1. Please listen to the audio as you work through the slides.
International Trade
Please listen to the audio as you work through the slides.

2. The United States in the Global Economy
Examine trade flows and the financial flows
That pay for them.
What is the extent and pattern of
International trade?
How much has it grown?
The United States in the Global Economy

3. Learning objectives
Students should be able to thoroughly and completely explain:
The relative position of the United States in the global economy and how the U.S. is linked to the rest of the world.
Why the rapid growth in trade of the past 4 decades.
The depreciation of the dollar and its impact on U.S. GDP.
The appreciation of the dollar and its impact on U.S. GDP.
The types of trade barriers and the evolution of trade since 1930.

4. Interesting book about the implications of European
Union regulations on the US Economy.
Exposed: The toxic Chemistry of Everyday Products
And what’s at stake for American Power.
By Mark Schapiro

5. The Circular Flow Revisited
Import & export
Resource
Market
Money flows
Money Income
Costs
Resources
Input Factors
Expenditures
Resources
Goods &
Services
Goods &
Services
Rest
Of the
World
Businesses
Government
Households
Net Taxes
Net Taxes
Goods &
Services
Expenditures
Goods & Services
Goods & Services
Import & export
Money flows
Product
Market
Revenue
Consumption
4-5

6. International Linkages
United
States
Economy
Other
National
Economies
Goods & Services
Capital & Labor
Information & Technology
Money
5-6

7. U.S. Imports and Exports Billions of dollars, 2007
We depend on foreign markets to buy our - Rice, wheat, cotton, tobacco
We depend on others to provide us with – bananas, cocoa, coffee, nickel, tin, natural rubber
Exports
Imports
Chemicals
Consumer Durables
Agricultural Products
Semiconductors
Computers
Generating Equipment
Automobiles
Aircraft
Medical Equipment
Fuels and Lubricants
$94.1
70.9
77.6
50.2
42.9
41.5
43.6
48.6
32.0
47.7
Petroleum
Automobiles
Household Appliances
Computers
Metals
Clothing
Consumer Electronics
Generating Equipment
Chemicals
Aircraft
$331.0
133.8
112.1
104.0
115.7
86.3
94.7
55.0
56.2
34.4
Source: Department of Commerce Data
5-9

8. U.S. Imports and Exports Goods by area – 2007 in billions of dollars
Exports to
Value
Imports from
Value
Canada $250
European Union
Mexico
China
Japan
OPEC countries
All other
TOTAL $1149
Canada $347
European Union
Mexico
China
Japan
OPEC countries
All other
TOTAL $1965
Imports Exceed Exports by $816 Billion
Source: Survey of Current Business, April 2006
5-10

9. Why the rapid trade growth?

10. Transportation – Standard size shipping containers
Global transportation costs fell, made it more economical to move
Production to foreign countries and import the finished goods.

15. Why the rapid trade growth?
Communications Technology – High bandwidth Internet
Greatly contributes to the shift of jobs from U.S.
Participants developed more to sell
US, Japan, Canada, Russia, France, Germany, Italy, UK, (G8 countries)
Growth of Multinational Corporations
General Decline in Tariffs
Growing Participants – China, Taiwan, South Korea, Singapore, Indonesia, India
Collapse of Communism

16. Specialization and Comparative Advantage
Basic Principle – specialization helps nations reduce the cost of getting the goods & services they desire.
Comparative Advantage – producing a product at lower opportunity cost than a trading partner
Absolute Advantage – A country uses fewer resources to produce a good than another country does.
Gains from Specialization & Trade – economic growth and improved resource allocation

17. Exchange Rates One U.S. dollar will buy January 2008
39.17 Indian rupees
.51 British pounds
1.01 Canadian dollars
10.94 Mexican pesos
1.12 Swiss francs
.68 European euro
Japanese yen
South Korean won
6.42 Swedish kronors
5-19

18. The Foreign Exchange Market Countries and others buy and sell currency – why?
Dollar – Yen Market P Sy
Exchange Rate:
$.01=¥1
.01
Dollar price of 1 yen Dy Qe Q
Quantity of yen
5-20

19. The Foreign Exchange Market
A Competitive Market – large # of sellers and buyers, standard product (currency)
Linkages to All Domestic and Foreign Prices
Dollar-Yen Market – you want to be paid in your own currency.
Dollar price of yen
Yen price of dollars
Changing Rates:
Increased US demand for Japanese goods increases the demand for yen and raise the dollar price of yen.

20. Important Macroeconomic Relationship
GDP = C + I + G + Net Exports, where
C = Consumption spending
I = Investment spending
G = Government Spending
Net Exports = Exports – Imports
When Net Exports increase – GDP increases
When Net Exports decrease – GDP decreases

21. The Foreign Exchange Market
Depreciation of the dollar vs. the yen
Increase in U.S. demand for Japanese goods & services leads to increased demand for yen
Dollar price of yen rises (depreciation of the dollar)
Takes more dollars to buy yen.
International value of the dollar declines
Dollar gets weaker relative to other currency
Japanese goods become more expensive (bad 4 them / good 4 us)
US consumers shift spending to less expensive sources
US goods become cheaper to Japan and
Their purchases of US goods go up (good for us / bad for them)
Imports decrease and Exports increase = Net Exports rise!
Dynamic process!

22. The Foreign Exchange Market
Appreciation of the dollar vs. the yen
An increased Japanese demand for US goods leads to increased supply of yen to pay for the goods.
The dollar price of yen declines (appreciation of the dollar)
Takes fewer dollars to buy yen
Dollar gets stronger relative to other currency
Japanese goods become less expensive to US (good for them)
US imports of Japanese products go up
US exports to Japan go down. (bad for us)
Imports increase and Exports decrease – Net Exports fall!
Again a dynamic process!

