Why Countries Trade To understand why countries trade.

Why Countries Trade

To understand why countries trade

Why Trade?

There are two theories on why countries trade, they both agree that countries should produce those things that they are most efficient at making

Absolute Advantage

Theory that we should produce what is efficient, and trade the surplus for things that we aren’t efficient at making

Absolute Advantage

Theory that we should produce what is efficient, and trade the surplus for things that we aren’t efficient at making

Ex. – we export machinery to Central America, they export bananas to us

Comparative Advantage

Theory that we should produce those things at which we are relatively more efficient at making

Comparative Advantage

Theory that we should produce those things at which we are relatively more efficient at making

Ex. – US makes both watches and airplanes more efficiently than Switzerland

Comparative Advantage

Theory that we should produce those things at which we are relatively more efficient at making

Ex. – US makes both watches and airplanes more efficiently than Switzerland• However, we are 3x more efficient in

airplanes, 2x in watches

Comparative Advantage

Theory that we should produce those things at which we are relatively more efficient at making

Ex. – US makes both watches and airplanes more efficiently than Switzerland• However, we are 3x more efficient in

airplanes, 2x in watches• Therefore, we should specialize in airplanes

Barriers to Trade

Tariffs – taxes on imports

Barriers to Trade

Tariffs – taxes on imports3 types of tariffs:

Barriers to Trade

Tariffs – taxes on imports3 types of tariffs:

Revenue – intended to raise money

Barriers to Trade

Tariffs – taxes on imports3 types of tariffs:

Revenue – intended to raise moneyProtective – to protect US made goods

Barriers to Trade

Tariffs – taxes on imports3 types of tariffs:

Revenue – intended to raise moneyProtective – to protect US made goodsRestrictive – to reduce/eliminate flow on a product to the country

Barriers to Trade

Quotas – limit on the amount of goods let into a country (made illegal by GATT General Agreement of Tariffs and Trade)

Barriers to Trade

Quotas – limit on the amount of goods let into a country (made illegal by GATT General Agreement of Tariffs and Trade)VER (Voluntary Export Restraints) countries volunteer to set their own quota on exports to help another country out

Barriers to Trade

Regulations and Certification – imports must meet these

The Costs and Benefits of Trade Barriers

Why restrict trade?

The Costs and Benefits of Trade Barriers

Why restrict trade?Infant Industry – needs to protect young growing industry from well-established industry

The Costs and Benefits of Trade Barriers

Why restrict trade?Infant Industry – needs to protect young growing industry from well-established industryNational Security – produce necessary military products itself

The Costs and Benefits of Trade Barriers

Why restrict trade?Infant Industry – needs to protect young growing industry from well-established industryNational Security – produce necessary military products itselfProtection of domestic jobs – foreigners work for less

The Costs and Benefits of Trade BarriersWhy restrict trade?

Infant Industry – needs to protect young growing industry from well-established industryNational Security – produce necessary military products itselfProtection of domestic jobs – foreigners work for lessMaintaining economic stability – can be greatly disrupted by other countries’ problems

Balance of Trade

Since 1980, US imports more than it exports (negative balance of trade)

Balance of Trade

Since 1980, US imports more than it exports (negative balance of trade)

Can be bad for employment, taxes, profits, economic growth

Balance of Trade

Since 1980, US imports more than it exports (negative balance of trade)

Can be bad for employment, taxes, profits, economic growthGood for fighting inflation, providing low cost goods

Politics

The US has backed away from Free Trade, and pushed for Fair Trade

Politics

The US has backed away from Free Trade, and pushed for Fair Trade

Opposed to the policy of dumping (selling of products for less than that country can produce them for)

Politics

The US has backed away from Free Trade, and pushed for Fair Trade

Opposed to the policy of dumping (selling of products for less than that country can produce them for)

The US has published a list of Unfair Trade Countries, and threats of retaliation from the US have improved conditions