International Trade

ExportsExports equal 25% of global economic output25% of global economic output, but, but only only 12%12% of of U.S. outputU.S. output.. In 2004, American imports & exportsAmerican imports & exports totaled around $2.9 tril$2.9 tril.

““Loonie”Loonie”

RicardoRicardo

It is comparative advantage that matters, not absolute advantage.

Independently PoorIndependently Poor[If we consumed only the goods & services we produced]

[We would toil long hours but remain dirt poor]

Globalization: Merchandise Exports Globalization: Merchandise Exports as a Share of World GDP (28%) as a Share of World GDP (28%)

05

The Fruits of Free TradeThe Fruits of Free TradeA Global Fruit BasketA Global Fruit BasketApples New ZealandApricots ChinaBananas EcuadorBlackberries CanadaBlueberries ChileCoconuts PhilippinesGrapefruit BahamasGrapes PeruKiwifruit ItalyLemons ArgentinaLimes El SalvadorOranges AustraliaPears South KoreaPineapples Costa RicaPlums GuatemalaRaspberries MexicoStrawberries PolandTangerines S.AfricaWatermelons Honduras

And – Looking Ahead To GraduationAnd – Looking Ahead To Graduation

Changfeng SUV at Detroit Auto Show

Changfeng Liebao SUV: Communist Leader says: “Competition is Good.”

Are You Really Buying Are You Really Buying AAmmeerriiccaann??Toyota Camry and Tundra – Toyota Camry and Tundra – U.U.S.S.A.A. (California and Texas) (California and Texas)

Honda Accord and Honda Odyssey Minivan – Honda Accord and Honda Odyssey Minivan – U.U.S.S.A.A. (Ohio) (Ohio)

BMWX4 Roadster and BMWX5 SUV – BMWX4 Roadster and BMWX5 SUV – U.U.S.S.A.A. (South Carolina) (South Carolina)

Mercedes-Benz-M-Class – Mercedes-Benz-M-Class – U.U.S.S.A.A. (Alabama) (Alabama)

Toyota Corolla – Toyota Corolla – U.U.S.S.AA. (California). (California)

Subaru Legacy – Subaru Legacy – U.U.S.S.A.A. (Indiana) (Indiana)

Nissan Maxima – Nissan Maxima – U.U.S.S.A.A. (Tennessee) (Tennessee)

Hyundai Sonata & Elantra – Hyundai Sonata & Elantra – U.U.S.S.A.A. (Alabama) (Alabama)

Dodge Ram – Dodge Ram – MexicoMexico Pontiac Firebird - Pontiac Firebird - CanadaCanada

Plymouth Voyager – Plymouth Voyager – CanadaCanada Chevy Lumina & Impala - Chevy Lumina & Impala - CanadaCanada

Chrysler PT Cruiser – Chrysler PT Cruiser – MexicoMexico Mercury Capri - Mercury Capri - AustraliaAustralia

Ford Jaguar – Ford Jaguar – EnglandEngland Chrysler Crossfire – Chrysler Crossfire – GermanyGermany

Chrysler 300 -Chrysler 300 - Canada Canada

ChryslerChrysler was acquired by Daimler BenzDaimler Benz. Daimler BenzDaimler Benz builds Mercedes SUVsMercedes SUVs in Vance Alabama & owns a controlling stake in MitsubishiMitsubishi and 10% of Hyundai Motor10% of Hyundai Motor. GMGM owns SaabSaab and has stakes in Isuzu, Suzuki, Subaru, Fiat & Daewoostakes in Isuzu, Suzuki, Subaru, Fiat & Daewoo. FordFord owns Mazda, Volvo, Jaguar, Land Rover, & Aston MartinMazda, Volvo, Jaguar, Land Rover, & Aston Martin.

Chrysler 300Chrysler 300Concept carConcept car

“Another Starbucks on Venus?”

Principal U.S. Exports & Imports, 2002Principal U.S. Exports & Imports, 2002

SemiconductorsSemiconductors $42.3$42.3

ComputersComputers 38.638.6

ChemicalsChemicals 49.849.8

Consumer Durables 40.1

Generating Equipment 27.6

Aircraft 26.7

Telecommunications 22.2

AutomobilesAutomobiles 20.520.5

Grains 14.4

Nonferrous Metals 12.2

AutomobilesAutomobiles $114.1$114.1

ComputersComputers 75.375.3

Petroleum 103.6

Clothing 64.3

Household Appliances 66.4

SemiconductorsSemiconductors 37.637.6

ChemicalsChemicals 33.133.1

Consumer Electronics 32.2

Telecommunications 23.2

Iron and Steel 17.7

ExportsExports AmountAmount ImportsImports AmountAmount

224224

CCanadaanada

197197[in 04][in 04]

ChinaChina

118118

JapanJapan

138138

MMexicoexico

9797

MexicoMexico

170170

CCanadaanada

3535[in 04][in 04]

ChinaChina

200200

180180

160160

140140

120120

100100

8080

6060

4040

2020

00

180180

160160

140140

120120

100100

8080

6060

4040

2020

00

ImportsImports6868

GermanyGermany

4040

TaiwanTaiwan

4343

UKUK

3737

KKoreaorea

1919FFrancerance

3434

UKUK

29 29

GermanyGermany

2424

KoreaKorea

2828

TaiwanTaiwan1717

SingaporeSingapore1717

NetherlandsNetherlands1414

FFrancerance

EXPORTSEXPORTS5252

JapanJapan

If World Trade Is So Great, Why If World Trade Is So Great, Why Are These People Against It?Are These People Against It?

