1. NEXT International Trade

2. NEXT Chapter 17: International Trade KEY CONCEPT Economic interdependence involves producers in one nation that depend on producers in other nations to supply them with certain goods and services. WHY THE CONCEPT MATTERS Nations choose to produce some things and trade for others. For example, Japan trades for the raw materials it uses to produce automobiles. It then turns around and trades the automobiles for other goods.

3. NEXT Resource Distribution and Specialization KEY CONCEPTS Nation’s economic patterns based on factors of production it has –patterns change over time; for example, U.S. originally agricultural Specialization occurs when narrow range of products made –increased productivity and profit – economic interdependence—reliance on others for products not made Benefits and Issues of International Trade

4. NEXT Resource Distribution and Specialization Example: Specialization Costa Rica exports bananas; has warm, wet climate bananas need –relatively low agricultural wages are beneficial—production is labor intensive New Zealand exports wool, lamb, and mutton –has temperate climate, water, open grasslands needed for grazing –has low population density, scientific breeding, mechanized processing

5. NEXT David Ricardo: The Theory of Comparative Advantage Example: Trading in Opportunity Ricardo (1772–1823): English economist; lived at turn of 19th century In his time, international trade based on absolute advantage Ricardo showed nations can benefit from comparative advantage –produce products it can make at lower opportunity cost than others

6. NEXT Absolute and Comparative Advantage KEY CONCEPTS Absolute advantage—nation’s ability to make product more efficiently –due to uneven distribution of production factors in different areas Comparative advantage—ability to produce at lower opportunity cost –absolute cost of product not important, just opportunity cost

7. NEXT Absolute and Comparative Advantage Example: Absolute Advantage Australia produces more iron ore and steel than China with same labor –Australia has absolute advantage Before Ricardo, logic held Australia should not trade for either

8. NEXT Absolute and Comparative Advantage Example: Comparative Advantage Law of comparative advantage—countries gain when –produce items they are most efficient at producing –and are at the lowest opportunity cost If Australia’s ratio of steel to iron ore is 1:5 tons and China’s is 1:3 –China has comparative advantage in steel production

9. NEXT Absolute and Comparative Advantage Example: Advantages of Free Trade If China, Australia specialize, set trade ratio steel to iron ore at 1:4 –China gets 4 tons iron ore for 1 of steel, got 3 before –Australia gets 1 ton of steel for 4 of iron ore; cost 5 before Specialization, trade raise nations’ production ratios, world output Increased output is mark of economic growth

10. NEXT International Trade Affects the National Economy KEY CONCEPTS Exports—goods and services produced in one country, sold in others Imports—products produced in one country, purchased by another Costs and benefits of international trade vary by nation –economists examine impact of exports and imports on prices and quantity

11. NEXT International Trade Affects the National Economy Impact 1: Exports on Prices and Quantity If a country begins exporting product, foreign buyers increase total demand –demand curve shifts right, sets higher equilibrium price Higher prices at home offset by more jobs and income –created by production expanded to meet demand

12. NEXT International Trade Affects the National Economy Impact 2: Imports on Prices and Quantity Imports shift supply curve right, lower equilibrium price Lower prices lead domestic producers to offer less of product –improve efficiency, worker productivity, customer service Trade gives consumers increased selection of goods, lower prices Gives producers new markets, chance for more profits

13. NEXT International Trade Affects the National Economy The United States in the World Economy U.S. is world’s largest exporter; exports more services than imports –tourism, transportation, architecture, construction, information systems Also world’s largest importer; imports more goods than it exports –oil and refined oil products, machinery, raw materials Main trading partners: Canada, China, Mexico, Japan

14. NEXT Reviewing Key Concepts Explain the differences between the terms in each of these pairs: specialization and economic interdependence absolute advantage and comparative advantage export and import

15. NEXT Barriers to Trade KEY CONCEPTS Most nations pass trade limit laws to protect domestic industries Laws lead to higher prices, economic retaliation by other nations In long run, industries can only be saved by becoming competitive Trade restrictions are basically a political issue Trade Barriers

