Transcript Trade Barriers

International Trade
Voluntary Trade Creates Wealth
Reasons for International
Trade

Possession of special resources
– Raw materials, skilled labor, geography

Economic advantages
– Comparative & Absolute Advantage

Politics
– Trade organizations, agreements
– OPEC, NAFTA
Possession of special
resources

Unique Climate or Terrain
– Hawaii – pineapple, Wisconsin - cheese

Valuable Raw Materials
– Middle East – Oil, South Africa - Diamonds

Skilled Labor Force
– U. S. – Engineers, India – Software writers

Capital Resources
– Developed Countries, Tools - inventions

Favorable Geographic Location
– Resources, Harbors, Transportation
International Trade
Economic Advantages
Comparative Advantage
Do what you are best at.
Absolute Advantage
When best at compared to others.
ideas of David Ricardo
Hatfields vs McCoys
Should they Trade?

Hatfields
Corn 8 hours
Cloth 10 hours

McCoys
Corn 15 hours
Cloth 12 hours
Who has an absolute advantage in CORN production?
Who has an absolute advantage in CLOTH production?
Who has a comparative advantage in CORN production?
Who has a comparative advantage in CLOTH production?
If the Hatfields and McCoys specialize & trade
will they both gain?
Trade

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Specialization raises standard of living
Specialization makes us
interdependent
Top Trading Partners 2010
Merchandise Trade - Billions $ thru Oct
Country
Canada
China
Mexico
Japan
Germany
U.K.
S. Korea
France
Taiwan
Brazil
Exports
207.4
72.3
134.0
49.9
39.5
40.5
32.2
21.8
20.9
29.3
Imports
229.4
299.0
190.0
98.0
67.7
41.1
39.9
31.6
29.4
19.7
Total
436.8
371.3
323.9
147.8
107.2
81.6
72.1
53.4
50.3
49.0
Percent
16.6
14.1
12.3
5.6
4.1
3.1
2.7
2.0
1.9
1.9
Top Trading Partners 2008
Country
Exports
Canada
$225.2
China
$61.0
Mexico
$129.4
Japan
$56.9
Germany
$46.5
U.K.
$46.6
S. Korea
$30.5
France
$24.7
Saudi Arabia $9.8
Venezuela
$10.3
Imports
$293.3
$284.4
$186.2
$119.4
$83.3
$50.6
$41.2
$37.3
$49.6
$46.6
Total
$518.5
$345.5
$315.6
$176.3
$129.7
$97.2
$71.7
$62.0
$59.3
$56.9
Percent
17.7%
11.8%
10.8%
6.0%
4.4%
3.3%
2.4%
2.1%
2.0%
1.9%
Top Trading Partners 2007
Country Exports
Canada 248.9
China
65.2
Mexico
136.5
Japan
62.7
German
49.7
y
Imports
313.1
321.5
210.8
145.5
Total
562.0
386.7
347.3
208.1
Percent
18.0%
12.4%
11.1%
6.7%
94.4
144.0
4.6%
United K
50.3
56.9
107.2
3.4%
Korea, S
France
Taiwan
34.7
27.4
26.4
47.6
41.6
38.3
82.3
69.0
64.7
2.6%
2.2%
2.1%
Top Trading Partners 2006
Country
Canada
China
Mexico
Japan
Germany
U.K.
S. Korea
France
Taiwan
Exports
$192.8
$45.2
$112.3
$49.6
$34.0
$38.0
$26.9
$20.4
$18.9
Imports
$254.8
$235.8
$166.0
$122.7
$73.5
$44.6
$38.3
$30.8
$31.9
Total
$447.6
$281.0
$278.3
$172.4
$107.5
$82.6
$65.1
$51.2
$50.8
Percent
18.6%
11.7%
11.6%
7.2%
4.5%
3.4%
2.7%
2.1%
2.1%
International Trade
Politics and Mechanics
Protectionism

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The viewpoint that trade with a foreign
country will do harm to the national
economy.
Must “protect” country from foreign
competition.
Difficult to apply standards of one
country to another.


