Chapter 8

The Export-Import Sector

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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

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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– This is called specialization and exchange

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Examples of Specialization and Exchange

• We have been a major exporter of wheat, corn, and soybeans since colonial times– Initially, we had an abundance of land– Eventually we came to have a tremendous stock of farm

equipment

• We used to be a major exporter of steel and textiles– Now other nations produce these more cheaply

• After WWII, we produced more than sixty percent of the worlds oil supply and exported much of this– Now, we have exhausted most of our easily extractible reserves

and import more than half of our oil– If we didn’t import oil, gasoline could easily be $10 a gallon

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Merchandise Imports and Exports as Percentage of Goods Produced in the United States, 1990-2002

Economic Report of the President, 2001; Survey of Current Business, February 2003

Since 1990 our imports and exports as a percentage of goods produced in the United States has grown steadily. about one-fifth 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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Sum of U.S. Imports and Exports as Percentage of GDP, 1970-2002

Economic Report of the President, 2001; Survey of Current Business, March 2001

Between 1970 and 2000 the foreign trade sector more than doubled as a percentage of GDP. Since 2000 a U.S. recession and a worldwide economic slowdown have depressed our trade with other nations.

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U.S. Balance of Trade in Goods, Services, and Overall Balance, 1970-2002 (in billions of dollars)

Economic Report of the President, 2003; Survey of Current Business, May 2003

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

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 8-8

A Summing Up: C + I + G + Xn

8-9

Net exports = Xn

Xn = Exports - Imports

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

8-10

Copyright 2005 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

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)

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NAFTA, The North American Free Trade Agreement

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

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

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Countries of the European Union

The European Union (EU)

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

within the EU without checkpoint delays and paperwork

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

in any other member country

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The European Union (EU)

• In 1999, 11 EU countries formed the European Monetary Union (Now 12 member nations)– 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 replaced each country’s own national currencies

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

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World Trade Agreements• The General Agreement on Trade and Tariffs

(GATT)– GATT was drafted in 1947 and has since been

signed by more than 146 nations• The latest version was ratified by Congress in 1994

– GATT • Reduces tariffs worldwide by an average of 40%

• Lowers other barriers to trade such as quotas on certain products

• Provides patent protection for American software, pharmaceuticals, and other industries

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World Trade Agreements

8-17

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

adversely, the positive appears to outweigh the negative

• On the 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

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

World Trade Agreements

8-18

• 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

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

World Trade Agreements

8-19

• 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

Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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

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Liberalization of Trade

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

trade zones such as NAFTA and the European Union

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Nondiscrimination:The Most-Favored-Nation Principle

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

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

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No Unfair Encouragement of Exports

• No unfair encouragement of exports encompasses export subsidies, which are considered a form of unfair competition– American and European governments have long

subsidized their farmers– This enables the producers to sell their crops well

below cost– This sets the price of agriculture staples so low that

small farmers in developing countries can’t compete– These small farmers are eventually forced off their

land by subsidized imports and have no means to survive

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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 United States has also lost some cases in which other governments were the complaining parties.

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Objections

• 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

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Objections

• 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

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Summary

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

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

• Especially the WTO

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Summary

• The debate is not just about “free trade” but also 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

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Summary

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

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

8-29Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.