Name a TV CompanyName a TV CompanyThat SThat Still till Produces Produces

TVs in the U.S.TVs in the U.S.

Giant Giant SuckingSucking Sound Sound

Familiar TV Names But ForeignFamiliar TV Names But Foreign[We used to have 27 companies producing TVs, now 0]

MagnavoxMagnavox Netherlands (Phillips)Netherlands (Phillips)PhilcoPhilco Netherlands (Phillips)Netherlands (Phillips)SylvaniaSylvania Netherlands (Phillips)Netherlands (Phillips)RCARCA France-China France-China (TCL-Thompson)(TCL-Thompson)

GGeneral eneral ElectricElectric France (Thompson)France (Thompson)MotorolaMotorola Japan (Quasar)Japan (Quasar)ZenithZenith South KoreaSouth Korea

Top Chinese Imports (bil.)Top Chinese Imports (bil.)8.6 Shoes6.1 Toys5.6 Input-output units5.1 Data processing machine parts3.2 VCRs2.6 Wood furniture2.0 Transmission1.7 Data Storage units1.6 Christmas items1.6 Video games1.6 Telephone sets1.4 Sweaters & pullovers

Top Chinese ImportsTop Chinese Imports (percentage of all imports)(percentage of all imports)88% of all Radios87% Christmas & festive items83% Toys70% Leather goods67% Shoes67% Handbags65% Lamps and lights64% Cases for cameras, eyeglasses, etc.60% Drills, power tools56% Household plastics54% Sporting goods53% Ceramic Kitchenware

The U.S. trade deficit with China in 2004 was $$162162 billionbillion.Wal-Mart bought $16 billion from China in 2004.

$124 Billion Chinese Trade Deficit$124 Billion Chinese Trade Deficit

JapanJapan – – “Land of the $30 pizzas, $30 lipstick, $50 “Land of the $30 pizzas, $30 lipstick, $50 melons, $100 jeans and $4,500 two-bedroom apts.”melons, $100 jeans and $4,500 two-bedroom apts.”

Japan has been aJapan has been a closed economy[fewer choices, higher pricesclosed economy[fewer choices, higher prices]

ItemItem N.Y.N.Y. TokyoTokyoShock Absorbers $228$228 $605$605

Alternator $120$120 $600$600

Watermelon $5$5 $50$50

Cup of coffee $1$1 $7$7

Cab to airport $20$20 $200$200

Stamp .37.37 .79.79

Gallon of gasoline $1.85$1.85 $5.00$5.00

Newspaper .50.50 $1.00$1.00

Movie Ticket $14$14 $20$20

We have 550 cars per 1,000550 cars per 1,000; Japan has only 240 per 1000240 per 1000 inhabitants.Japanese cameras areJapanese cameras are more expensive in Tokyomore expensive in Tokyo than in New York. In Tokyo, you have to have a sizable inheritance to be able to afford a house.Their national debt is $31,000 per capita$31,000 per capita, compared to $24,500 in the U.S.$24,500 in the U.S.Japan has had a decade-long economic tailspindecade-long economic tailspin, even with in. rates of .15 of 1%.in. rates of .15 of 1%.

The Japanese paid $28 The Japanese paid $28 billionbillion

per year in higher prices for per year in higher prices for rice because they would notrice because they would notbuy from U.S. rice farmers.buy from U.S. rice farmers.

Japanese consumers pay Japanese consumers pay $600,000 in higher prices $600,000 in higher prices for each job protected. for each job protected.

Knock-offKnock-off

Check out this Honda Chinese Knockoff.Check out this Honda Chinese Knockoff.

One of these One of these Honda motorcyclesHonda motorcycles is a is a Chinese knockoffChinese knockoff..

*The fake one is on the right [selling for $300].*The fake one is on the right [selling for $300].

Global counterfeitingGlobal counterfeiting cost companies $512 billion$512 billion in 2004. China hasChina has2/3 of all counterfeit products2/3 of all counterfeit products. Some of the counterfeiting goods include:16.5 million Lipitor tablets, $1 million worth of H-P inkjet cartridges, phony Viagra; cigarettes, $100 bills, 11,000 fake parts for Nokia phones,Callaway Golf clubs, Intel Computer chips, shampoos, soaps, teas, 10%of all medicines, bogus car parts, Sony PS2’s, even cars.

China’s policy seems to be:““If you can make itIf you can make it, , we can fake itwe can fake it.”.”

PointPoint:: Protecting businesses from

foreign competition preserves American jobs.

Counterpoint:Counterpoint: Few are helped by Anti - Trade policies, but they are more visible and more vocal than the many who are hurt. Protecting jobs in import competing industries raising prices to consumers and costs jobs in industries that use imported inputs. America and consumers pay dearly each time protectionist measures “save” jobs.

Jobs, Jobs, JobsJobs, Jobs, Jobs

Counterpoint:Counterpoint: That is half the story. Here is the rest of the story. 1. The higher steel prices saved 17,000saved 17,000 jobs in the steel industry but led to the loss ofloss of 52,400 52,400 jobsjobs in American steel-using industries. For every job saved, three were lost. 2. The import quotas on Japanese autos preserved 4,598preserved 4,598 American auto jobsAmerican auto jobs but at a cost to consumers of $241,235$241,235 per jobper job per year, in higher prices paid for cars. Saving a 30,000 30,000 auto job costauto job cost consumersconsumers $120,000 $120,000 annuallyannually in higher prices.

..

Point:Point: Protecting American businesses from foreign competition does potentially preserve American jobs. 1. Restrictions on imported steel in the 80s saved 17,000saved 17,000 jobsjobs in the steel industry and its suppliers. 2. Import quotas on Japanese autos preserved 4,598 American jobspreserved 4,598 American jobs.

