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Econ789 chapter038
- 1. International Trade Chapter 38 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- 2. 38-2 Global Economy • Households and firms in the U.S. economy interact with households and firms in other economies in two main ways: • International Trade: They buy and sell goods and services. • International Finance: They borrow and lend. LO1
- 3. 38-3 Global Economy • Households and firms in the U.S. economy interact with those in the rest of the world in goods markets and financial markets. LO1 • The red flow shows the expenditure by Americans on imports of goods and services. • The blue flow shows the expenditure by the rest of the world on U.S. exports (other countries’ imports).
- 4. 38-4 Global Economy • The green flow shows U.S. lending to the rest of the world. • The orange flow shows U.S. borrowing from the rest of the world LO1 • These international trade and international finance flows tie nations together. • Global booms and slumps are transmitted through these flows.
- 5. 38-5 U.S. Trade Facts • U.S. exports and imports as shares of gross domestic product have been on a long-term upward trend. • International trade has roughly tripled in importance compared to the economy as a whole in the past 50 years. • Both imports and exports fell in 2009 due to the recession. LO1
- 6. 38-6 U.S. Trade Facts • Exports and Imports as a Percentage of U.S. GDP LO1
- 7. 38-7 U.S. Trade Facts • Compared to the United States, other countries are even more tied to international trade. • Their imports and exports as a share of GDP are substantially higher. • The United States, due to its size and diversity of resources, relies less on international trade than almost any other country. LO1
- 9. 38-9 U.S. Trade Facts • In 2013, the world as a whole produced goods and services worth about $74 trillion at current price. • World trade in goods and services exceeded $23 trillion in 2013. • More than 30% of world output is sold across national borders. • So, who trades with whom? In particular, whom does the U.S. trade with?LO1
- 11. 38-11 U.S. Trade Facts • The 5 largest trading partners with the U.S. in 2012 were Canada, China, Mexico, Japan, and Germany. • The largest 15 trading partners with the U.S. accounted for 69% of the value of U.S. trade in 2012. • 3 of the top 10 trading partners with the U.S. in 2012 were also the 3 largest European economies: Germany, the United Kingdom, and France. LO1
- 12. 38-12 U.S. Trade Facts • Total U.S. Trade with Major Partners, 2012 LO1
- 13. 38-13 U.S. Trade Facts • Principal U.S. exports include: • Chemicals • Agricultural products • Consumer durables • Semiconductors • Aircraft LO1 • Principal U.S. imports include: • Petroleum • Automobiles • Metals • Household appliances • Computers
- 14. 38-14 U.S. Trade Facts • Trade surplus when exports exceed imports • Trade deficits when imports exceeds exports • U.S. trade deficit in goods • $735 billion in 2012 • U.S. trade surplus in services • $196 billion in 2012 • Trade deficit with China • $315 billion in 2012 LO1
- 15. 38-15 Specialization and Trade • Specialization: People concentrate on what they are good at. • Division of Labor: Breaking up a task into a number of smaller, more specialized tasks. • Specialization through division of labor leads to greater production of goods and services without increasing inputs. LO2
- 16. 38-16 Specialization and Trade • Mutual Gains from Voluntary Exchange: A voluntary exchange between two parties must make both parties better off. LO2 Before Exchange After Exchange Exchange
- 17. 38-17 Specialization and Trade • Nations have different resource endowments • Land, Labor, Capital, and Entrepreneur • Goods and services are produced with different combinations of resources • Land-intensive goods: Agricultural & mining goods • Labor-intensive goods: Manufacturing & services • Capital-intensive goods: Manufacturing & services • Some economies are good at producing land- intensive goods, while others are good at Labor- intensive or Capital-intensive goods. LO2
