Chap008-The Export-Import Sector

Chapter 8

The Export-Import Sector

8-1Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• The basis for international trade• U. S. imports and exports• A summing up: C + I + G + Xn

• Specialization and exchange

• The world’s leading trading nations• World trade agreements and free-trade

zones• Outsourcing and off-shoring


The Basis for International Trade

• The basis for international trade is that if country A can produce a commodity, product, or service for country B at a lower cost than country B can do it, country B produces something else and buys the product from country A.– In other words, if you can buy it cheaper than you can

make it you buy it

– This maxim is true for individuals and nations

– This is called specialization and exchange


Specialization and Exchange

• We have been a major exporter of wheat, corn, and soybeans since colonial times– Initially, we had an abundance of land– Eventually we came to have a tremendous stock of farm equipment

• We used to be a major exporter of steel and textiles– Now other nations produce these more cheaply

• 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 sixty percent of our oil– If we didn’t import oil, gasoline could easily be $10 a gallon

• Today we are a major exporter of computer software and entertainment goods and services


Examples of Specialization and Exchange



U.S. Imports and Exports

As Percentage of GDP, 1970-2005Economic Report of the President, 2006


U.S. Balance of Trade, 2005 IN Billions of Dollars

www.bea.gov

Outsourcing and Off-Shoring

• Outsourcing– When a company in the United States contracts some of

their jobs to other firms in the United States• There is no job loss or job gain

• Off-Shoring– When a company in the United States contracts some of

their jobs to firms outside the United States• When jobs are transferred out of the United States, the

unemployment rates goes up

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 8-8

Outsourcing and Off-Shoring

• Since 1970– At least five million relatively high paying

jobs have been off-shored– Today, close to 85 percent of our labor force

is employed in the service sector– Today, less than one percent of American

jobs are sent off-shore• This is something most Americans can live with• If your job in in this one percent, then this is a

different story

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. 8-9

A Summing Up: C + I + G + Xn

8-10

Net exports = Xn

Xn = Exports - Imports

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

8-11


C + I + G + Xn

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

World Trade Agreements and Free Trade Zones

• The North American Free Trade Association (NAFTA)

• The Central American-Dominican Republic Free Trade Agreement (CAFTA)

• The European Union (EU)• Mercosur• The General Agreement on Trade and Tariffs

(GATT)• The World Trade Organization (WTO)


CAFTA, The Central American-Dominican Republic Free Trade Agreement

• CAFTA includes the Dominican Republic as well as Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua

• CAFTA will eventually eliminate all tariffs among these seven nations


NAFTA, The North American Free Trade Agreement

• NAFTA was ratified by Congress in 1993• NAFTA created a free trade area that includes

Canada, the United States, and Mexico– Trade barriers in industrial goods were dismantled– Agreements on services, investment, intellectual

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



Countries of the European Union

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


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


Mercosur

• Includes, Argentina, Brazil, Paraguay, and Uruguay and associate members Bolivia, Peru, and Chile

• It is the fourth largest market after NAFTA, the EU, Japan, and Chile

• It was formed in 1991• It has succeeded in eliminating all internal

tariffs while imposing a common external tariff on goods imported from countries outside the union

• However, some trade restrictions still exist, especially between Brazil and Argentina


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


World Trade Agreements

8-20

• 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



8-21

• 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



8-22

• Will GATT help or hurt the United States?– GATT brings agriculture under

international trade rules for the first time.• European farm subsidies dwarf those paid to

American farmers

• Proportionally, the Europeans will will have to reduce their subsidies a lot more than the United States, making American crop exports even more competitive


The World Trade Organization (WTO)

• The WTO was set up in 1995 as a successor to GATT

• The WTO is based on three major principles– Liberalization of trade– Nondiscrimination – the most-favored-nation

principle– No unfair encouragement of exports


Liberalization of Trade

• Trade barriers, which were reduced under GATT, should continue to be reduced– Trade barriers have been falling within free

trade zones such as NAFTA and the European Union


Nondiscrimination:The Most-Favored-Nation Principle

• Under the most-favored-nation principle, members of WTO must offer one member the same trade concessions as any other member.– This is a lot like when the teacher says that if

you bring candy to class, you must bring some for everyone


No Unfair Encouragement of Exports

• No unfair encouragement of exports encompasses export subsidies, which are considered a form of unfair competition– American and European governments have long

subsidized their farmers– This enables the producers to sell their crops well

below cost– This sets the price of agriculture staples so low that

small farmers in developing countries can’t compete– These small farmers are eventually forced off their

land by subsidized imports and have no means to survive


The WTO Dispute Settlement Body

• The WTO has a Dispute Settlement Body to handle disagreements among member nations– Many politicians in the United States have very

reluctantly accepted the jurisdiction of the WTO• The United States has won almost all the more than two

dozen cases in which the U. S. was the complaining party

• The United States has also lost some cases in which other governments were the complaining parties.


Objections

• Environmentalists argue that elitist trade and economics bodies make undemocratic decisions that undermine national sovereignty on environmental regulation

• Unions charge that unfettered trade allows unfair competition from countries that lack labor standards


Objections

• Human rights and student groups say the IMF and the World Bank prop up regimes that condone sweatshops and pursue policies that bail out foreign lenders at the expense of local economies


Summary

• The debate is not just about “free trade” but also about “fair trade”– Many Americans, as well as citizens of other

leading industrial nations, have strong reservations about ceding some national sovereignty to international organizations

• Especially the WTO


Summary

• The debate is not just about “free trade” but also about “fair trade”– Much concern centers on the possible loss of

jobs and the reduction of wages in their countries if their workers were forced to compete with low-wage workers in the poorer countries

• Many earn just one or two dollars a day


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


Current Issue: Is Your School Sweatshirt Sewn in A Sweatshop?

• If it is, do school administrators and students bear any responsibility for the abysmal working conditions and measly pay of the workers making their college paraphernalia?


Documents

Chap008-The Export-Import Sector