*The more you pay for protected goods, the less you have to use to*The more you pay for protected goods, the less you have to use tobuy other goods. The less consumers have to buy other goods, thenbuy other goods. The less consumers have to buy other goods, thenfewer jobs will be created by the market.fewer jobs will be created by the market.

Jobs, Jobs, Jobs ArgumentJobs, Jobs, Jobs Argument

Counterpoint:Counterpoint: Low wages allow developing countries to enter the world economy. These jobs are considered “good jobs” in the developing country, and allows the US to produce what we do best.

Point:Point: If we trade freely with low wage countries,U.S. businesses will flee to those countries and U.S.wages will plummet.

Low Wage CompetitionLow Wage Competition

““I know you are against I know you are against free free trade as a former employeetrade as a former employee. . But – how do you feel about But – how do you feel about free trade as a consumerfree trade as a consumer??

• ABSOLUTE ADVANTAGE: When a country can produce more When a country can produce more of a given product than another of a given product than another countrycountry.

Total output will be greatest wheneach good is produced by the nationthat has the lowest opportunity cost for that good.

Principle of Comparative Advantage

““The Babe” Absolute Advantage The Babe” Absolute Advantage

in Hitting & Pitchingin Hitting & PitchingBabe Ruth was the best hitterbest hitter and pitcherpitcher on His team. He had been the best pitcher in the American League for several years, winning 94 94 gamesgames and losing only 46. He could produce the same amount of home runs as any teammate with fewer at bats. The problem was that if he pitched, he would batfewer times because pitchers need rest after pitching. The Babe had helped the Red Sox win the pennant in 1915, 1916, & 19181915, 1916, & 1918. Hehad pitched 29 scoreless innings29 scoreless innings in the world series. As a pitcher for the Red Sox in 1918 & 1919, he hit 40 of the Red Sox 46 home runs40 of the Red Sox 46 home runs. After being sold to the Yankees in 1920sold to the Yankees in 1920, the coaches decided that the Babe had a comparative advantage in hittingcomparative advantage in hitting. A few pitchers on the team could pitch almost as well as the Babe, but not one could touch the his hitting. In terms of opportunity costs, the Yankees would lose fewer games if the Babe specialized in hitting. So – the Babe ended up hitting 714 home runs714 home runs even though he spent seven years as a pitcher. And the Red Sox don’t win again – until 2004And the Red Sox don’t win again – until 2004.

Absolute AdvantageAbsolute Advantage [[outputs or quantityoutputs or quantity]] – – high number is more efficient, can produce more high number is more efficient, can produce more

push-ups with the same number of muscles.push-ups with the same number of muscles.

I Can do 8 push-ups. I Can do 42 I Can do 42

push-ups.push-ups.I have an I have an absolute absolute advantageadvantage in in producing push-ups.producing push-ups.

Absolute AdvantageAbsolute Advantage [[inputs or hoursinputs or hours] -] -

low number is morelow number is more efficient, can clean efficient, can clean the same the same house quicker. house quicker.

I can clean that I can clean that house in house in 44 hours. hours.

I’m more efficient. I can I’m more efficient. I can do the same work in do the same work in 33 hours hours so I have an so I have an absoluteabsolute advantageadvantage..

PRODUCTION POSSIBILITIES

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Curve For Each CountryUnited States Brazil

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The Gains from TradeUnited States Brazil

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The Gains from TradeUnited States Brazil

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The Gains from TradeUnited States Brazil

The Case ForFree Trade

COMPARATIVE ADVANTAGECOMPARATIVE ADVANTAGE

Trading According to Comparative Advantage

With trade, a few people lose a lot, With trade, a few people lose a lot, a lot of people gain a little. a lot of people gain a little. [Freer trade is like improved technology][Freer trade is like improved technology]

FREE TRADEFREE TRADE

• Efficient allocation of resources

• World = higher level of material well-being

• Historical evidence

Wanted: More Cheap ImportsWanted: More Cheap ImportsTrade fosters competition, which rewards productivity and restrains cost.

More-traded ProductsMore-traded ProductsFive-year price decrease

VVideo Equipmentideo Equipment

TVTV sets sets

TToysoys

PPhoto equipmenthoto equipment

RRoasted coffeeoasted coffee

AAudio equipmentudio equipment

DDishes & flatwareishes & flatware

WWomen’s outerwearomen’s outerwear

MMen’s en’s shirts/sweatersshirts/sweaters

FFilm & photo sup.ilm & photo sup.

GGirls’ apparelirls’ apparel

MMen’s footwearen’s footwear

NNew carsew cars

WWomen’s dressesomen’s dresses

RRiceice

HHHH laundry equip. laundry equip.

Less-Traded ProductsLess-Traded Products [Less competition-higher [Less competition-higher prices]prices]

Less-traded ProductsLess-traded Products

Joe Export Goes Out Of BusinessJoe Export Goes Out Of Business12,000 x $40 = $480,000; 12,000 X $25 = $300,000

(It cost $180,000 to save one clock-radio guy’s job)

Suppose Joe Export lives and works in the U.S. making dancingclock radios. He produces and sells 12,000sells 12,000 clock radios per yearat a price of $40 eachprice of $40 each. There is no international trade.

One day the U.S. market is openedU.S. market is opened to dancing clock radiosto dancing clock radios from Japan. The Japanese manufacturers have a comparative comparative advantage advantage and sell them for $25 each. Joe can not compete atand sell them for $25 each. Joe can not compete atthis price. His sales drop to such a degree that he goes out ofthis price. His sales drop to such a degree that he goes out ofbusiness. International business. International trade has harmed himtrade has harmed him but helped but helped American consumers because they save $180,000.American consumers because they save $180,000.