- 18. 38-18 Specialization and Trade • Each person or economy can produce identical goods and services. • Each person and economy has different skill/technology and resources. Their production possibilities frontiers differ, and so as their opportunity costs. • With limited resources each person and economy should specialize in producing goods and services that they are good at, to achieve greater production, then trade each others. ⇒ More efficient! LO2
- 19. 38-19 • Assume U.S. and Mexico have the same amount of labor resources, and they can produce vegetables or beef using own labor • U.S. can produce maximum of 30 tons of vegetables or 30 tons of beef, but currently producing 12 tons of vegetable or 18 tons of beef • Mexico can produce maximum of 20 tons of vegetables or 10 tons of beef, but currently producing 4 tons of vegetable or 8 tons of beef Absolute Advantage LO2
- 20. 38-20 Absolute Advantage (a) United States (b) Mexico Vegetables(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 Beef (Tons) Vegetables(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 25 30 Beef (Tons) 12 18 8 4 A Z LO2
- 21. 38-21 • Absolute advantage: one nation is more productive than another—needs fewer inputs or takes less time to produce a good or perform a production task. • U.S. has an absolute advantage in production of both vegetables and beef over Mexico • With same number of labor the U.S. can produce more vegetables than Mexico (30 > 20) • With same number of labor the U.S. can produce more beef than Mexico (30 > 10) • Should the U.S. trade with Mexico? Absolute Advantage LO2
- 22. 38-22 • Comparative advantage: the ability of a nation to produce a good or service at a lower opportunity cost than someone else. • When one nation has a comparative advantage in producing one good, the other nation has a comparative advantage in producing the other goods. • Opportunity cost: Opportunity cost of producing one good is the decrease in the quantity of the other good as it moves along the PPF. • The slope of PPF measures the opportunity cost of producing goods measured along X-axis. Comparative Advantage LO2
- 23. 38-23 Comparative Advantage (a) United States (b) Mexico Vegetables(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 Beef (Tons) Vegetables(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 25 30 Beef (Tons) 12 18 8 4 A Z LO2
- 24. 38-24 • Opportunity cost of producing 1 ton of beef: • 1 pound of vegetables in U.S. • 2 pounds of vegetables in Mexico • The U.S. has a comparative advantage of producing beef over Mexico • Opportunity cost of producing 1 ton of vegetable: • 1 pound of beef in U.S. • 1/2 pounds of beef in Mexico • The Mexico has a comparative advantage of producing vegetables over the U.S. Comparative Advantage LO2
- 25. 38-25 Comparative Advantage • Law of comparative advantage: A nation should specialize in producing goods and services on which the nation has a comparative advantage. • Nations can gain from specializing in production of the goods in which they have a comparative advantage and then trading. • The U.S. should specialize in production of beef and produce 30 tons. • Mexico should specialize in production of vegetables and produce 20 tons.
- 26. 38-26 Comparative Advantage • Trade: the U.S. trades 10 tons of beef for 15 tons of vegetable. • The U.S. exports 10 tons of beef and imports 15 tons of vegetables. • After trade • The U.S. can consume 20 tons of beef (= 30 – 10) and 15 tons of vegetables (= 0 + 15) • Mexico can consume 10 tons of beef (= 0 + 10) and 5 tons of vegetables (= 20 – 15)
- 27. 38-27 Comparative Advantage • Gains from Trade: After specialization and trade each nation can consume than before trading. • The U.S. can consume 2 extra-tons of beef (= 20 – 18) and 3 extra-tons of vegetables (= 15 – 12) • Mexico can consume 2 extra-tons of beef (= 10 – 8) and 1 extra-ton of vegetables (= 5 – 4) • Two nations mutually benefit from trade. • Both nations achieve consumption combinations beyond own PPF.