Can/should we
apply our
standards or
moral
viewpoint to
other
countries?
ethnocentrism
Protectionism Arguments

National Security
– Self-sufficient in military & defense goods

Agricultural Self-sufficiency
– Nation should feed itself

Employment Protection
– Prevent job loss to imports
Protectionism Arguments

Infant / Emerging Industry
– New industries need help until they become
efficient

Wage Protection
– Competition from “cheap foreign labor”

Diversified Economy
– Don’t want to be dependent on single product
Trade Barriers
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Used to “protect” domestic economy
imposition of some sort of cost on trade that
raises the price of the traded products
When two or more nations repeatedly use
trade barriers against each other a trade
war results.
Economists generally agree that trade
barriers are detrimental and decrease
overall economic efficiency
Trade Barriers

Tariff
– Tax on imports
Trade Barriers

Tariff
– Tax on imports
– Raises Price
– Lowers Quantity
Trade Barriers

Quota
– Limits the number
of imports
– Raises prices
Trade Barriers

Embargo
– No trade at all
– Specific country

Cuba, North Korea
– Specific products - imports/exports

Military Goods –Arms
– ITAR - International Traffic in Arms Regulations (UN)
Endangered Species
 Drugs, narcotics
 Technology
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Current US Trade
Embargoes
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Cuba
Iran
North Korea
Sudan
Syria
Burma/Myanmar
Belarus
Zimbabwe
Ivory Coast
Congo
State Dept list
Trade Barriers

Product standards
– Quality control on imports
– Customs and cultural mores
Electric power system
 Driving on right side of road
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Trade Barriers

Subsidy
– Aid to domestic producers
– Lowers cost to consumer
– Preserves jobs
Most Favored Nation
Normal Trade Relations 1998
– Gives country the lowest trade barriers.
– Reciprocal or bilateral agreement
– WTO members
– Exceptions are made
– Political tool
Trade Organizations

World Trade Organization (WTO)
– International governing body – main treaty
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Regional Organizations
– NAFTA, European Union
– World regions

Product Organizations
– OPEC, Coffee Exporters
Current US Free Trade
Agreements
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NAFTA – Canada & Mexico
Australia
Bahrain
Chile
Costa Rica
Dominican Republic
El Salvador
Guatemala
Honduras
Israel
Jordan
Morocco
Nicaragua
Singapore
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Pending
–
–
–
–
–
Peru
Columbia
Oman
Panama
South Korea
– Need
Congressional
Approval
Foreign Exchange

Exchange rate
– How much of one currency another buys

One dollar = 2 Euros
– Units of Measure

One Mile = 1760 yards = 5280 feet
Foreign Exchange

Fixed Exchange Rates
– Bretton Woods – Gold Standard
– Pegged or Tied Exchange Rates

Floating Exchange Rates
– Supply & Demand in World Market
– Stronger – can buy more units of currency
– Weaker – can buy less units of currency
– Change in relative position not good/bad
Dollar vs French Franc
Current Exchange Rate 4.58
Date
Ex Rate
S/W?
Stronger
Jan ’80
4.04
Weaker
Feb ’85
10.09
Weaker
Dec ’96
5.23
Stronger
Dec ’07
4.55
Weaker
Nov’08
5.15
Stronger
Oct’09
4.37
Dollar vs British Pound
Current Exchange Rate
.6219
1 British Pound Equals $1.61
Date
Ex Rate Stronger
Jan ’80
.441
Weaker
Feb ’85
.915
Stronger
Dec ’96
.601
Stronger
Dec ’07
.495
Weaker
Nov’08
.665
Stronger
Oct ’09
.603
Dollar vs Euro
Current Exchange Rate
.6984
One Euro Equals $1.43
Date
Ex Rate
Dec ’96
.804
Dec ’07
.693
Nov’08
.786
Oct ’09
.6668
Weaker
Stronger
Weaker
Stronger
Dollar vs Yen
Current Exchange Rate
90.936
Date
Ex Rate
Jan ’80
237.88
Feb ’85
260.48
Dec ’96
113.91
Dec ’07
113.36
Nov’08
97.07
Oct’09
89.95
Weaker
Weaker
Weaker
Weaker
Weaker
Stronger
Dollar vs Mexican Peso
Current Exchange Rate
12.82
Date
Ex Rate
Jan ’80
22.84
Feb ’85
236.05
Mexico devalues it’s
currency
Dec ’96
7.85
Dec ’07
10.82
Nov ’08
13.84
Stronger
Stronger
Stronger
Stronger
Weaker
Weaker
Dollar vs Canadian Dollar
Current Exchange Rate
$1.06
Date
Ex Rate
Jan ’80
1.16
Feb ’85
1.35
Dec ’96
1.36
Dec ’07
1.02
Nov’08
1.22
Oct ‘09
1.04
Weaker
Weaker
Weaker
Stronger
Weaker
Stronger
Benefit from Strong or
Weak $ ?
FARMERS
U.S. TOURISTS abroad
CLOTHES BUYERS
CAR BUYERS
AUTOWORKERS
ENTERTAINERS
JOB SEEKERS
WEAK
STRONG
STRONG
STRONG
WEAK
WEAK
DEPENDS