““I can do the I can do the econ rap.”econ rap.”

Absolute AAbsolute Advantagedvantage

““We can We can produce 40 produce 40 tons of corn.”tons of corn.”

“We can produce 60 tons of corn, so - we have an absolute advantage because we can produce more corn with the same resources.”

The world is becoming a smaller place. What happens in Tokyo affects what happens in New York and Minneapolis.

There is over $12 trillion in world tradeover $12 trillion in world trade. Volume of TradeExports as % of GDPExports as % of GDPPanama 80%Belgium 70%Netherlands 62%Kuwait 55%Norway 45%Canada 41%[If we sneeze, Canada catches a cold][If we sneeze, Canada catches a cold]South Korea 36%Germany 36%China 35%[1/3 bought by U.S.]United Kingdom 29%Spain 29%Italy 28%France 27%Mexico 25%[80% of Mexico’s exports are sold to the U.S.]Japan 12%United StatesUnited States 11%11%[over $1 trillion in 2004]WorldWorld 25%25%

Global TradeGlobal Trade

In 2004, we had a trade deficittrade deficitin goodsin goods of $666 billion$666 billion.We had a trade surplustrade surplus in in services of $48 billionservices of $48 billion. ($618. ($618)

The importance of trade has grown.The importance of trade has grown.

1111%%

High Cost of ProtectionHigh Cost of ProtectionIt cost an average of $231,289 per job saved.

Consumers pay $100 billion$100 billionannually in higher priceshigher prices.Protecting sugar raises candy and soft drink prices; protecting steel makes car prices higher.

This is a “negative-sum “negative-sum game.”game.”

History of TariffsHistory of Tariffs1. Revenue TariffsRevenue Tariffs – applied to products not produced domesticallynot produced domestically [bananas, coffee]. These are normally low & their purpose is to provide income for the government.

2. Protective TariffsProtective Tariffs – tax on imports designed to protect domestic protect domestic producers from foreign competitionproducers from foreign competition [autos, shoes, textiles]. *We have tariffs on 8,753 products (70% of our imports). They add about 3% to prices. They cost consumers an extra $70 billion. [$1,000 per family][$1,000 per family]

11stst

Hong KongHong Kong

22ndnd

33rdrd

Smoot-Hawley Tariff of 1930Smoot-Hawley Tariff of 1930Smoot-Hawley Tariff ofSmoot-Hawley Tariff of 19301930-so high it decreased imports 60% and hurt all international trade. International trade plummeted from $60 billion in 1928 to $25 billion in 1938.

Smoot-HawleySmoot-Hawley Tariffs on over 12,000 products went up. Agricultural tariffs went from 20% to 34%, clocks from 45% to 55%, woolen products from 50% to 60%, wines, spirits, & beverages from 36% to 47%, corn and butter tariffs were doubled, over 800 production items were taxed. Thispolicy put the “Great”“Great” in the “Great Depression”“Great Depression”.

Reed SmootReed Smoot Willis HawleyWillis Hawley

Smoot and HawleySmoot and Hawley

Reed SmootReed Smoot

1,028 Economists Plead for Veto1,028 Economists Plead for Veto

And Hoover replied:And Hoover replied:

2. GATT GATT [GGeneral AAgreement on TTariffs & TTrade] 1947–1995 - started with 2323 nationsnations and ended with 128 nations128 nations – set the rules for world traderules for world trade. GATT had no mechanism to enforce their rules. Tariffs fell from 40%40% to 4%4%.

1. Reciprocal Trade ActReciprocal Trade Act – 1934-Roosevelt said to other countries, ““If you’ll lower your tariffs,If you’ll lower your tariffs, we’ll reciprocate and lowerwe’ll reciprocate and lower ours by the sameours by the same percent.”percent.” [up to 50% of existing rates]

Trade PoliciesTrade Policies

GATT protected intellectual propertyprotected intellectual property (patents, trademarks, and copyrights). GATT in 19951995 was replaced by the World Trade Organization [WTOWTO]. These agreements (by 2005) will boost the world’s GDP by $6 trillion [8%]$6 trillion [8%].. [148 nations148 nations] U.S. consumers will gain $30 billionconsumers will gain $30 billion annually.

World Trade OrganizationWorld Trade Organization

We have trade restrictions on orangesoranges from S. AmericaS. America, machine toolsmachine tools from SwitzerlanSwitzerland, TVs TVs from S. Koreafrom S. Korea, computer screens from Japancomputer screens from Japan, and steelsteel from nearly everywhere on earth. There are also restrictions on watcheswatches, tobaccotobacco, shipsships, ice creamice cream, cheesecheese, clothing, sugarclothing, sugar, & hundreds of other products. Sugar quotasSugar quotas for 2,000 sugar growers cost consumers $3 billion per yearcost consumers $3 billion per year [cost twice the world price -22 cents per pound v. 10 cents per pound for the world price]. The annual cost of retaining just 1 job through trade restraintsretaining just 1 job through trade restraints is $1 million $1 million in specialtyspecialty steel, $550,000 in nuts and screwssteel, $550,000 in nuts and screws, $240,000 in orange juice$240,000 in orange juice, and $200,000 in glassware$200,000 in glassware.