- 28. 38-28 Gains from Trade (a) United States (b) Mexico Vegetables(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 Beef (Tons) Vegetables(Tons) 30 25 20 15 10 5 0 35 40 45 5 10 15 20 25 30 Beef (Tons) 12 18 8 4 A Z A’ Z’ V V’ W v b b’ Trading Possibilities Line Trading Possibilities Line B LO2
- 30. 38-30 Comparative Advantage • Terms of trade: Rate of exchange of two goods • 2 tons of beef = 3 tons of vegetables • Trading possibilities line: a line starting from the production combination point under specialization with its slope equals terms of trade • Both nation can choose any combination of two goods along the trade possibilities line under the terms of trade as own consumption pointLO2
- 31. 38-31 Comparative Advantage • Why do they trade? • Before trade, an opportunity cost of 1 ton of vegetables was 1 ton of beef in the U.S. and ½ tons of beef in Mexico. • It is cheaper to buy vegetables from Mexico than producing by itself even at terms of trade of 2/3 tons of beef. • How about beef for Mexico? LO2
- 32. 38-32 Increasing Cost and Trade • Under constant costs • PPF is a straight line • Complete specialization • Under increasing costs • Concave PPF • Resources not perfectly substitutable • Incomplete specialization: both nations still produce both goods LO2
- 33. 38-33 Supply and Demand Analysis of International Trade • Without international trade, the market must be at equilibrium in each country • If foreign price is different from domestic price • Firms want to sell products at higher price, so firms exports to the country where the market price is higher • Households want to buy products at lower price, so households imports from the country where the market price is lower LO3
- 34. 38-34 Supply and Demand Analysis of International Trade • If foreign price > domestic price • Domestic firms make more profits by selling to foreigners • Export to foreign country • Domestic price rises • Surplus will be exported • Export supply curve LO3
- 35. 38-35 Supply and Demand Analysis of International Trade • If foreign price < domestic price • Domestic consumers can buy cheaply from foreign firms • Import from foreign country • Domestic price falls • Shortage will be imported • Import demand curve LO3
- 36. 38-36 Supply and Demand Analysis of International Trade • At equilibrium • Exporting country has surplus, while importing country has shortage • Trade must be balanced: Export must be equal to import • Surplus in the exporting country must be equal to shortage in the importing country • Trade ends when the price in tow countries are the same. LO3
- 37. 38-37 1.50 1.25 1.00 .75 .50 0 50 100 Quantity of Aluminum (Millions of Pounds) Price(PerPound;U.S.Dollars Price(PerPound;U.S.Dollars 1.50 1.25 1.00 .75 .50 0 50 75 100 125 150 Quantity of Aluminum (Millions of Pounds) Supply and Demand Analysis of International Trade (a) U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand Dd Sd U.S. Export Supply U.S. Import Demand a b c x y Surplus = 50 Surplus = 100 Shortage = 50 Shortage = 100 LO3
- 38. 38-38 Price(PerPound;U.S.Dollars 1.50 1.25 1.00 .75 .50 0 50 75 100 125 150 Quantity of Aluminum (Millions of Pounds) 1.50 1.25 1.00 .75 .50 0 50 100 Quantity of Aluminum (Millions of Pounds) Price(PerPound;U.S.Dollars (a) Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand Dd Sd Canadian Export Supply Canadian Import Demand q r s t Surplus = 50 Surplus = 100 Shortage = 50 Supply and Demand Analysis of International Trade LO3
- 39. 38-39 International Trade Equilibrium 1.00 .75 .88 0 50 100 Quantity of Aluminum (Millions of Pounds) Price(PerPound;U.S.Dollars Import demand = Export supply Canadian Export Supply e U.S. Export Supply U.S. Import Demand Equilibrium Canadian Import Demand LO3
- 40. 38-40 Case for Free Trade • All countries participating trade benefit from specialization and trade • Promote efficiency • Promote competition • Variety of goods and services • Higher standard of living (more consumption possible) LO2
- 41. 38-41 Trade Barriers • Trade Barriers: The government-imposed restraint on the international trade of goods or services • Tariffs: Excise taxes on imported goods • Import quota: A limit on the quantity of goods imported • Nontariff barrier (NTB): licensing, product standard, inspection, and other government measures intended to restrict imports • Voluntary export restriction (VER): Exporting country voluntarily limits the amount of exports • Export subsidy: Subsidies on export goodsLO4
