Chapter 17Civil Liberties: International Trade

•Section 1: Absolute and Comparative Advantage

•Section 2: Trade Barriers and Agreements

Section 1: Absolute and Comparative Advantage

• Resource Distribution and Specialization

Natural Resources• Natural Resources help determine what goods and services an economy

produces– Fertile soil and a good growing climate allowed the U.S. to develop an economy based on agriculture!

Capital and Labor• Capital and Labor also shape a regions economy

– Physical capital- includes the things that people make in order to produce final goods and services

» Examples: machinery, tractors, and computers.

– Human capital- refers to the size of the workforce. Knowledge and skills a worker gains through education and experience.

» Every job requires human capital!!!

Section 1: Absolute and Comparative Advantage

• Resources Distribution and SpecializationUnequal Resources Distribution

• Availability differs from one country to another

Specialization and Trade• Unequal distribution of resources creates a need for specialization

• Export- a good or service sent to another country for sale• Import- a good or service brought in from another country for sale

• Absolute and Comparative Advantage• Absolute Advantage- the ability to produce more of a given product using a given

amount of resources

Absolute Advantage• Countries have to face many questions. Examples: Should a wealthy

country with many resources be self-sufficient, or should it specialize in producing a few products and trade others? How does a poorer nation decide what to produce?

Section 1: Absolute and Comparative Advantage

• Comparative Advantage– Comparative Advantage- the ability to produce a product most efficiently

given all the other products that could be produced.

– It is the nation that has the comparative advantage not necessarily the one with the absolute advantage.

– Law of Comparative Advantage- the principle that a nation is better off when it produces goods and services for which it has a comparative advantage

• Importance of Opportunity Cost– Each person should produce the good for which they have a lower

opportunity cost.

• Mutual Benefits– Each person specializes in producing the good- they have a

comparative advantage!– Both producers are operating at great efficiently therefore more

total goods are produced.

Section 1: Absolute and Comparative Advantage

– Growing Interdependence» Interdependence- the shared need of countries for resources, goods,

labor, and knowledge supplied by other countries

• The growth of interdependence trade has led to greater economic interdependence

• Because Countries are interdependence when one country’s economy changes it influences other country’s economy.

– Example of interdependence- economic growth

• The United States Trade– The United States as Exporter

• United states trade is the world’s third largest exporter!!– Due to it’s largest range of exports– Goods are made of bulk of international trade.

– The United States as Importer– The U.S. is also the world’s top importer!

Section 1: Absolute and Comparative Advantage

– US imports about $1.9 trillion or 15.5 percent of the world’s total!!

• The Effects of Trade on Employment– Specialization and Job Loss

• Trade and Employment in the United States– International trade has let to significant changes with employment

in the US.» Example: high workers productivity and new technologies like

robotics helped give Japan a comparative advantage in making automobiles.

» Result- Japan cars became less expensive then American cars therefore, American sales dropped!

» Businesses and gov’t often help laid off workers find other jobs. However its not very easy!

» Retraining and or relocating is very difficult.» Finding jobs require certain needed skills.

Section 2: Trade Barriers and Agreements

• Trade Barriers– Trade Barriers- a means of preventing a foreign product or service from

freely entering a nations territory.– Tariffs

• Tariff- a tax on imported goods

• Tariffs were a major tool of fiscal policy and the main source of revenue for the federal government.

– Quotas and VERBS• Import quotas- a set limit on the amount if a good that can be imported- type of

barrier

• Example: U.S. limits the annual amount of raw cotton coming into the country from other countries.

– Many import quotas are now illegal

• VER- a voluntary limit set by the exporting country, restricting the quantity of a product it will sell to another country.

Section 2:Trade Barriers and Agreements

– Other Barriers to Trade• Government actions may also create trade barriers

– Eamaple: Gov’t may require foreign companies to obtain a license to sell goods in that country. High licensing fees or slow licensing processes act as informal trade barriers.

– Sanctions- actions a nation or group of nations takes in order to punish or put pressure on another natiion– Embargo- a ban on trade with a particular country.