In 19801980, U.S. auto companies sold 1 million fewer carssold 1 million fewer cars than in 1979. The “Big 3” lost over “Big 3” lost over $4 billion$4 billion. The “Big 3” demanded protection so they could retool for smaller cars. Japan agreed to voluntarily freeze auto exports to 1.65 million from 1981-19831.65 million from 1981-1983 & 1.85 million in 19841.85 million in 1984. With fewer choices, domestic car prices rose $2,000car prices rose $2,000 and Japanese car prices rose $2,500Japanese car prices rose $2,500. We had a smaller selection, had to wait longer and paid $15.7 billion extra. smaller selection, had to wait longer and paid $15.7 billion extra.

WTOWTO WTOWTO

WTO Objectives – WWTO Objectives – World’s orld’s TTraderade P Policeolice F Forceorce

WTOWTO

148148

•Reductions in Tariffs Worldwide

•New Rules to Promote Trade in Services

•Reduction in Agricultural Subsidies

• Intellectual Property Protections

•Phasing Out Textile Quotas & Tariffs

•Tariffs will be totally eliminated by 2008

•WTO settled more disputes in 10 years than GATT did in 50 years.

WORLD TRADE ORGANIZATION [WTO]WORLD TRADE ORGANIZATION [WTO]

WTOWTO

Traffic Jam in China.

This is more cars than the entire country of

China had under the communist economy.

Example Example of Aof A Trade Dispute Trade Dispute on on BananasBananasThe Dispute: The EU restricted banana imports to

bananas from only a few countries that were former colonies. As a result, the price paid for bananas in European markets was about twice the price of bananas in the U.S. The world’s largest banana companies, Dole, Chiquita, and Del Monte, headquartered in the U.S., complained that they were being harmed because their bananas, which came from other countries of Central and South America were excluded from the EU system, which favored a few former colonies.

Ruling: The WTO ruled that the EU restrictions on banana imports were harmful and against the rules of trade to which all nations had agreed. This is but one example of the role of the WTO in promoting fair and free international trade.

A man from India holds the recordA man from India holds the recordfor eating bananas 91 in 30 min.for eating bananas 91 in 30 min.

Free Trade Area of the Americas(FTAA)Free Trade Area of the Americas(FTAA)• This would include South, Central and North

America, from Anchorage to Patagonia, a population of 800 million. This would be the largest free-trade zone on the planet. President Bush favors this. It includes 34 nations with a combined output of $13 trillion.

Import QuotasImport Quotas – sets a maximum amount for an import. They may be a more effective protective device than tariffs which do not limit the amount of goods entering a country.

FTAAFTAA

CAFTA-DR Free Trade AgreementCAFTA-DR Free Trade Agreement

• CAFTA is a comprehensive trade agreement between the U.S.U.S., Costa RicaCosta Rica, the Dominican RepublicDominican Republic, El SalvadorEl Salvador, GuatemalaGuatemala, HondurasHonduras, and NicaraguaNicaragua.

• It will eliminate the barriers to American’s goods to 44 million44 million customerscustomers. CAFTA is considered to be a stepping stone to stepping stone to the FTAAthe FTAA which would include 34 countries.

Non-tariff BarriersNon-tariff Barriers –licensing requirements, re-inspectionsre-inspections,unreasonable standards pertaining to quality and safety, or unnecessary bureaucratic red tape red tape in customs procedures. The Japanese Japanese conductconduct stringent re-inspectionsre-inspections of our autos that cost the Japanese consumer an extra $500.00extra $500.00.

Non-tariff BarriersNon-tariff Barriers

3333%% 2222%% 3131%%

8686%%

2323%%2525%%

NAFTA is a $12 trillion market$12 trillion market [1,000 page docu] gamble for 421 million consumers421 million consumers.NAFTA will roll back 20,000 separate tariffs20,000 separate tariffs over 15 yrs.Before NAFTA, those barriers averaged 11% in Mexico,5%5% in Canadain Canada, & 4%4% in the U.S.in the U.S.American consumers will save $20 $20 billion per year when all trade barriers are removed.

U.S.U.S. CanadaCanada MexicoMexicoGDPGDP $12 tril.$12 tril. $1 Tril.$1 Tril. $1 Trillion$1 Trillion

[40% live[40% live on on less than $2 day]less than $2 day]

PPopulationopulation 295 mil.295 mil. 30 mil.30 mil. 105 million105 million [Only 28% grad. high school][Only 28% grad. high school]

PPer er CCapitaapita $36,000$36,000 $30,000$30,000 $9,000$9,000

Ave. HourlyAve. Hourly $16.00$16.00 $17.00$17.00 $2.00 $2.00 [.60 min. wage][.60 min. wage]

NAFTANAFTA [January 1, 1994][January 1, 1994] [[U.S., U.S., Canada,Canada, & & MexicoMexico ]]

Texas’ exports to Mexico have increased from $19 B to $52 BTexas’ exports to Mexico have increased from $19 B to $52 B

Top Texas Export Countries - 2000Top Texas Export Countries - 2000$52 $52 billionbillion

=$4 b=$4 billionillion

Carlos SalinasCarlos SalinasDe GortariDe Gortari

Brian MulroneyBrian Mulroney

George BushGeorge BushSigning of NAFTA - 1994Signing of NAFTA - 1994

NAFTA’s Benefits for MexicoNAFTA’s Benefits for MexicoMexicoMexico buys 70% of its imports from Texas. Texas’ exports to Mexico have increased from $19 billion in 1994 to over $52 billion$52 billion in 20042004. Mexico’s imports of U.S. goodsimports of U.S. goods have gone from $51 billion$51 billion to $111 billionto $111 billion, supporting over 1 million jobs1 million jobs in the U.S. ImportsImports from Mexico have more than tripledtripled.

