Chapter Objectives

• The basis for international trade

• U. S. imports and exports
Chapter 8 • A summing up: C + I + G + Xn
• The world’s leading trading nations
The Export-Import Sector • World trade agreements and free-trade
zones

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Examples of Specialization and

The Basis for International Trade Exchange
• The basis for international trade is that a • We have been a major exporter of wheat, corn, and
soybeans since colonial times
nation can import a particular good or – Initially, we had an abundance of land
– Eventually we came to have a tremendous stock of farm
service at a lower cost than if it were equipment
produced domestically • We used to be a major exporter of steel and textiles
– In other words, if you can buy it cheaper than – Now other nations produce these more cheaply

you can make it you buy it
– This maxim is true for individuals and nations
– This is called specialization and exchange
• After WWII, we produced more than sixty percent of the
worlds oil supply and exported much of this
– Now, we have exhausted most of our easily extractible reserves
and import more than half of our oil
– If we didn’t import oil, gasoline could easily be $10 a gallon

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Merchandise Imports and Exports as Percentage of Goods Sum of U.S. Imports and Exports as Percentage of GDP, 1970-2002
Produced in the United States, 1990-2002 Economic Report of the President, 2001; Survey of Current Busin ess, March 2001

Economic Report of the President, 2001; Survey of Current Busin ess, February 2003

Between 1970 and

2000 the foreign trade
Since 1990 our imports and
sector more than
exports as a percentage of
doubled as a
goods produced in the United
percentage of GDP.
States has grown steadily.
Since 2000 a U.S.
about one-fifth of all the goods
recession and a
produced here are shipped
worldwide economic
abroad, while our imports are
slowdown have
equal to about one-third of the
depressed our trade
goods we produce in the
with other nations.
United States

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1
U.S. Balance of Trade in Goods, Services, and Overall Balance,
1970-2002 (in billions of dollars)
Economic Report of the
President, 2003; Survey of
Current Business, May 2003

Since the late 1980s, we

have been running a
large and growing
balance on services.
Our balance on goods,
which has been negative
since the mid-1970s, has
grown steadily worse
since 1991 and now
totals more than $300
billion
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A Summing Up: C + I + G + Xn C + I + G + Xn

10,000 10,000

C +I + G C +I + G
8,000

Net exports = Xn 8,000

C + I + G + Xn

6,000 6,000

4,000 4,000

Xn = Exports - Imports 2,000

2,000

45û 45û
2,000 4,000 6,000 8,000 10,000 2,000 4,000 6,000 8,000 10,000
Disposable income ($)
Disposable income ($)

Why is the C + I + G + Xn line lower than the C + I + G line?

Answer: It is lower because net exports (Xn) are negative
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World Trade Agreements and NAFTA, The North American

Free Trade Zones Free Trade Agreement
• The North American Free Trade • NAFTA was ratified by Congress in 1993
Association (NAFTA) • NAFTA created a free trade area that
includes Canada, the United States, and
• The European Union (EU) Mexico
• The General Agreement on Trade and – Trade barriers in industrial goods were
dismantled
Tariffs (GATT) – Agreements on services, investment, intellectual
• The World Trade Organization (WTO) property rights, agriculture, and strengthening of
trades rules were included
– There were also side agreements on labor
adjustment provisions, protection of environment,
and import surges

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2
 Countries of the European Union
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The European Union (EU)
• In 1999, 11 EU countries formed the
European Monetary Union (Now 12
member nations)
– The euro was established as a common
currency
• Initially, the euro existed along with each
country’s own currency
• In 2002 new euro coins and paper money
replaced each country’s own national
currencies
– This common currency is expected to
make trade among participating member
nations much easier to conduct
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World Trade Agreements
• Will GATT help or hurt the United
States?
– Although some industries will be affected
adversely, the positive appears to
outweigh the negative
• On the average, foreign countries have more
trade restrictions and tariffs on U. S. goods
than we have on theirs
– GATT should help the U. S. more than it hurts
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The European Union (EU)
• This free trade association of 15
nations was formed in 1992
– Freight was now able to move anywhere
within the EU without checkpoint delays
and paperwork
– So-called quality codes were ended
– Workers from any EU country could work
in any other member country
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World Trade Agreements
• The General Agreement on Trade and
Tariffs (GATT)
– GATT was drafted in 1947 and has since been
signed by more than 146 nations
• The latest version was ratified by Congress in 1994
– GATT
• Reduces tariffs worldwide by an average of 40%
• Lowers other barriers to trade such as quotas on
certain products
• Provides patent protection for American software,
pharmaceuticals, and other industries
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World Trade Agreements
• Will GATT help or hurt the United
States?
– GATT will, for the first time protect
intellectual property rights like patents,
trademarks, and copyrights
– GATT will also open markets for service
industries such as accounting,
advertising, computer services, and
engineering
• These are fields in which Americans excel
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3
 World Trade Agreements The World Trade Organization
(WTO)
• Will GATT help or hurt the United
• The WTO was set up in 1995 as a
States?
successor to GATT
– GATT brings agriculture under
international trade rules for the first • The WTO is based on three major
time. principles
• European farm subsidies dwarf those paid – Liberalization of trade
to American farmers – Nondiscrimination – the most-favored-
• Proportionally, the Europeans will will have nation principle
to reduce their subsidies a lot more than the
United States, making American crop – No unfair encouragement of exports
exports even more competitive
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Nondiscrimination:
Liberalization of Trade The Most-Favored-Nation
• Trade barriers, which were reduced •
Principle
Under the most-favored-nation principle,
under GATT, should continue to be members of WTO must offer one member
reduced the same trade concessions as any other
– Trade barriers have been falling within free member.
trade zones such as NAFTA and the – This is a lot like when the teacher says that if
European Union you bring candy to class, you must bring
some for everyone

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No Unfair Encouragement of
The WTO Dispute Settlement
Exports
• No unfair encouragement of exports Body
• The WTO has a Dispute Settlement Body to
encompasses export subsidies, which are handle disagreements among member
considered a form of unfair competition
– American and European governments have long nations
subsidized their farmers – Many politicians in the United States have very
– This enables the producers to sell their crops well reluctantly accepted the jurisdiction of the WTO
below cost • The United States has won almost all the more than two
– This sets the price of agriculture staples so low dozen cases in which the U. S. was the complaining
that small farmers in developing countries can’t party
compete • The United States has also lost some cases in which
– These small farmers are eventually forced off their other governments were the complaining parties.
land by subsidized imports and have no means to
survive

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4
 Objections Objections

• Environmentalists argue that elitist • Human rights and student groups say
trade and economics bodies make the IMF and the World Bank prop up
undemocratic decisions that undermine regimes that condone sweatshops and
national sovereignty on environmental pursue policies that bail out foreign
regulation lenders at the expense of local
• Unions charge that unfettered trade economies
allows unfair competition from
countries that lack labor standards

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Summary
Summary
• The debate is not just about “free • The debate is not just about “free
trade” but also about “fair trade” trade” but also about “fair trade”
– Many Americans, as well as citizens of – Much concern centers on the possible loss
other leading industrial nations, have of jobs and the reduction of wages in their
strong reservations about ceding some countries if their workers were forced to
national sovereignty to international compete with low-wage workers in the
organizations poorer countries
• Especially the WTO • Many earn just one or two dollars a day

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Summary

• The debate is not just about “free trade” but

also about “fair trade”
– Is it fair to make American factories, which have
relatively high environmental standards, compete
with Third World factories that are not similarly
burdened?
– If the United States and other industrial countries
are subject to the rules and regulations of the
WTO, their own governments would be unable to
prevent a flood of cheap imports

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