International Trade
Please listen to the audio as you
work through the slides.
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
Learning objectives
Students should be able to thoroughly and completely explain:
1.
2.
3.
4.
5.
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.
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
Import & export
Money flows
The Circular Flow Revisited
Resource
Market
Expenditures
Resources
Goods &
Services
Government
Households
Net Taxes
Expenditures
Goods &
Services
Product
Market
4-5
Import & export
Net Taxes
Rest
Of the
World
Money flows
Businesses
Goods &
Services
International Linkages
Goods & Services
Capital & Labor
United
States
Economy
Information & Technology
Other
National
Economies
Money
5-6
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
$94.1
Chemicals
70.9
Consumer Durables
77.6
Agricultural Products
50.2
Semiconductors
Computers
42.9
Generating Equipment 41.5
Automobiles
43.6
Aircraft
48.6
Medical Equipment
32.0
47.7
Fuels and Lubricants
Imports
Petroleum
$331.0
Automobiles
133.8
Household Appliances 112.1
Computers
104.0
Metals
115.7
Clothing
86.3
Consumer Electronics
94.7
Generating Equipment 55.0
Chemicals
56.2
34.4
Aircraft
Source: Department of Commerce Data
5-9
U.S. Imports and Exports
Goods by area – 2007 in billions of dollars
Exports to
Canada
European Union
Mexico
China
Japan
OPEC countries
All other
TOTAL
Value
Imports from
Value
$250
242
136
65
61
49
346
Canada
European Union
Mexico
China
Japan
OPEC countries
All other
TOTAL
$347
356
214
322
146
174
436
$1965
$1149
Imports Exceed Exports by $816 Billion
Source: Survey of Current Business, April 2006
5-10
Why the rapid trade growth?
•Transportation – Standard size shipping containers
Global transportation costs fell, made it more economical to move
Production to foreign countries and import the finished goods.
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
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
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
109.87 Japanese yen
937.38 South Korean won
6.42 Swedish kronors
5-19
The Foreign Exchange Market
Countries and others buy and sell currency – why?
Dollar – Yen Market
Dollar price of 1 yen
P
Exchange Rate:
$.01=¥1
Sy
.01
Dy
Qe
Quantity of yen
Q
5-20
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.
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
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!
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!
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)
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.
•http://www.tradebarriers.org/ntb/non_tariff_barriers
•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?
Government & Trade
Trade issues
• Multilateral Trade Agreements
•Free-trade Zones
•Smoot-Hawley Tariff Act - 1930
Government & Trade
The growth of trade
• 1930 - Smoot-Hawley Tariff Act
•Lead to high global tariffs and higher U.S.
unemployment rates
• 1934 - Reciprocal Trade Agreements Act
•Negotiating Authority to the President
•Lead to Generalized Tariff Reductions
•Most-Favored-Nation Clauses
• Agreements to treat each other equally
Government & Trade
• 1947 - 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.
Government & Trade
• 1986 Uruguay Round of GATT
– 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.
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
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!
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.
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.
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.
Government and Trade
The growth of trade
• 1993 The European Union (EU)
27 countries
• The EU Trade Bloc – Free trade zone
• The Euro (23 countries use the Euro)
• ECB – European Central Bank
Countries Using the Euro
• 1) Andorra
2) Austria
3) Belgium
4) Cyprus
5) Estonia
6) Finland
7) France
8) Germany
9) Greece
10) Ireland
• 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
European Union Countries
Government and Trade
• 1994 North American Free Trade Agreement (NAFTA) –
Canada, US, Mexico free trade zone
– Implications
• Regional Trade Agreements
–
–
–
–
–
–
–
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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
Government and Trade
• 2001 The Doha Round of the WTO (Qatar) –
Agriculture focus
• Increased Global Competition
• Globalization – good or bad thing?
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
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)