The Export/Import Sector Chapter 8

Basis of International Trade Specialization and Exchange U.S. Exports and Imports World Trade Agreements & Free Trade Zones Summing Up

Basis for International Trade

Trade takes place when it is in the interest of both parties See Page 168 Adam Smith Observation, 1776 Virtually all economists are free trade advocates If one nation has a production advantage in one good and another has a production advantage in a second good, the two should work out a trade agreement

Specialization & Exchange

Specialization increases the potential for maximum production

Productivity Cost of Production Lowered Total Production Increased Every modern economy specializes

Nations will export the goods & services they can produce efficiently (cheaper than other nations) and import the goods & services that other nations produce more efficiently

U.S Exports and Imports

Historically, U.S. has had advantages in agriculture and related technology (Farm Equipment, Seed, Etc) Also, in recent years, U.S. has been a leading exporter of computer software and Entertainment goods and services The U.S. used to be a major exporter of steel and textiles, but today other countries have advantages in these products and U.S. has become a major importer Following WWII, U.S. exported petroleum

Trade Balances
Positive Trade Balance When a nation exports more $ value than it imports: $Exports > $Imports Negative Trade Balance When a nation imports more $ value than it exports: $Exports < $Imports Prior to 1970, U.S. enjoyed a Positive Trade Balance Since 1970, Trade Balance has become negative in a major way

Merchandise Imports and Exports as Percentage of Goods Produced in the United States, 1990-2000
Since 1990 our imports and exports as a percentage of goods produced in the United States has grown steadily. More than one-quarter of all the goods produced here are shipped abroad, while our imports are equal to about one-third of the goods we produce in the United States
1990 1992 1994

Imports

Exports

1996

1998

2000

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U.S. Balance of Trade in Goods, Services, and Overall Balance, 1970-2000 (in billions of dollars)
Balance on s erv ices

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

Ov erall balanc e on goods and s erv ic es

Balance on goods

1970

1975

1980

1985

1990

1995

2000

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Exports of Goods & Services as Percentage of GDP, Selected Countries, 1999

Netherlands Canada Sweden Switzerland Denm ark Germany France United Kingdom Italy U.S. 0 10.7 10 20 30 40 50 Percentage of GDP 60 70 29.5 26.1 25.8 25.5 43.7 43.7 41.2 36.8 60.6

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The Worlds Top Ten Exporting Nations, 1999

United States Germany Japan Canada China South Korea Mexico Taiwan Singapore Switzerland 133 118 110 110 79 214 388 358 520 683

100

200

300

400

500

600

700

(billions of dollars)

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World Trade Agreements & Free Trade Zones

Examples of Free Trade Agreements

General Agreement on Trade and Tariffs (GATT) [1947] World Trade Organization [1995] European Union [1992] North American Free Trade Agreement [1993] Central American Free Trade Agreement [Pending?]

World Trade Agreements and Free Trade Zones

Examples of Free Trade Zones Geographical areas where trade barriers have been eliminated or greatly reduced

NAFTA Canada, U.S. and Mexico

200,000 U.S. mfg jobs to Mexico Modestly depressing impact on U.S. factory wages Increased trade deficits with both Canada and Mexico Mexico has become a manufacturing base 60% of U.S. exports to Mexico are upgraded and returned to the U.S. Canada is our largest, single trading partner Existing tariffs are scheduled to be phased out over time

World Trade Organizations & Free Trade Zones

European Union Although discussed since 1950s, really formed in 1992

Fifteen Nations Removed all checkpoints, delays and paperwork (customs) Quality restrictions on certain products removed No restriction on worker employment within the EU (immigration) Creation of European Monetary Union (Euro as common currency) Trade within the EU could expand 3X

The European Union (EU)

Sweden Denmark Netherlands Belgium Finland Germany Luxembourg Austria Italy Greece

United Kingdom Ireland

France Spain Portugal

Indicates the 15 countries that form the European Union (EU)

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World Trade Agreements and Free Trade Zones

Mercosur (Argentina, Brazil, Paraguay and Uruguay with associate members Bolivia and Peru [1991]

Fourth largest integrated market in the world after NAFTA and EU Eliminated all tariffs within the region while establishing common tariffs for products coming from outside the region However, some trade restrictions among the members have remained

World Trade Agreements and Free Trade Zones

General Agreement on Trade and Tariffs (GATT) [1947]

Ultimately signed by 146 nations Uniform system of rules for conduct of international trade Advantages for the U.S.

Foreign nations generally impose more trade restrictions than the U.S. Intellectual property rights addressed such as patents, copyrights, trademarks Open markets for business services such as advertising, accounting, computer services, and engineering where U.S. excels Agriculture supposed to come under international trade rules

World Trade Agreements and Free Trade Zones

World Trade Organization [1995] as a successor to GATT

Liberalization of Trade Nondiscrimination Most favored nation status defined

Members must offer all other members granted status the same trade concessions

No unfair encouragement of exports

Reductions of subsidies that encourage exports Been a major point of contention among all nations

Globalization: Arguments Against

Upsets the status quo

Workers in poorer countries exploited to provide cheaper goods for U.S. Most nations have a difficult time ceding their national sovereignty to an international organization

A Summing Up: C + I + G + Xn
Net exports = Xn

Xn = Exports - Imports

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C + I + G + Xn
10,000 C+I+G 8,000
8,000 C + I + G + Xn 10,000 C+I+G

6,000

6,000

4,000

4,000

2,000

2,000

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

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

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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