States?
GATT brings agriculture under international trade rules for the first time.
European farm subsidies dwarf those paid to American farmers.
Proportionally, the Europeans will will have to reduce their subsidies a lot more than the U.S., making American crop exports even more competitive.

23. Lowering Tariffs Will GATT help or hurt the United States?
Although some industries will be affected adversely, the positive appears to outweigh the negative.
On the average, foreign countries have more trade restrictions and tariffs on U.S. goods than we have on theirs.
GATT should help the U.S. more than it hurts.

24. Questions for Thought and Discussion
Is trade between the 50 U.S. states a good thing? Is trade with Mexico, Canada, and China beneficial to the U.S.?
What have been the primary features of the different free trade agreements and how has this impacted the U.S. economy?
Is the development of the Euro a good thing for trade in the European Union? Why would a common currency be good for trade?

25. The World Trade Organization (WTO)
The WTO was set up in 1995 as a successor to GATT.
The WTO is based on three major principles:
Liberalization of trade
Nondiscrimination–the most-favored-nation principle
No unfair encouragement of exports

26. Liberalization of Trade
Trade barriers, which were reduced under GATT, should continue to be reduced.
Trade barriers have been falling within free trade zones such as NAFTA and the European Union.

27. Nondiscrimination: The Most-Favored-Nation Principle
Under the most-favored-nation principle, members of WTO must offer one member the same trade concessions as any other member.
This is a lot like when the teacher says that if you bring candy to class, you must bring some for everyone.

28. No Unfair Encouragement of Exports
No unfair encouragement of exports encompasses export subsidies, which are considered a form of unfair competition.
American and European governments have long subsidized their farmers.
This enables the producers to sell their crops well below cost.
This sets the price of agriculture staples so low that small farmers in developing countries can’t compete.
These small farmers are eventually forced off their land by subsidized imports and have no means to survive.

29. The WTO Dispute Settlement Body
The WTO has a Dispute Settlement Body to handle disagreements among member nations
Many politicians in the U.S. have very reluctantly accepted the jurisdiction of the WTO.
The U.S. has won almost all the more than two dozen cases in which the U.S. was the complaining party.
The U.S. has also lost some cases in which other governments were the complaining parties.

30. Objections
Environmentalists argue that elitist trade and economics bodies make undemocratic decisions that undermine national sovereignty on environmental regulation.
Unions charge that unfettered trade allows unfair competition from countries that lack labor standards.
Human rights and student groups say the IMF and the World Bank prop up regimes that condone sweatshops and pursue policies that bail out foreign lenders at the expense of local economies.

31. The debate is not just about “free trade” but also about “fair trade.”
Summary
The debate is not just about “free trade” but also about “fair trade.”
Many Americans, as well as citizens of other leading industrial nations, have strong reservations about ceding some national sovereignty to international organizations.
Especially the WTO
Much concern centers on the possible loss of jobs and the reduction of wages in their countries if their workers were forced to compete with low-wage workers in the poorer countries.
Many earn just 1 or 2 dollars a day.
Is it fair to make American factories, which have relatively high environmental standards, compete with Third World factories that are not similarly burdened?
If the U.S. and other industrial countries are subject to the rules and regulations of the WTO, their own governments would be unable to prevent a flood of cheap imports.

32. Questions for Thought and Discussion
Is your school sweatshirt sewn in a sweatshop? If it is, do school administrators and students bear any responsibility for the abysmal working conditions and measly pay of the workers making their college paraphernalia?
Can the environment be protected under the conditions of free trade? Are we in the race to the bottom in terms of wages, working conditions, and environmental quality because of globalization?