16. NEXT Barriers to Trade Types of Trade Barriers Trade barrier—law limiting free trade among nations; most mandatory Quota—limits on the amount of a product that can be imported Dumping—sale of product in other country at lower price than at home –hurts domestic producers; gives consumers lower price

17. NEXT Barriers to Trade Types of Trade Barriers Tariff—fee charged for goods brought from another country Revenue tariff—tax on imports, specifically to raise money –rarely used today Protective tariff—tax on imported goods to protect domestic products –raise price of goods more cheaply elsewhere

18. NEXT Barriers to Trade Types of Trade Barriers Voluntary export restraint—nation’s self-imposed limit on exports – VER used to avoid a quota or tariff Embargo—law that cuts most or all trade with a specific country Informal trade barriers—licenses, environmental, health, safety laws

19. NEXT The Impact of Trade Barriers KEY CONCEPTS Trade barriers may temporarily save domestic jobs –lack of competition promotes inefficiency, higher prices Trade limits can lead to a trade war—succession of increasing trade barriers between nations

20. NEXT The Impact of Trade Barriers Impact 1: Higher Prices Trade barriers raise prices or keep them high In 2000, U.S., Japan set tariffs on South Korean semiconductor chips –Korean and domestic chip prices went up in U.S. and Japan

21. NEXT The Impact of Trade Barriers Impact 2: Trade Wars Trade wars often result from disagreements over quotas or tariffs Can result over other issues –EU banned U.S hormone-treated beef, U.S. set 100% tax on many EU foods

22. NEXT Arguments for Protectionism KEY CONCEPTS Protectionism—use of trade barriers to protect domestic industries Purpose to protect jobs, national security, infant industries –new industries unable to compete with larger, established competitors

23. NEXT Arguments for Protectionism Argument 1: Protects Domestic Jobs? U.S. workers upset over jobs lost to countries with cheaper labor Trade barriers generally protect inefficient production, higher prices Laid-off voters influenced government to fund job training programs

24. NEXT Arguments for Protectionism Argument 2: Protects Infant Industries? Protection expected to allow new industries to grow until competitive –used by developing nations to keep out goods from developed nations Critics say freedom from competition maintains perpetual infancy –and need for perpetual support

25. NEXT Arguments for Protectionism Argument 3: Protects National Security? National security affects industries considered vital for safety –energy industry considered vital by most nations Political differences exist over which industries are truly vital –2006 Dubai forced to abandon deal to operate several port facilities –critics doubted security concerns, worried over interference with trade

26. NEXT Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: trade barrier and quota tariff and voluntary export restraint trade war and protective tariff infant industries and protectionism

27. NEXT Foreign Exchange KEY CONCEPTS Trade needs way to set relative value of trading nations’ currencies Foreign exchange market—where different currencies bought and sold –network of major commercial, investment banks linking world economies Foreign exchange rate—price of a currency in other currencies Measuring the Value of Trade

28. NEXT Foreign Exchange Rates of Exchange In 1800s, early 1900s, gold standard determined value of currencies – fixed rate of exchange—nation’s currency constant in relation to others Post–World War II to 1970s, currencies pegged to USD—1 oz gold = $35 Flexible exchange rate—changes along with currency’s supply, demand –regulates foreign exchange, balancing imports and exports

29. NEXT Foreign Exchange Strong and Weak Currencies Trade-weighted value of the dollar—international value of U.S. dollar –measured by the Fed Weak dollar makes imported goods more expensive –easier for domestic goods to compete –exports become cheaper, easier to sell abroad

30. NEXT Balance of Trade KEY CONCEPTS Balance of trade—difference between value of imports and exports Balance of payments—all transactions between nation and rest of world –includes government and private transactions, both trade and investment Trade surplus—nation exports more than imports; favorable balance Trade deficit—nation imports more than exports; unfavorable balance

31. NEXT Balance of Trade Example: U.S.-China Trade China has undergone one of most rapid industrializations in history Has pegged yuan at fixed rate versus dollar, keeping yuan weak Made U.S. top destination for Chinese exports –China has record trade surplus of $200 billion with U.S.

