International Notes Why do we trade with other countries? A. Obtain products and scarce resources the U.S. does not produce or have. (No bauxite, thus no aluminum) B. Products from other countries are better than the ones produced here (French wine vs. American wine) Why do we trade with other countries? C. Products can be produced cheaper in other countries (Goods made in vs. Goods made in U.S) D. So we can sell our goods to other countries E. Consumers have a better selection of products at cheaper prices. Trade Barriers  What are trade barriers?  Trade policies that limit or prevent trade with other nations Tariffs  - a tax placed on imports to increase their price in the domestic market  Example- Swiss Chocolate imported at $5.00 a lb.  U.S. puts a tariff on Swiss Chocolate of $1.00 a lb  Now the cost of Swiss Chocolate for Americans is $6.00 a lb Types of Tariffs  Protective Tariff- high tax used to protect less efficient domestic industries  Example- U.S. Chocolate= $6.00 a lb. o Swiss Chocolate imported at = $5.00 a lb. o Which would you buy? o U.S. adds tariff of $1.50 a lb to the imported Swiss Chocolate o Now the cost of the Swiss Chocolate is $6.50 a lb. o Now which would you buy? Types of Tariffs  Revenue Tariff- high enough to raise money but not enough to prohibit imports (not as high as a protective tariff)  Example- U.S. chocolate = $6.00 a lb. o Swiss Chocolate imported at $5.00 a lb. o U.S. adds a tariff of .$50 to Swiss Chocolate o Now the cost of Swiss Chocolate in the U.S. is $5.50 a lb., which is still cheaper that U.S. Chocolate but enough for the government to make some money Types of Tariffs  Countervailing Tariff- a tax placed on imported goods for the purpose of creating a level playing field for domestic goods and foreign-made goods  Example- U.S. Chocolate = $6.00 a lb o Swiss Chocolate = $5.00 a lb o U.S. adds a tariff of $1.00 to Swiss Chocolate o Now both U.S. chocolate and Swiss Chocolate costs $6.00 a lb. Embargo  Embargo- legal prohibition of trade with a nation  Example-The U.S. currently has an embargo on communist Cuba which means that no one in the U.S. can trade or buy goods from Cuba Quota  Quota- a number limit placed upon imports from another nation.  Example- U.S. can only import 10,000 lbs of Swiss Chocolate a year. Quota  If you increase a quota, you increase the number of goods allowed into the country, thus increasing trade  If you decrease a quota, you decrease the number of goods allowed into the country, thus decreasing trade Dumping  Dumping- selling goods in another country for less than is costs to produce the good.  This can be a good way for a country to get rid of surplus goods or get rid of .  This is illegal in the international community Trade Barriers  How do we INCREASE trade barriers?  Lower or add a quota  Add or raise a tariff  Place an embargo on a country Trade Barriers  What happens when we INCREASE trade barriers?  Decrease competition  Decrease the quantity available  Decrease interdependence on other nations  Decrease standards of living  INCREASE in price Trade Barriers  How do we DECREASE trade barriers?  Raise or eliminate a quota  Lower or remove a tariff  Remove an embargo on a country Trade Barriers  What happens when we DECREASE trade barriers?  Increase competition  Increase quantity available  Increase interdependence on other countries  Increase standard of living  DECREASE in price  What is globalization?  The development of an increasingly integrated global economy Globalization  Characteristics of a Global Economy  (trade without trade barriers)  Free flow of investment capital ($)  The use of cheaper labor in foreign countries  Which area of the world has been the least affected by globalization?  Sub-Saharan Africa Factor Price Equalization ()  What is outsourcing?  The movement of jobs from the domestic market to markets overseas because other countries can produce the products more efficiently Factor Price Equalization (Outsourcing)  Advantages of Outsourcing  Helps U.S. business become more competitive internationally due to cost  An open economy allows new ideas to emerge from other countries  Cheaper goods are available to consumers Factor Price Equalization (Outsourcing)  Disadvantages of Outsourcing  Loss of manufacturing and service jobs in the U.S.  Workers could face pay cuts instead of companies exporting jobs  Companies could lose their Comparative Advantage vs.  Comparative Advantage- when a country can produce a product more efficiently than any other product that it produces (makes)  When this is the case the nation should choose what it is best at and use their resources to make that product Comparative Advantage vs. Absolute Advantage  Absolute Advantage- when a country can produce a product more efficiently than any other nation Agreements  Purpose of international trade agreements?  To reduce trade barriers and tariffs between two or more nations in order to increase trade with each other International Trade Agreements  General Agreement in Tariffs and Trade (GATT)  Established in 1948 in an effort to reduce tariffs and expand world trade International Trade Agreements  (WTO)  Founded in 1995 in order to enforce GATT, to negotiate new trade agreements, and resolve trade disputes  Acts as a referee by enforcing the rules agreed upon by the member countries. World Trade Organization International Trade Agreements  European Union (EU)  A regional trade organization made up of European nations  These nations have eliminated all tariffs and trade restrictions between its members.  Many member nations have adopted the use of the same currency, the . European Union International Trade Agreements  North American Free (NAFTA)  Went into effect on January 1, 1994  Eliminated all tariffs and trade barriers between the United States, , and as of 2009.  Created the largest free trade zone in the world Trade Balance  What is Balance of Trade?  The relationship between a nation’s imports and Trade Balance  Trade Surplus  When a nation exports more goods than it imports  China has a trade surplus.  Trade Deficit  When a nation imports more goods than it exports  The United States has a trade deficit U.S. Top Trading Partners (as of April 2008) 1. Canada 2. Mexico 3. China 4. Japan 5. Germany 6. United Kingdom 7. South Korea 8. France 9. Saudi Arabia 10. Taiwan Currency Exchange Rates  Fixed Exchange Rate  In this system governments try to keep the value of their nation’s currency relatively consistent against one another.  Example- $4 (U.S.) is equal to 1 £ (English pound)  The United States moved away from this type of system in the early 1970s Currency Exchange Rates  Floating Exchange Rate  Value of Currency follows the law of supply and demand  This is the system currently used by most nations Movement from Fixed to Floating Foreign Currency Why does money lose its value? (Depreciate)  When Supply increases, Demand decreases  Increased trade means more dollars in the foreign market (Supply increases)  The Demand for the U.S. dollar drops (Demand decreases)  People are willing to pay less for the U.S. dollar, thus the value of the U.S. dollar drops  Effect on the U.S.- lower standard of living because we are now paying more for imports (buying less for more)  Weak dollar benefits U.S. businesses who wish to sell their products overseas Advantages of a Strong Dollar Disadvantages of Strong Dollar Why does money increase in value? (Appreciate)  Supply decreases, Demand increases  Decreased trade means less U.S. dollars in foreign markets (Supply decreases)  Demand for the U.S. dollar increases  People are willing to pay more for the U.S. dollar, thus the value of money increases  Effect on the U.S.- higher standard of living because we are now paying less for imports (buying more for less)  Strong dollar benefits U.S. consumers Advantages of a Weak Dollar Disadvantages of a Weak Dollar Foreign Currency  So why don’t we stop trading with other nations to increase our currency’s value in the world market?  We can’t because we are dependent upon other nations for trade.