Table of Contents:

Short Introduction of the Current Crisis……………………………………………..2

Trade drivers………………………………………………………………………………2

Main trade areas of the United

States………………………………………………..4

Trade and Economy in the

USA………………………………………………………..5

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Trade Policy of the USA during the
Crises

Short introduction of the Current Crises

The biggest problem of the present is the crises started in 2007. It is a financial crises, which
is caused by a liquidity shortfall in the banking system of the United States, which resulted
several collapses of large financial institutions. The first bankruptcies occurred in summer
2007, and these fails continued in 2008 with the collapse of Freddie Mac, Lehman Brothers
and more.
The crises can be attributed to a number of factors pervasive in both housing and credit
markets, factors which emerged over a number of years. Causes proposed include the inability
of people to make their mortgage payments, due primarily to adjustable-rate mortgages
resetting, borrowers overextending, predatory lending, speculation and overbuilding during
the boom period, risky mortgage products, high personal and corporate debt levels, financial
products that distributed and perhaps concealed the risk of mortgage default, monetary policy,
international trade imbalances and government regulation.
As the crises emerged in the US subprime, it spread to other financial markets, and
transmitted through the financial channel, so it became an international problem.
The Wall Street, the mainstream media and many economists, such as Nouriel Roubini,
Nariman Behravesh, Kenneth Rogoff and György Soros, have reached the consensus that this
is the worst financial crises since the Great Depression of the 1930s. Let me paraphrase
György Soros, who exactly said “the world faces the worst finance crises since WWII”.
From 2009, a new economic period started, a huge and extended recession, which is going on
nowadays as well.

Trade drivers
The main concept of trade drivers is that there isn’t a single, well-structured theory. Since
countries are different from each other in many perspectives, they all have their own empirical
evidence, and they make decisions to achieve different goals. On the other hand, consumers

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are mostly the same everywhere in the world, their needs are similar irrespective of where
they reside: get the highest quality product or service as cheap and fast as possible.
Based on these two statements, there are different trade types used:
- inter-industry trade
- intra-industry trade

Inter-industry trade is a trade in which a country's exports and imports are in different
industries. The absolute driver of inter-industry trade is comparative advantage, the ability to
produce a good at lower costs, relative to other goods, compared to another country. As it is
mentioned in the lecture slides, comparative advantage always exists because opportunity
costs are different in every country. Let me prove this with a simple example, for instance, if
there is a country with a disadvantage in terms of land, resources or technology, it can still
find a way to produce relatively cheaply with different methods. There are some certain
resources which cheaper to produce abroad from productivity, flexibility and availability
point of view. Typical models of comparative advantage are Ricardian Model and Heckscher
Ohlin Model.
Ricardian Model is the classic model of international trade introduced by David Ricardo
(1772-1823). It assumes perfect competition and a single factor of production, labour, with
constant requirements of labour per unit of output that differ across countries.
Heckscher Ohlin Model is a model of international trade, which was originally formulated by
Eli Heckscher (1879-1952) and integrated by Bertil Ohlin (1899-1979).
Intra-industry trade is a trade in which a country exports and imports in the same industry,
in contrast to inter-industry trade. It can be horizontal or vertical. The leading EU countries
and majority of the USA favour this type of trading.
When we talk about trade, we must see clearly what it is about. Trade is the voluntary
exchange of goods and services. It is a transaction, in which the participating countries gain
something beneficial. As a matter of fact, distribution of benefits is really ambiguous. The
Terms of Trade (ToT) index gives a useful help in measuring different beneficiary levels. It is
a commonly used measure in a trade analyses, a ratio of the price of exports to the price of
imports. If ToT increases, the development of the economy and productivity will also
increase.
In industrialized and oil/mineral exporting countries the ToT is increasing, while those
nations, who are trading with farming goods, have to face with a decreasing ToT.

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The most simple calculation of ToT can be done by export price over import price times 100.
If the given percentage is above 100%, it means the economy is doing well. On the other
hand, if it is below 100%, then the economy is not going well.