NAFTANAFTA encourages more world-wide investment in Mexico. This is enhancing their productivityenhancing their productivity and incomeincome. Some of this increased income is being used to buy U.S. exportsbuy U.S. exports. A higher standardhigher standard of living in Mexico will help stem the flow of illegal stem the flow of illegal immigrantsimmigrants to the U.S.

U.S. – Canada TradeU.S. – Canada TradeU.S. exports to Canada $175 BU.S. imports from Canada $229 B

Canadian-Mexican TradeCanadian-Mexican TradeCanadian exports to Mexico $1.3 BCanadian imports from Mexico $8.5 B

U.S. - Mexico TradeU.S. - Mexico TradeU.S. exports to Mexico $109 BU.S. imports from Mexico $135 B

North American Free Trade Agreement [NAFTA]North American Free Trade Agreement [NAFTA]

Note Sheet – 1-13Note Sheet – 1-131. Most of our merchandise tradeour merchandise trade is with other industrially advanced (capitalist/communist) nations.2. Quantitatively, our most important trade partnerour most important trade partner is (Japan/Mexico/Canada/Germany/Djibouti).3. American exportsAmerican exports of of goods/servicesgoods/services average about (30%/25%/12%/4%) of GDP.4. According to the theory of comparative advantagecomparative advantage, a good should be produced in that nation where its cost is (most/least) in terms of alternative goods which might otherwise be produced.5. The ratio at which nations will exchange two goodsexchange two goods is the (domestic comparative [opportunity] cost/terms of trade). 6. A (quota/tariff) is an excise tax on imported goodsexcise tax on imported goods.7. If the U.S. eliminates tariffs on Cuban rollerbladeseliminates tariffs on Cuban rollerblades, we would expect the price of Cuban rollerblades to (increase/decrease) in the U.S. Also employment would (increase/decrease) in the Cuban rollerblade industryCuban rollerblade industry.8. The Smoot-Hawley TariffSmoot-Hawley Tariff of 1930 established very (low/high) tariffs on goods imported to the U.S. 9. GATTGATT included over 100 nations and emphasized tariff (reductions/increases) for members, and (increasing/decreasing) import quotas.10. The Reciprocal Trade AgreementsReciprocal Trade Agreements ActAct of 1934 brought about considerable (increases/reductions) in American trade barriers.11. The European UnionEuropean Union (abolished/increased) tariffs among one another and established a system of common tariffs with non-member nations. 12. NAFTANAFTA included the U.S., Mexico, and (Japan/Canada/Djibouti).13. ProponentsProponents of of NAFTANAFTA contend it will (incr/decr) the flow of illegal immigrants (incr/decr) U.S. exports by raising productivity & income in Mexico, and enable the U.S. to obtain (more/less) total output from its scarce resources.

Japanese TV cost Y207,000Japanese TV cost Y207,0001. A. A. $1$1 = 140 [TV would cost = 140 [TV would cost $1,479$1,479]] B. B. $1$1 = 80 [TV would cost = 80 [TV would cost $2,588$2,588]] C. C. $1$1 = 106 [TV would cost = 106 [TV would cost $1,953$1,953]]

2. A. 2. A. 1 Euro1 Euro = = $1.17$1.17 B. B. 1 Euro1 Euro = = 86 cents86 cents [in 2002] [in 2002] C. C. 1 Euro1 Euro = = $1.23$1.23 [in 2005] [in 2005]

3. 3. $1$1 = = 1.3 Loonies1.3 Loonies

4. A. 4. A. $1$1 = = 2,400 rupiahs2,400 rupiahs [in 1996] [in 1996] B. B. $1$1 = = 9,555 rupiahs9,555 rupiahs [in 2005] [in 2005]

AppreciationAppreciation//Depreciation Depreciation HistoryHistory

And – And – $1 = 15.8 Vietnamese dongs$1 = 15.8 Vietnamese dongs

Exports Have More Than DoubledMore Than Doubled As A Percent of GDP Since 1975

$$618618 Billion Billion Trade Deficit in 20042004

Export Goods & Services 12%12% of American GDP

KEY FACTS ON TRADEKEY FACTS ON TRADE

European Union – 25 NationsEuropean Union – 25 Nations

Started with Started with these 15these 15

Joined bythese 10in 2004

15 initial mbrs15 initial mbrs

That Sinking FeelingThat Sinking Feeling[Percent change from 8/11/97 to 8/11/98][Percent change from 8/11/97 to 8/11/98]

CCanada’s anada’s DDollar ollar [“Loonie”] [“Loonie”] -8.5-8.5%%Indonesia’s Rupiah Indonesia’s Rupiah -80.6-80.6%%

Thailand’s Baht Thailand’s Baht -26.3-26.3%%

South Korean Won South Korean Won -33.3-33.3%%Mexico’s Peso Mexico’s Peso -15.2-15.2%%

Japanese Yen Japanese Yen -21.2-21.2%%

So – Currency So – Currency PricesPrices Can Can Be Be Very Volatile.Very Volatile.

The New Iraqi Dinar = $25,000The New Iraqi Dinar = $25,000

On January 1, 2002, 300 million Europeans in 12On January 1, 2002, 300 million Europeans in 12countries woke up to a new currency, the euro.countries woke up to a new currency, the euro.1. Windows Windows and gatewaysgateways dominate the front side of eachnote as symbols of EU spirit of opennessopenness and cooperationcooperation.On the back side is a bridge bridge from a particular age, a metaphor for communicationcommunication among the people of Europepeople of Europeand between Europe and the rest of the worldEurope and the rest of the world.