- 42. 38-42 Economic Impact of Trade Barriers • Direct effects • Increase in domestic price • Decline in consumption (Loss of consumer surplus) • Increase in domestic production and profits of domestic firms • Decline in imports • Tariff revenue • Indirect effects • Loss of efficiency (Producing at higher cost) • Decline in exports (Trade is an exchange of goods produced) • Decline in standard of living and welfare LO4
- 43. 38-43 The Case for Protection • Military self-sufficiency • Diversification for stability • Infant industry • Protection against dumping • Increased domestic employment • Cheap foreign labor LO5
- 44. 38-44 Multilateral Trade Agreements • World Trade Organization (WTO) • European Union (EU) • North American Free Trade Agreement (NAFTA) • Trans-Pacific Partnership (TPP) LO6
- 45. 38-45 WTO • Established by Uruguay Round of GATT • 153 member nations in 2010 • Oversees trade agreements and rules on disputes • Critics argue that it may allow nations to circumvent environmental and worker- protection laws LO6
- 46. 38-46 European Union • Initiated in 1958 as Common Market • Abolished tariffs and import quotas between member nations • Established common tariff with nations outside the EU • Created Euro Zone with one currency LO6
- 47. 38-47 NAFTA • Agreement between U.S., Canada, and Mexico • Established a free trade zone between the countries • Trade has increased in all countries • Enhanced standard of living LO6
- 48. 38-48 Trade Adjustment and Offshoring • Trade Adjustment Assistance Act • Designed to help individuals hurt by international trade • Offshoring of jobs • Shifting of work previously done by American workers to workers abroad LO6
Notes de l'éditeur
- In this chapter we will take a look at some key facts about international trade and then start evaluating international trade using comparative advantage. We will also use demand and supply curves to explain how countries determine which goods they will import, which goods they will export, and the price that is charged for these goods. Lastly we will look at trade barriers and how they impact the outcomes of international trade.
- International trade is a key component in most nations’ economies. It is what allows countries to grow. Without it, a nation might not have access to a key resource or a way to exchange its own key resources for other items needed. The U.S. economy has thrived on international trade throughout its history. In one sense, the U.S. was founded on the very basis of international trade as Christopher Columbus discovered the new world while looking for a new route to engage in international trade. We can understand why Canada is our largest trading partner given the fact that we share a lengthy border that facilitates trade. The trade deficit with China has been decreasing in recent years as their economy grows, providing the citizens with more disposable income with which to purchase imported items coming from the U.S. Our dependence on foreign oil still causes concerns in many sectors because if the supply was disrupted for any reason, it could cause severe supply shocks in the economy.
- This Global Perspective shows exports of goods and services as a percentage of GDP for selected countries. Although the United States is one of the world’s largest exporters, as a percentage of GDP, its exports are quite low relative to many other countries.
- This Global Perspective illustrates the largest export nations in the world in 2011. China has the largest share of world exports, followed by the United States and Germany. These eight countries account for approximately 46% of the world exports.
- The principal U.S. exports reflect the fact that we have a more skilled workforce and also a thriving agricultural industry. Frequently the U.S. is referred to as the breadbasket of the world due to our ability to produce crops such as wheat and corn.
- International trade is a key component in most nations’ economies. It is what allows countries to grow. Without it, a nation might not have access to a key resource or a way to exchange its own key resources for other items needed. The U.S. economy has thrived on international trade throughout its history. In one sense, the U.S. was founded on the very basis of international trade as Christopher Columbus discovered the new world while looking for a new route to engage in international trade. We can understand why Canada is our largest trading partner given the fact that we share a lengthy border that facilitates trade. The trade deficit with China has been decreasing in recent years as their economy grows, providing the citizens with more disposable income with which to purchase imported items coming from the U.S. Our dependence on foreign oil still causes concerns in many sectors because if the supply was disrupted for any reason, it could cause severe supply shocks in the economy.