– Effects of Trade Barriers– Increased Prices for Foreign Goods

• Trade Barriers can help domestic producers compete with foreign firms. By limiting imports from those firm, or by making the prices of those imports higher, trade barriers can help companies!

• Restrictions on imports result in higher prices.

– Trade Wars• Trade Wars- a cycle of escalating trade barriers.

– When one country restricts imports, its trading partner may retaliate by placing its own restrictions on imports.

– Most damaging trade war began in the Great Depression.

– 1930, Congress passed the Smoot-Hawley Act- raising average tariff rates

Section 2: Trade Barriers and Agreements

• Arguments for Protection• Protectionism- the use of trade barriers to shield domestic industries from

foreign competition!

– Protecting Jobs• Shelters workers in industries that be hurt by foreign competition.

• Public officials favor protectionism may lack the incentive to grow up to become more efficient and competitive.

• Once an

– Protecting Infant Industries– Infant Industries- an industry in the early stages of development.

– Industries need to have time and experience to become good producers!

– Alexander Hamilton favored tariffs to protect young American industries from European competition

– 3 problems may arise with such protective tariffs.• 1st- protected infant industry may lack the incentive to grow up that is becoe more efficient and

more competitive!• 2nd- Once an industry has been given tariff protection, lawmakers may find it difficult for political

reasons to take the protections away• 3rd – a protected industry can keep its prices relatively high, increasing costs to consumers!

Section 2: Trade Barriers and Agreements

– Safeguarding National Security– Industries might require certain protection due to their products that are essential to defend

their country.– Foes of trade barriers like that protecting defense industries is important, yet they dislike

that some industries seek protection that is not essential to national security

• Trade AgreementsFree Trade- involves the lowering of elimination of protective tariffs and other trade

barriers between two or more nations• Supporters argue that free trade is the best way to pursue comparative

advantage, raise living standards, and further cooperative relationships among nations.

• Roots of Free Trade

• To encourage trade, congress passed the Reciprocal Trade Agreements Act of 1934

• It gave the President the power to reduce tarriffs by 50%.

Section 2: Trade Barriers and Agreements

– Congress granted the MFN, which most of the nation favored. MFN status is called Normal Trade Relation Status, or NTR.

– World Trade Organization• 1995 the World Trade Organization was founded with the goal of

making global trade more free.• It works to ensure that countries comply with GATT, Negotiate new

trade agreements.– The European Union

• It develops slowly after several decades.• 1957 six Western European nations set up the common market to

coordinate economic and trade policies.• 1993, the EEC nations formed the European Union- became the largest

trading bloc in the world.

Section 2: Trade Barriers and Agreements

– NAFTA• Free-trade zones- region where a group of countries agrees to seduce or

eliminate trade barriers

• NAFTA-North American Free Trade Agreement, created a free trade zone linking the United States, Canada, and Mexico.

– DR-CAFTA and FTAA– 2003, United States Gov’t reached a free trade agreement with five nations of Central

America, it was known as the Central American Free Trade Agreement-CAFTA

– Trade Area of the Americas-FTAA- this trade deals with opened trade among 34 nations of North and South America.

– Other Regional Trade Agreements

– APEC- Asia Pacific Economic Cooperation includes 21 countries along the Pacific Rim, including the United States.

– MERCOSUR-The Southern Common Market is similar to the EU in its goals. Its members are the South American nations of Brazil, Paraguay, Uruguay, Argentina, and Venezuela.

– CARICOM- The Caribbean Community and Common Market includes countries from South America and the Caribbean.

– ASEAN- 10-member Association of Southwest Asian Nations has taken steps to establish a free trade.

Section 2: Trade Barriers and Agreements

• The Debate Over Free Trade• Debates over the impact of NAFTA

• The Role Of Multinationals• Multination's- large corporation that sells goods and services

throughout the world.• Example: an automobile company might design its cars in the U.S. and import parts to

Asia to an assembly plant in Canada.• Mostly cars besides are produced globally.• Host nations worry about the effect of multinationals on their countries. • In a small country with a fragile economy, multinationals can gain excessive political

power.