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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
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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 twoshould work out a trade agreement
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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
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U.S Exports and Imports
Historically, U.S. has had advantages in agricultureand related technology (Farm Equipment, Seed, Etc)
Also, in recent years, U.S. has been a leadingexporter 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 advantagesin these products and U.S. has become a majorimporter
Following WWII, U.S. exported petroleum
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Trade Balances
Positive Trade Balance When a nation exports more$ value than it imports: $Exports > $Imports
Negative Trade Balance When a nation importsmore $ value than it exports: $Exports < $Imports
Prior to 1970, U.S. enjoyed a Positive Trade Balance
Since 1970, Trade Balance has become negative in amajor way
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8-4Copyright2002 by The McGraw-Hill Companies, Inc. All rights reserved.
1990 1992 1994 1996 1998 2000
Imports
Exports
Merchandise Imports and Exports as
Percentage of Goods Produced in the
United States, 1990-2000Since 1990 our imports and
exports as a percentage of
goods produced in the UnitedStates 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
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7/198-6Copyright2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Overallbalanceon goodsand serv ices
Balanceon goods
1970 1975 1980 1985 1990 1995 2000
Balance
on serv ices
U.S. Balance of Trade in Goods, Services, and
Overall Balance, 1970-2000 (in billions of dollars)
Since the late 1980s, we
have been running a
large and growingbalance on services.
Our balance on goods,
which has been negative
since the mid-1970s, hasgrown steadily worse
since 1991 and now
totals more than $300
billion
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Percentage of GDP
0 10 20 30 40 50 60 70
Netherlands
Canada
Sweden
Switzerland
Denmark
Germany
France
United Kingdom
Italy
U.S.
60.6
43.7
43.7
41.2
36.8
29.5
26.1
25.8
25.5
10.7
Exports of Goods & Services as Percent-
age of GDP, Selected Countries, 1999
Copyright2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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100 200 300 400 500 600 700
United States
Germany 520
Japan 388
China 214
South Korea 133
Mexico 118
Canada 358
Taiwan 110
Singapore 110
Switzerland 79
(billions of dollars)
683
8-10Copyright2002 by The McGraw-Hill Companies, Inc. All rights reserved.
The Worlds Top Ten Exporting
Nations, 1999
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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?]
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World Trade Agreements and Free Trade
Zones Examples of Free Trade Zones Geographical areas
where trade barriers have been eliminated or greatlyreduced
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
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World Trade Organizations & Free Trade
Zones European UnionAlthough 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 commoncurrency)
Trade within the EU could expand 3X
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Ireland
Belgium
Sweden
United Kingdom
Denmark
Netherlands
The European Union (EU)
Finland
Germany
Luxembourg
Austria
Greece
Italy
France
Portugal
Spain
Indicates the 15 countries thatform the European Union (EU)
Copyright2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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World Trade Agreements and Free TradeZones
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
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World Trade Agreements and Free TradeZones
World Trade Organization [1995] as a successor toGATT
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
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Globalization: Arguments Against
Upsets the status quo
Workers in poorer countries exploited to providecheaper goods for U.S.
Most nations have a difficult time ceding theirnational sovereignty to an international organization
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A Summing Up: C + I + G+ Xn
8-7
Net exports = Xn
Xn = Exports - Imports
Copyright2002 by The McGraw-Hill Companies, Inc. All rights reserved.
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45
8,000
10,000
8,000 10,000
6,000
6,000
4,000
4,0002,000
2,000
C + I + G
Disposable income ($)
45
8,000
10,000
8,000 10,000
6,000
6,000
4,000
4,0002,000
2,000
C + I + G
Disposable income ($)
C + I + G + Xn
C + I + G + Xn
Why is the C + I + G + Xn line lower than the C + I + G line?
Answer: It is lower because net exports (Xn) are negative