- Why trade? The reason is that nations, as well as individuals, can gain by specializing. With trade, everyone ends up better off than before. The benefits are derived from three facts: (1) the distribution of natural, human, and capital resources is uneven among nations, (2) not all nations have the same degree of technology, and (3) people have different preferences. In a country such as China, which has an abundant supply of cheap labor, producing labor-intensive goods makes sense. Other countries may be blessed with an abundance of natural resources and therefore can produce land-intensive goods inexpensively. Industrially-advanced nations can produce goods that require large amounts of capital at a low cost. As countries evolve, their economies will also evolve and change. Countries that once focused on labor-intensive goods may now move towards more capital-intensive goods as their firms acquire more capital and experience.
- The production possibilities curves illustrate the relationship between vegetables and beef in each nation. For example, in the U.S., if the country produces 12 tons of vegetables, it can only produce 18 tons of beef. If the U.S. were to increase vegetable production to 15 tons, beef production would go down to 15 tons. In Mexico, the numbers are much smaller as their economy is not as large. If Mexico produces 4 tons of vegetables, then it can only produce 8 tons of beef. To produce more beef, a country must produce less vegetables and vice versa.
- The production possibilities curves illustrate the relationship between vegetables and beef in each nation. For example, in the U.S., if the country produces 12 tons of vegetables, it can only produce 18 tons of beef. If the U.S. were to increase vegetable production to 15 tons, beef production would go down to 15 tons. In Mexico, the numbers are much smaller as their economy is not as large. If Mexico produces 4 tons of vegetables, then it can only produce 8 tons of beef. To produce more beef, a country must produce less vegetables and vice versa.
- If each country is isolated and self-sufficient, each must decide what mix of beef and vegetables it desires to produce, recognizing the fact that to get more beef, the country must produce less vegetables. Mexico has a higher opportunity cost as it must give up 2 pounds of vegetables for every pound of beef, whereas in the U.S., it is a 1 to 1 ratio.
- As we can see in these graphs, the maximum production line for each country has rotated outwards to provide each with a higher level of output under trade. In the long run, all parties benefit from trade, at any level. The slope of the trading possibilities line reflects the terms of trade between the two countries.
- This table lists the international specialization according to comparative advantage and the gains from trade for the U.S. and Mexico.
- The trading possibilities line shows that both countries end up better off with trade. With comparative advantage, the nations have complete specialization in which each nation only produces the good that it has the comparative advantage in and then imports all of the good for which it has a comparative disadvantage. Each country ends up with more of both goods. Both the U.S. and Mexico made more efficient use of their resources by specializing in production of the good for which they have a comparative advantage.
- Since the U.S. can produce beef for less than Mexico, it makes sense for the U.S. to produce beef and trade with Mexico for vegetables. Mexico has a comparative advantage in vegetables as the country would only have to sacrifice ½ ton of beef to gain a ton of vegetables, whereas the U.S. would have to give up 1 ton of beef to gain a ton of vegetables. By doing so, both nations will benefit as they work out the terms of trade. The U.S. will end up getting more than 1 ton of vegetables for one ton of beef, and Mexico will get more than ½ ton of beef for 1 ton of vegetables, which it would get without trade.
- While we were using a very simple example of two products and two countries, the analysis would be the same for any number of products and countries. In the real world we are also faced with a concave production possibilities curve instead of the linear one from our analysis. This means there are increasing opportunity costs in the real world and, at some point, the underlying basis for further specialization and trade disappears so both countries end up producing some of both products. This is why we end up with domestically-produced products competing with similar imported products. However the numbers come out, everyone ends up benefitting somehow from trade. In addition to promoting efficiency and competition among firms, nations benefit as they build relationships with their trading partners that can help to prevent disagreements that might lead to wars.