Calculation of ToT:
price of exports in the current period

quantity of exports in the base period

price of exports in the base period

price of imports in the current period

quantity of imports in the base period

price of imports in the base period

Figure 1.: Calculation of Terms of Trade ratio

Main trade areas of the United States

The United States is one of the world's largest producers, exporters, and importers of
agricultural products. Moreover, it is a major producer and consumer of minerals and energy.
U.S. energy policy places emphasis on domestic energy production and provides tax and other
incentives for the supply of alternative and renewable fuels. The United States is the world's
leading producer of manufactured goods. Manufacturing tariffs are generally low, but tariff
peaks have sheltered a few industries from international competition, for example textiles,
clothing, and footwear and leather. Initial entry into the U.S. market through the establishment
or acquisition of a nationally chartered bank subsidiary by a foreign person is permitted in all
states. U.S. bank subsidiaries of foreign banks are granted national treatment. Regulation for
the insurance services sector is done primarily at the state level. Insurance companies, agents,
and brokers must be licensed under the law of the state in which the risk they intend to insure
is located. The U.S. telecommunications market, the world's largest by revenue, is open to
foreign participation and is highly competitive. No significant policy or legislative changes
have taken place with respect to maritime and air transport since 2006. The profitability of
U.S. airlines has improved. The United States has bilateral aviation agreements with
97 countries, of which 79 are open skies agreements. The U.S.-EU Air Transport Agreement,
applied provisionally since 30 March 2008, introduced a number of liberalization measures.
There have been no major changes in professional services regulation in the past few years.

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States have responsibility for the regulation, licensing, and oversight of the professions
practiced within their jurisdictions. According to an Economic Statistic, the United States is at
the 15th place based in the worldwide measures of Terms of Trade ratio.

Terms of Trade Ratios

Country Amount

Figure 2: Terms of Trade ratios by country

Trade and Economy in the USA

Constituting less than one-twentieth of the world's population, Americans generate and earn
more than one-fifth of the world's total income. America is the world's largest national
economy and leading global trader. The process of opening world markets and expanding
trade, initiated in the United States in 1934 and consistently pursued since the end of the
Second World War, has played important role development of American prosperity.
According to the Peterson Institute for International Economics, American real incomes are
9% higher than they would otherwise have been as a result of trade liberalizing efforts since
the Second World War. In terms of the U.S. economy in 2008, that 9% represents $1.3 trillion
in additional American income.
Such gains arise in a number of ways. The ability to expand the output of America's most
competitive industries and products, through exports, raises U.S. incomes. Shifting more of

5
work effort to the most competitive areas of the economy helps raise the productivity of the
average American worker and average compensation earned from employment. With the
ability to serve a global market, investment is encouraged in the expanding export sectors and
the rising scale of output helps lower average production costs. Such effects help strengthen
America's rate of economic growth. Moreover, imports increase consumer choice, restrain
price increases and raise purchasing power. High quality inputs imported by U.S. companies
can help companies and their U.S. employees become or remain highly competitive in the
U.S. domestic and foreign markets.
The potential economic gains from trade for America are far from exhausted. Roughly three
quarters of world purchasing power and almost 95% of world consumers are outside
America's borders. The Peterson Institute analysis also estimated that elimination of
remaining global trade barriers would increase the gain America already enjoys from trade by
another 50%. Trade remains an engine of growth for America. The negotiation of further
reductions in global barriers and efforts to effectively enforce existing agreements are the
tools to reap those additional benefits.
The U.S. economy entered recession in 2008 and was eventually followed by the rest of the
world economy into a severe economic downturn. Prior to the generalization of global
recessionary conditions, exports had for a number of years been a strong support to sustaining
economic growth. Between 2005 and 2008, exports rose by 43%, accounting for 47% of
overall GDP expansion. Last year (2008) U.S. exports totaled $1.8 trillion or a record high
13% of U.S. GDP. With the decline of the global economy into recession in the second half of
2008, America’s exports, as well as world exports have entered a period of sharp decline.
As policy actions taken in the United States and countries around the globe begin to restore
economic and job growth, an important part of the recovery will be the restoration of trade
expansion. In fact, rapid trade growth may well act as a transmitter of economic stimulus
around the globe and a vehicle of recovery, particularly if enhanced by additional efforts
reduce barriers and expand trading opportunities further.

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References

Deardorff’s Glossary of International Economics [Internet]

Available from: > http://www-personal.umich.edu/~alandear/glossary/i.html<
[Accessed at: 2001]

Economic Statistic on Terms of trade by country [Internet]

Available from: > http://www.nationmaster.com/graph/eco_ter_of_tra-economy-terms-of-
trade<

Trade policy review: Continued openness is key at a time of economic

uncertainty [Internet]
Available from: > http://www.wto.org/english/tratop_e/tpr_e/tp300_e.htm<
[Accessed at: 11 June 2008]

Current Economic Crises Worse Than The Great Depression by Dr. Krassimir
Petrov [Internet]
Available from: > http://www.marketoracle.co.uk/Article7099.html<
[Accessed at: 02 November, 2008]

Terms of Trade: Why the U.S. lost manufacturing jobs, and how it can
replace them [Internet]
Available from: > http://www.washingtonpost.com/wp-
dyn/content/article/2009/01/05/AR2009010501381.html<
[Accessed at: 5 January 2009]