32. NEXT Balance of Trade Example: The U.S. Trade Balance 1770–1870: U.S. had deficit in products; surplus in capital investment 1870–1920: paying back debts; was exporting more than importing 1920–1945: had surplus in exports, deficit in foreign investment 1945–1980: had deficit in merchandise; deficit in foreign investments Today has surplus of foreign investment; merchandise deficit

33. NEXT Reviewing Key Concepts Explain the differences between the terms in each of these pairs: foreign exchange market and foreign exchange rate fixed rate of exchange and flexible rate of exchange trade surplus and trade deficit

34. NEXT Regional and World Organizations KEY CONCEPTS Free-trade zones—areas where nations trade without protective tariffs Customs unions—agreements that abolish trade barriers among members –establish uniform tariffs for non-members Some trade groups called common markets Modern International Institutions

35. NEXT Regional and World Organizations Group 1: The European Union 1957, six European nations created Common Market; became EU in 1993 European Union—economic and political union; no barriers for members Euro—currency of the EU, used by 12 of 27 member nations EU has 20% of global exports and imports, world’s biggest trader –sets low tariffs; wants to remove all barriers to international trade

36. NEXT Regional and World Organizations Group 2: NAFTA NAFTA—North American Free Trade Agreement of 1994 –phases out trade barriers between Canada, Mexico, U.S. in 15 years Has led to specialization, efficiency, expanded markets, new jobs –also competitive advantage over EU and Japan All countries have had economic gain; trade has more than doubled

37. NEXT Regional and World Organizations Group 3: Other Regional Trade Groups Various groups formed to specialize, promote free trade, stay competitive –include Mercosur, ASEAN, APEC, SADC OPEC—Organization of Petroleum Exporting Countries is a cartel –group of producers controls production, pricing, marketing of a product

38. NEXT Regional and World Organizations Group 4: World Trade Organization In 1944, Allied nations formed General Agreement on Tariffs and Trade World Trade Organization—formed in 1995 by nations that follow GATT –negotiates, administers trade agreements; resolves disputes –monitors policies of 149 members; gives support to developing countries WTO successful to varying degrees

39. NEXT Multinationals Bring Changes to International Trade KEY CONCEPTS Multinational corporations affect many different nations –must deal with different sets of tariffs, labor restrictions, taxes –often bring jobs and technology to developing nations –boost overall levels of international trade

40. NEXT Multinationals Bring Changes to International Trade International Trade Within Multinationals Intrafirm trade is trade between various divisions of a multinational –exchange of goods between two parts of the company –coordination of production between parts of the multinational Materials or parts sent to overseas affiliate count as exports –intrafirm imports count as imports in balance of trade

41. NEXT Multinationals Bring Changes to International Trade Example: A Multinational Telecom Corporation Worldwide Cellular is U.S.-based multinational –mines raw material in Australia –manufactures phones in South Korea –markets phones in Europe –provides customer service from India

42. NEXT Reviewing Key Concepts Explain the relationship between the terms in each of these pairs: free-trade zone and customs union EU and NAFTA OPEC and cartel

43. NEXT Analyzing Tariffs—Who Wins and Who Loses? Background The United States has had tariffs on sugar since the days of the early republic. In recent WTO talks, less-developed countries have objected to the lack of market access for their goods and their price disadvantage. What’s the Issue How do the trade barriers set up by the U.S. government affect producers (both foreign and domestic) and consumers? Thinking Economically Which argument for protection does document C seem to make? Is this argument economically valid? Explain. Is the difference in price shown in document B an unavoidable outcome of the program outlined in document A? Explain. How does U.S. government intervention in the sugar industry limit the functioning of the economy as a free market? Use examples from the documents in your answer.