- We can apply supply and demand analysis to see how equilibrium prices and quantities of imports and exports are determined. The amount that a nation imports or exports of a particular good depends on the difference between the equilibrium world price and the equilibrium domestic price. It is assumed that when the country starts to trade, then the domestic price will either rise or fall to the world price level. The equilibrium domestic price is the price that would prevail in a closed economy that does not engage in trade. When the world equilibrium price is above the domestic equilibrium price, there would be an export surplus as suppliers would produce more than that demanded by the domestic economy and would then export it to receive the higher world price. If the world equilibrium price is less than the domestic equilibrium price, the opposite effect occurs.
- Here in these graphs we see the effects of differences between the world price and the domestic equilibrium price. The domestic equilibrium price is $1.00/pound. If the world price is above that point, say at $1.25/pound, domestic producers will produce 125 million pounds, which creates a surplus of 25 million pounds over the domestic demand. The surplus will be exported and sold at the higher price. For each price above the domestic equilibrium price, there will be surplus and the U.S. will export that surplus at that price, creating the U.S. export supply. For each price below the domestic equilibrium price, the U.S. will have a shortage and will import aluminum equivalent to the size of the shortage. Doing this for each price creates the U.S. import demand.
- Here we switch our viewpoint to Canada for illustration purposes. We can see their domestic equilibrium price is $.75/pound, and we see the surpluses and shortages that occur when the world price is higher or lower than that.
- Now we can combine the two countries into one analysis to determine a world equilibrium price. If we combine the U.S. export supply curve and import demand curve with the Canadian export supply curve and import demand curve, we find the equilibrium point where one country’s export supply curve intersects the other country’s import demand curve. In this example that occurs at a price of $.88/pound. After trade, this would be the price found in both countries.
- While we were using a very simple example of two products and two countries, the analysis would be the same for any number of products and countries. In the real world we are also faced with a concave production possibilities curve instead of the linear one from our analysis. This means there are increasing opportunity costs in the real world and, at some point, the underlying basis for further specialization and trade disappears so both countries end up producing some of both products. This is why we end up with domestically-produced products competing with similar imported products. However the numbers come out, everyone ends up benefitting somehow from trade. In addition to promoting efficiency and competition among firms, nations benefit as they build relationships with their trading partners that can help to prevent disagreements that might lead to wars.
- Even though a nation gains from trade as a whole, some domestic industries may be hurt by trade and some industries may need to be maintained even if they are not cost effective for reasons such as national security or defense. Countries use several different techniques to protect industries from the harmful effects of trade. Tariffs are one of the most common barriers to trade. A tariff is an excise tax on the dollar value, or quantity of an imported good. Revenue tariffs are applied to a good that is typically not produced in the domestic country, and they are designed to raise revenue for the domestic government. Revenue tariffs tend to be fairly low. Protective tariffs are another matter. They are applied to goods that do have a domestic competitor and are designed to make the imported goods cost at least as much as, or more than, the domestic good, so these tariffs can be quite high. Import quotas are another common barrier countries use. A quota is a limit on the amount of a particular good that could imported in a given amount of time. By limiting the supply, you drive the price up, thereby making the imported good more expensive than its domestic competitor. A nontariff barrier can include such things as requiring extensive documentation for imported goods, restricting the location available to receive the imported goods, or having unreasonable standards for imported goods. A voluntary export restriction is when foreign firms “voluntarily” agree to limit the amount of their exports to a particular country. The catch is that even though it was voluntary, it was done under the threat of mandatory barriers so it really was not done through free will. Export subsidies consist of government payments to a domestic producer of export goods and are designed to help that producer by reducing its production costs. This should enable the producer to compete more effectively against the imported goods.