23. The Foreign Exchange Market
Depreciation of the dollar vs. the yen = Appreciation of the yen vs. the dollar
Takes more dollars to buy yen
U.S. imports from Japan go down and exports to Japan go up
U.S. net exports go up
Takes fewer yen to buy dollars
Japanese imports from U.S. go up and exports to the U.S. go down
US net exports go up
US gdp goes up
Appreciation of the dollar vs. the yen = Depreciation of the yen vs. the dollar
Takes fewer dollars to buy yen
U.S. imports from Japan go up and exports to Japan go down
Takes more yen to buy dollars
Japanese imports from U.S. go down and exports to the U.S. go up
US net exports go down (US gdp goes down)

24. Protect domestic producers
Government & Trade
Trade Impediments
Protect domestic producers
Protective Tariffs
Shield domestic producers from foreign Competition.
Import Quotas
Limits on quantities imported
Nontariff Barriers (watch this later)
Any law of policy that is not a tariff, but affects trade.
Product quality, environmental, health, labor standards that might negatively impact businesses involved in international trade.
Export Subsidies
Government pays domestic producers
Lowers their production costs so they can lower their prices and sell more exports. U.S. Farmers, who else?

25. Multilateral Trade Agreements Free-trade Zones
Government & Trade
Trade issues
Multilateral Trade Agreements
Free-trade Zones
Smoot-Hawley Tariff Act

26. Government & Trade 1930 - Smoot-Hawley Tariff Act
The growth of trade
Smoot-Hawley Tariff Act
Lead to high global tariffs and higher U.S. unemployment rates
Reciprocal Trade Agreements Act
Negotiating Authority to the President
Lead to Generalized Tariff Reductions
Most-Favored-Nation Clauses
Agreements to treat each other equally

27. Government & Trade
General Agreement on Tariffs and Trade (GATT) – 23 nations
A forum for trade negotiations
Reduced tendency for war
Many trade agreements were created
1979 Tokyo Round of GATT
More focus on “nontariff barriers”
Onerous customs procedures, mountains of paperwork required to import goods, subsidies for domestic industries, etc.
Expanded “nontariff barriers to include environmental laws, food-safety regulations, etc.

28. Government & Trade 1986 Uruguay Round of GATT WTO Mission
World Trade Organization (WTO) 145 nations
157 members on 24 August 2012
New direction, new focus
WTO Mission
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.
At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.
The goal is to help producers of goods and services, exporters, and importers conduct their business.

30. World Trade Organization
Rules
Agreements signed by members
Governing trade in goods, services, intellectual property, etc.
Countries agree on issues: antidumping, subsidies, product standards, intellectual property, etc.
Dispute resolution process
Rules, procedures, etc.
Appeals process
Impact on U.S. policy
Internal policy must adhere to the WTO agreements
Loss of freedom

31. A Case that impacted American Citizens
Case: U.S. weakens clean air rule to implement WTO Order
Challenge by Venezuela and Brazil.
WTO dispute panel ruled in 1996 that U.S. Clean Air Act
regulations were in violation of WTO rules.
U.S. instructed by the WTO to amend its gasoline cleanliness
regulations, which it did!

32. A Case that impacted people in the EU
U.S. pressures EU to abandon high standards for curtailing Electronics
Industry Pollution
The American Electronics Association (3000 member companies)
used the WTO to attack a proposed EU directive to control electronics
industry pollution. Would force electronics companies to be responsible
for their pollution.
Summer of 1999, the EU proposed to revise the directive, eliminating
Key provisions on recycling and reversing the bans on some hazardous
substances.

33. Five Years of Reasons to Resist Corporate Globalization
The WTO:
Five Years of Reasons to Resist Corporate Globalization
By: Lori Wallach, Michelle Sforza
Amazon and BN
A very readable book for those interested in learning more.

34. This is a crude measure of success and failure; it doesn't address the relative importance of the different cases, or the nature of the negotiated solutions.

35. Government and Trade 1993 The European Union (EU) 27 countries
The growth of trade
1993 The European Union (EU) countries
The EU Trade Bloc – Free trade zone
The Euro (23 countries use the Euro)
ECB – European Central Bank

36. Countries Using the Euro
11) Italy 12) Kosovo 13) Luxembourg 14) Malta 15) Monaco 16) Montenegro 17) Netherlands 18) Portugal 19) San Marino 20) Slovakia 21) Slovenia 22) Spain 23) Vatican City
1) Andorra 2) Austria 3) Belgium 4) Cyprus 5) Estonia 6) Finland 7) France 8) Germany 9) Greece 10) Ireland

37. European Union Countries

38. Government and Trade
1994 North American Free Trade Agreement (NAFTA) – Canada, US, Mexico free trade zone
Implications
Regional Trade Agreements
The European Union
North American Free Trade Agreement,
FTAA – Free Trade Area of the Americas
Association of Southeast Asian Nations
South Asian Association for Regional Cooperation
Common Market of the South (MERCOSUR),
Australia-New Zealand Closer Economic Relations Agreement,
CAFTA – Central America Free Trade Agreement

39. Government and Trade
2001 The Doha Round of the WTO (Qatar) – Agriculture focus
Increased Global Competition
Globalization – good or bad thing?

40. Key Terms multinational corporations comparative advantage
Reciprocal Trade Agreements Act
most-favored-nation clauses
General Agreement on Tariffs & Trade (GATT)
World Trade Organization (WTO)
Doha Round
European Union (EU)
trade bloc
euro
North American Free Trade Agreement (NAFTA)
multinational corporations
comparative advantage
terms of trade
foreign exchange market
exchange rates
depreciation
appreciation
protective tariffs
import quotas
nontariff barriers
export subsidies
Smoot-Hawley Tariff Act