2. Sign Sign – was inspired by the Greek letter epsilonGreek letter epsilon, in reference to the cradle cradle of of European civilizationEuropean civilizationand the first letter first letter of the word “Europe”“Europe”. Theparallel linesparallel lines represent the stability of the eurostability of the euro. 3. Eight denominations of euro coinsEight denominations of euro coins, eachhaving a common side and a national side.

Seven Euro Bank NotesSeven Euro Bank Notes

8 Euro Coins 8 Euro Coins

1 cent 2 cents 5 cents1 cent 2 cents 5 cents

10 cents 20 cents 50 cents10 cents 20 cents 50 cents

One Euro Two EurosOne Euro Two Euros

$1 will buy$1 will buy

EXCHANGE RATES:EXCHANGE RATES:.63 British pounds

10.91 Mexican pesos

.93 European euros

119 Japanese yen

1,237 South Korean won

47.68 Indian rupee

1.48 Canadian dollars

1.36 Swiss francs

8.54 Swedish krona

GLOBAL PERSPECTIVEGLOBAL PERSPECTIVEForeign Currency per U.S. DollarForeign Currency per U.S. Dollar

StrongStrong and and WeakWeak Dollar Dollar

ExportsExports

ImportsImports

““StrongStrongDollar”Dollar”

Losers [anyone buying with pesos]Losers [anyone buying with pesos]1. Mexicans who buy American products2. Mexican businesses that buy supplies from the U.S.3. American businesses that sell products to Mexico4. Mexican visitors to the U.S.5. Those who primarily do business in pesos

Winners [anyone buying with dollars]Winners [anyone buying with dollars]1. American tourists to Mexico2. People who send dollars to family or friends in Mexico3. U.S. businesses that buy from Mexico4. American consumers who buy Mexican imports5. Those who primarily do business in dollars

The Falling Peso [Who Wins?]The Falling Peso [Who Wins?]

$1 = P3.5 $20,000 car = 70,000 pesos$1 = P3.5 $20,000 car = 70,000 pesos $1 = P10.0 $20,000 car = 200,000 pesos$1 = P10.0 $20,000 car = 200,000 pesos

Year Dollar Yen Franc MarkYear Dollar Yen Franc Mark 1 $1 320 4.0 1.81 $1 320 4.0 1.8 2 $1 350 5.8 2.32 $1 350 5.8 2.31. Given the change in the value of the dollar between year 1 and 1. Given the change in the value of the dollar between year 1 and year 2, as indicated above, describe the effects this will have onyear 2, as indicated above, describe the effects this will have on U.S. tourism overseas. U.S. tourism overseas.

12 European Currencies Became Euros on 1-1-0212 European Currencies Became Euros on 1-1-02

French FrancFrench Franc

Luxembourg FrancLuxembourg Franc Italian LiraItalian Lira

German MarkGerman Mark

Belgium FrancBelgium FrancPortugal’s EscudoPortugal’s Escudo

Greek DracmaGreek DracmaDutch GuilderDutch Guilder

Spanish PesetaSpanish Peseta

But – there are still plenty of other currencies around the world.

Ireland Pounds

Finland Markhaa Austria Schilling

The following countries The following countries use ouruse our dollar dollar as as their official currency.their official currency.1. Panama2. Ecuador & El Salvador3. Some Pacific Islands

Foreign Currencies and Sub CurrenciesForeign Currencies and Sub Currencies

The following countries use currencies called dollars [not ours].The following countries use currencies called dollars [not ours].Australia Solomon Islands Canada SingaporeBelize Bahamas Barbados Hong KongJamaican New Zealand Trinidad/Tobago DominicaZimbabwe Fiji Guyana BruneiNamibia

Strange Sounding CurrenciesStrange Sounding CurrenciesIrish Punt (now the Euro) Ethiopian Birr (100 cents)Viet Nam’s Dong (100 xu) Swaziland’s LilangeniPortugal’s Escudo (now the Euro) Mozambique’s MeticaisLatvia’s Lat Bangladesh’s TakaPolish Zloty Finland’s MarkkaaLatLat MarkkaaMarkkaa

European UnionEuropean Union

[25 nations–475 million people25 nations–475 million people] [“Euroland”“Euroland” makes up the 22 euro nations22 euro nations] [GDPs of 25 total around $9.3 tril.] *It's like a "U.S. of Europe""U.S. of Europe"[imagine each state in the U.S. having its own currency. If you wanted to buy a product in Louisiana, you would have to buy Louisiana currency and pay a 1-2% fee for doing so.) [After independence, states printed their own money. Formerly, there were tariffs and quotas against other European countries.

The single currency will create efficiencies leading tofaster growth & facilitate the establishment of a kind of U.S. of Europe. There will be huge benefits from free tradehuge benefits from free trade. The elimination of trade barriers alone will boost Europeanboost European GDPs an average of 6%GDPs an average of 6% && lower prices by about 6%.lower prices by about 6%. About 4-5 million more jobs4-5 million more jobs will be createdwill be created all over Europe.

European free trade will increase production in two ways. 1. Lower costsLower costs, which will increase outputincrease output. 2. It will increase productivityincrease productivity of capital and labor as those factors are allocated on the basis of comparative advantagebasis of comparative advantage. Europe will be more prosperous.So, there will be a central bank[European Central Bank]central bank[European Central Bank], or a kind of national sovereigntynational sovereignty. This is the goal. Each nation still has its own central bankown central bank but they will have no authority to conduct monetary policy. They will operate likeoperate likeregional banks of the Fedregional banks of the Fed.

European UnionEuropean Union

AppreciationAppreciation//DepreciationDepreciation NS NS [14-19][14-19]

17. Depreciation of the euro Depreciation of the euro will (increase/decrease) European exports & (increase/decrease) their importstheir imports.

