Chapter 8 The Export-Import Sector 8-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights...

Chapter 8

The Export-Import Sector

8-1Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• The basis for international trade

• U. S. imports and exports• A summing up: C + I + G + Xn

• The world’s leading trading nations

• World trade agreements and free-trade zones


The Basis for International Trade

• The basis for international trade is that a nation can import a particular good or service at a lower cost than if it were produced domestically– In other words, if you can buy it cheaper

than you can make it you buy it– This maxim is true for individuals and

nations



1990 1992 1994 1996 1998 2000

Imports

Exports

Merchandise Imports and Exports as Percentage of Goods Produced in the United States, 1990-2000

Since 1990 our imports and exports as a percentage of goods produced in the United States 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


1970 72 74 76 78 80 82 84 86 88 90 92 94 96 98 2000

Sum of U.S. Imports and Exports as Percentage of GDP, 1970-2000

Between 1970 and 2000 the foreign trade sector nearly tripled as a percentage of GDP


Overallbalanceon goodsand services

Balanceon goods

1970 1975 1980 1985 1990 1995 2000

Balanceon services

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 growing balance on services. Our balance on goods, which has been negative since the mid-1970s, has grown steadily worse since 1991 and now totals more than $300 billion

A Summing Up: C + I + G + Xn

8-7

Net exports = Xn

Xn = Exports - Imports

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

8-8 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

45û

8,000

10,000

8,000 10,000

6,000

6,000

4,000

4,0002,000

2,000

C +I +G

Disposable income ($)

45û

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

8-9

Percentage of GDP0 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


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


The World’s Top Ten Exporting Nations, 1999

World Trade Agreements and Free Trade Zones

• The North American Free Trade Association (NAFTA)

• The European Union (EU)

• The General Agreement on Trade and Tariffs (GATT)

• The World Trade Organization (WTO)


The North American Free Trade Agreement [NAFTA]

• NAFTA was ratified by Congress in 1993• NAFTA created a free trade area including

Canada, the United States, and Mexico– Trade barriers in industrial goods were dismantled– Agreements on services, investment, intellectual

property rights, agriculture, and strengthening of trades rules were included

– There were also side agreements on labor adjustment provisions, protection of environment, and import surges



8-13

• How well has NAFTA worked?– In late 1994, the United States trade surplus

with Mexico was up about 20 percent– In early 1995, the full effects of the peso’s

fall turned this trade surplus into an annual deficit of more than $15 billion



8-14

• How well has NAFTA worked?– Clearly, the threat of moving operations to

Mexico has had a depressing effect on American factory wages

• Hourly wages and fringe benefits average about $1.50 an hour in Mexico

– There is little evidence that the agreement has cost more than 200,000 jobs

• This is less than 2 one-thousandths of America’s total employment


8-15

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)


The European Union (EU)

• This free trade association of 15 nations was formed in 1992– Freight is now able to move anywhere within

the EU without checkpoint delays and paperwork

– So-called quality codes were ended– Workers from any EU country can work in

any other member country


The European Union (EU)• In 1999, 11 EU countries formed the European

Monetary Union and the euro was established as a common currency

• Initially, the euro existed along with each country’s own currency

• In 2002 new euro coins and paper money will begin to replace each country’s own national currencies

– This common currency is expected to make trade among participating member nations much easier to conduct


World Trade Agreements• The General Agreement on Trade and Tariffs

(GATT) was drafted in 1947 and has since been signed by more than 135 nations

• The latest version was ratified by Congress in 1994

– GATT will• Reduce tariffs by an average of 40%• Lower other barriers to trade such as

quotas on certain products• Provide patent protection for American

software, pharmaceuticals, and other industries


World Trade Agreements

8-19

• Will GATT help or hurt the United States?– Although some industries will be affected

adversely, the positive appears to outweigh the negative

• On average, foreign countries have more trade restrictions and tariffs on U. S. goods than we have on theirs

• GATT should help the U. S. more than it hurts



8-20

• Will GATT help or hurt the United States?– GATT will, for the first time protect

intellectual property rights like patents, trademarks, and copyrights

– GATT will also open markets for service industries such as accounting, advertising, computer services, and engineering

• These are fields in which Americans excel



8-21

• Will GATT help or hurt the United States?– GATT brings agriculture under

international trade rules for the first time.• European farm subsidies dwarf those paid to

American farmers

• Proportionally, the Europeans will will have to reduce their subsidies a lot more than the United States, making American crop exports even more competitive


The World Trade Organization (WTO)

• The WTO was set up in 1995 as a successor to GATT

• The WTO is based on three major principles– Liberalization of trade– Nondiscrimination [the most-favored-nation

principle]– No unfair encouragement of exports


Liberalization of Trade

• Trade barriers, which were reduced under GATT, should continue to be reduced under the WTO– Trade barriers have been falling within free

trade zones such as NAFTA and the European Union


NondiscriminationThe Most-Favored-Nation Principle

• Under the most-favored-nation principle, members of WTO must offer all its members the same trade concessions as any given member.– This is a lot like when the teacher says that if

you bring candy to class, you must bring some for everyone


No Unfair Encouragement of Exports

• No unfair encouragement of exports encompasses export subsidies, which are considered a form of unfair competition


The WTO Dispute Settlement Body

• The WTO has a Dispute Settlement Body to handle disagreements among member nations– Many politicians in the United States have

very reluctantly accepted the jurisdiction of the WTO

• The United States has won almost all the more than two dozen cases in which the U. S. was the complaining party


The Seattle Protest

• The WTO held a meeting in Seattle in late 1999– Tens of thousands of protesters descended

on the city• Prominent among them were labor unions,

environmentalists, and human rights advocates


The Seattle Protest

• BusinessWeek outlined the reasons for the protests– Environmentalists argue that elitist trade

and economics bodies make undemocratic decisions that undermine national sovereignty on environmental regulation

– Unions charge that unfettered trade allows unfair competition from countries that lack labor standards


The Seattle Protest

• BusinessWeek outlined the reasons for the protests– Human rights and student groups say the

IMF and the World Bank prop up regimes that condone sweatshops and pursue policies that bail out foreign lenders at the expense of local economies


Summary

• The debate is not about “free trade” but about “fair trade”– Many Americans, as well as citizens of other

leading industrial nations, have strong reservations about ceding their national sovereignty to international organizations

• Especially the WTO


Summary

• The debate is not about “free trade” but about “fair trade”– Much concern centers on the possible loss of

jobs and the reduction of wages in their countries if their workers were forced to compete with low-wage workers in the poorer countries

• Many earn just one or two dollars a day


Summary

• The debate is not about “free trade” but about “fair trade”– Is it fair to make American factories, which uphold

relatively high environmental standards, compete with Third World factories that are not similarly burdened?

– If the United States and other industrial countries are subject to the rules and regulations of the WTO, their own governments would be unable to prevent a flood of cheap imports


Chapter 8 The Export-Import Sector 8-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights...

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