- Because tariffs are the most commonly used trade barrier, we will look closer at their effect on the economy. The direct impact of tariffs includes a decline in domestic consumption as the desired goods are now at a higher price than consumers are willing to pay, an increase in domestic production as suppliers will be able to receive a higher price for the goods, a decline in imports which was the whole point of the tariff, and tariff revenue accruing to the domestic government. Tariffs also have an indirect effect beyond just basic supply and demand concepts. Since the foreign country supplying the import will sell less, their economy will decline. If they imported any products from the domestic country, those would decline as well. Tariffs also to some extent subsidize inefficient producers which can be a drain on the economy.
- There are many different arguments used to support the use of trade barriers. Military self-sufficiency preys on people’s fear of another war and being unable to defend themselves, so they argue that the industry related to the military must be protected and maintained domestically. Diversification for stability looks at the need to have a well-rounded economy that is not too heavily invested in any one area that could be subject to collapse. (That is the proverbial “all of our eggs in one basket” argument.) New or infant industries argue that they need protection during the infancy stage to help them grow and become strong enough to compete on their own. This may be needed especially in a developing nation that is just moving into the world economy, but care must be taken not to prolong the support. Other options besides tariffs or quotas may work better to help the industry develop. Dumping is also considered a big problem that needs addressing. Dumping occurs when a foreign firm deliberately sells goods below their cost in an attempt to drive the domestic industry out of business. Once the domestic industry is gone, the foreign firm is then free to raise prices to whatever level they desire. This may even be done with the support of the foreign government. Dumping is considered an “unfair trade practice,” and sanctions can be imposed against the countries or firms involved. The final arguments deal with labor issues. Saving American jobs is a standard campaign slogan for political candidates. While imports do eliminate some U.S. jobs, they also create new jobs in industries that will be exporting to the foreign country that now has disposable income to spend due to selling their exports. It also creates jobs for individuals involved with importing the good into the country. History has shown that trade barriers often have the reverse effects and can reduce domestic employment especially if foreign countries retaliate. It is argued that the cheap foreign labor will drive the wage rates in the U.S. down, reducing our standard of living. Again, the saying is “a rising tide lifts all boats.” Everyone benefits from trade.
- The modern trend is for nations to seek to reduce or eliminate trade barriers as they recognize the fact that trade is a good thing. Each of these trade agreements reflect the trend towards increased free trade.
- The WTO is the largest organization devoted to promoting international trade. The current round of negotiations began in 2001 in Doha, Qatar and are aimed at further reducing tariffs and quotas as well as agricultural subsidies that can distort trade. Critics are concerned that the WTO may supersede the authority of a member nation to protect its own environment and workers by allowing firms to move to countries with less restrictive laws. Proponents respond that these concerns are outside the scope of WTO authority and should be dealt with in other forums. They also feel that as developing nations gain from trade, they will be better equipped to help protect their workers and environment.
- Currently at 27 member nations, the EU is one of the most dramatic examples of a free-trade zone. In addition to eliminating almost all tariffs and quotas between the member nations, it has also liberalized the movement of capital and labor with the union and created common policies on matters of joint concern, such as agriculture, transportation, and business practices. The introduction of the Euro currency in the early 2000s, which was adopted by 17 of the member nations, has enabled those nations to improve their standard of living by making it easier to price and sell their products in the euro zone nations.
- So far, time has proven the critics of NAFTA wrong. Since NAFTA was enacted in 1993, over 20 million jobs have been created in the U.S., trade among the three nations has increased, and the standard of living in each nation has also increased.
- The Trade Adjustment Assistance Act of 2002 introduced some innovative policies designed to help those workers who had been displaced by international trade. The Act provided financial assistance beyond unemployment benefits, relocation allowances, and retraining services. Critics argue that helping one small section of workers is not fair to other workers who lose jobs for a variety of reasons. Offshoring of jobs is another major concern to American workers, but it is not necessarily bad for the economy. Offshoring can increase the demand for complementary jobs in the U.S. and increase the off-shored workers’ income to purchase goods produced in the U.S.