18. If Mexico decidesMexico decides to to increase increase their investmentstheir investments in thein the U.S. U.S., the peso will (appreciate/depreciate) which would (increase/decrease) [Mexico’s importsMexico’s imports] U.S. exports to Mexico.

19. If the exchange rate changes so that more Japanesemore Japanese yen are required to buy a dollaryen are required to buy a dollar then the yen will (appreciate/depreciate) and Americans will purchasepurchase (more/less) Japanese goods.

14. If the dollar depreciates relative to the pesodollar depreciates relative to the peso, the pesopeso will (appreciate/depreciate) relative to the dollar.15. Appreciation of the dollarAppreciation of the dollar will tend to (increase/decrease)

American imports & (increase/decrease) American exports.16. The yen price of the dollar has decreased fromyen price of the dollar has decreased from 150=$1 to 100=$1150=$1 to 100=$1, which means the dollardollar (apprec/deprec), which (incr/decr) our imports from Japan.

APPRECIATION of a CurrencyAPPRECIATION of a Currency1. Increase in tasteIncrease in taste [more demand for a country’s products or assets]2. Increase in interest ratesIncrease in interest rates [Overseas investors increase their investments there.]3. Decrease in price levelDecrease in price level [overseas buyers want to buy our cheaper goods.]4. Decrease in growth rateDecrease in growth rate [A country’s declining economy results in them buying less from other countries; decreasing demand for their currency and thus appreciating the declining economy’s currency]

5. Decrease in the price of a currencyDecrease in the price of a currencyrelative to the otherrelative to the other

AppreciationAppreciation//DepreciationDepreciation QuizQuiz

1. If Japan buys 2 mil. more AJapan buys 2 mil. more Americanmerican carscars the dollardollar would (appr/depr) & ourour imports from Japanimports from Japan would (incr/decr).

2. If U.S.U.S. in. rates in. rates are increasingare increasing faster faster than Japan’s, the dollardollar would (appr/depr) and our exportsour exports would (increase/decrease).

3. If prices are dropping more in Japanprices are dropping more in Japan than in the U.S., the yenyen will (appr/depr) and Japan’s Japan’s importsimports will (increase/decrease).

4. If the U.S. growth rate is faster than that of JapanU.S. growth rate is faster than that of Japan, the dollardollar will (appreciate/depreciate) and U.S.U.S. importsimports from Japan will (increase/decrease).

5. If the dollar price of the yen decreasesdollar price of the yen decreases, the dollardollar has (appreciated/depreciated) and ourour importsimports from Japan will (increase/decrease).

AppreciationAppreciation//DepreciationDepreciation Quiz Quiz [continued][continued]6. If Russia sells 10 bil. worth of oil to the Russia sells 10 bil. worth of oil to the U.S.U.S. the rubleruble would (appr/depr) and theirtheir imports from the U.S.imports from the U.S. would (incr/decr).

7. If U.S. in. rates are decreasing fasterU.S. in. rates are decreasing faster here than in Canada, the dollardollar would (appreciate/ depreciate) & U.S. exportsU.S. exports would (incr/decr).

8. If prices are increasing more in Japanprices are increasing more in Japan than in the U.S., the dollardollar will (appr/depr)

and our exportsour exports will (increase/decrease).

9. If the U.S. growth rate is slower than that of CanadaU.S. growth rate is slower than that of Canada, the Canadian dollarCanadian dollar will (appreciate/depreciate) & Canada’sCanada’s exportsexports to the U.S. will (increase/decrease).

10. If the dollar price of the euro increasesdollar price of the euro increases, the dollardollar has (appreciated/depreciated) and our ourour importsimports from France will (increase/decrease).

4. If Malaysia’s Malaysia’s price level is decreasingprice level is decreasing faster faster than that ofthan that of Brazil Brazil, the Malaysian ringgitMalaysian ringgit will (apprec/deprec) & Malaysia’s exportsMalaysia’s exports to Brazilto Brazil will (increase/decrease).5. If growth rate is less rapid in Djiboutigrowth rate is less rapid in Djibouti than in Swaiziland, then the Djibouti boutiDjibouti bouti will (appreciate/depreciate) and Djibouti’s exportsDjibouti’s exports will (increase/decrease).6. If the Euro price of the S. Korean won decreasesEuro price of the S. Korean won decreases, the EuroEuro has (apprec/deprec) & European exports to KoreaEuropean exports to Korea will (incr/decr).7. If interest ratesinterest rates are are increasing fasterincreasing faster in in ZambiaZambia than in Spain, the Zambian KwachiZambian Kwachi will (appreciate /depreciate) and Zambia’s Zambia’s imports from Spainimports from Spain will (increase/decrease).

AppreciationAppreciation//DepreciationDepreciation Practice Quiz 1Practice Quiz 11. If more Thai bahts are required to buy a dollarmore Thai bahts are required to buy a dollar, then the bahtbaht has (appreciated/depreciated), & Thai exportsThai exports to the U.S. to the U.S. should (increase/decrease).

2. If Latvia’s Latvia’s demand fordemand for U.S. Fuzzy W U.S. Fuzzy Wuzziesuzzies decrease decrease,

then Latvia’s Lat will (apprec/deprec) & Latvia’sLatvia’s importsimports from the U.S. from the U.S. will (increase/decrease).3. If interestinterest rates rates are decreasing fasterare decreasing faster in in S.Korea[4S.Korea[4%%]] than in Cuba[8%], then the Korean wonKorean won will (appr/depr)

& Korea’s exports to CubaKorea’s exports to Cuba will (increase/decrease).