InternationalTrade

Surpluses & DeficitsSurpluses & Deficits► BudgetBudget deficitdeficit—the —the

government spends government spends more than it takes in more than it takes in one year.one year.

► Budget surplusBudget surplus—the —the government takes in government takes in more than it spends in more than it spends in one year.one year.

► The US has been The US has been running a running a deficit deficit for for the last several years…the last several years…

► Leading to a huge Leading to a huge national debt.national debt.

The The NationNation

al al DebtDebt

► Is the Is the total amount of moneytotal amount of money the federal government owes to the federal government owes to bondholders.bondholders.

► Every year that the government runs a Every year that the government runs a deficitdeficit, it must borrow money , it must borrow money to operate.to operate.

► To borrow money, the government sells To borrow money, the government sells US Bonds US Bonds (they are (they are sometimes calledsometimes called SECURITIES SECURITIES). ).

► Individuals and nations all over the world buy them…Individuals and nations all over the world buy them…► Because they are viewed as some of the Because they are viewed as some of the safestsafest in the world… in the world…► The US is stable and has never The US is stable and has never defaulteddefaulted on its debt. on its debt.

Why Do Nations Trade?Why Do Nations Trade?

► Nations trade for the same Nations trade for the same reasonreason individuals trade— individuals trade—

► Out of self-interest.Out of self-interest.► What they trade is What they trade is

determined by:determined by: ► SpecializationSpecialization—nations, like —nations, like

people, produce only people, produce only certain goods and services.certain goods and services.

► Specialization is Specialization is determined by…determined by…

1.1. Natural resourcesNatural resources2.2. Human capitalHuman capital3.3. Physical capitalPhysical capital

International TradeInternational TradeInternational trade, International trade, which is which is voluntaryvoluntary, , creates wealthcreates wealth for a for a country. country. Without international Without international trade, each country trade, each country would be would be forced to forced to consume only the consume only the goods and servicesgoods and services it it produces within its produces within its own borders. own borders. SwitzerlandSwitzerland, for , for example, would never example, would never get to get to drink coffeedrink coffee..

Absolute Absolute AdvantageAdvantage

► A country has an A country has an absolute advantageabsolute advantage over another country in trade over another country in trade when it when it can simplycan simply produce moreproduce more of a product than another nation. of a product than another nation.

► China can produce more China can produce more ricerice than the US… than the US…► So, So, China has an absolute advantage in rice productionChina has an absolute advantage in rice production..► Large nations usually have an absolute advantage over small Large nations usually have an absolute advantage over small

nations in the production of nations in the production of EVERYTHINGEVERYTHING..► So, So, whywhy do large nations trade with small nations? do large nations trade with small nations?

Comparative Comparative AdvantageAdvantage

► Honduras cannot produce Honduras cannot produce as many T-shirtsas many T-shirts as the US…as the US…► The US has an The US has an absolute advantageabsolute advantage in T-shirt production. in T-shirt production.► So, why does the US So, why does the US import T-shirtsimport T-shirts from Honduras? from Honduras?► Because it is Because it is CHEAPERCHEAPER for Honduras to manufacture T-shirts than it is for the US. for Honduras to manufacture T-shirts than it is for the US. Why?Why?► Honduras has Honduras has cheaper laborcheaper labor, and , and fewer regulations…fewer regulations…► On On pollutionpollution standards, work standards, work hourshours, , benefitsbenefits, , childchild labor, labor, safety safety standards, etc. standards, etc. ► So, Honduras has the So, Honduras has the COMPARATIVECOMPARATIVE advantage in T-shirts… advantage in T-shirts…► Because they can make them Because they can make them CHEAPERCHEAPER than the US. than the US. ► A country should always A country should always IMPORTIMPORT a product if another nation has the comparative a product if another nation has the comparative

advantage.advantage.

The US The US as as Importer Importer & & ExporterExporter

The US is the The US is the leading exporterleading exporter in the world… in the world…Automobiles, computer software, medical equipment Automobiles, computer software, medical equipment and entertainment are our and entertainment are our top exportstop exports. . The US is also the world’s The US is also the world’s largest importer—largest importer—Clothing, food, toys, furniture and oil are some of ourClothing, food, toys, furniture and oil are some of our top imports. top imports. Every year we import an average of Every year we import an average of $1.4 trillion.$1.4 trillion.

Essential StandardsEssential Standards► The student will explain why countries sometimes The student will explain why countries sometimes

erect erect trade barrierstrade barriers and sometimes advocate and sometimes advocate free free trade.trade.

► The student will define trade barriers as The student will define trade barriers as tariffs, tariffs, quotas, embargoes, standards and subsidiesquotas, embargoes, standards and subsidies..

► The student will identify costs and benefits of trade The student will identify costs and benefits of trade barriers over time.barriers over time.

► The student will list specific examples of trade The student will list specific examples of trade barriers.barriers.

► The student will list specific examples of trading The student will list specific examples of trading blocs such as the blocs such as the EU, NAFTA and ASEAN.EU, NAFTA and ASEAN.

► The student will evaluate arguments for and against The student will evaluate arguments for and against free trade.free trade.

The Balance of TradeThe Balance of Trade► Is the difference Is the difference

between a nation’s between a nation’s imports and exports.imports and exports.

► When the U.S. exports When the U.S. exports more than it imports more than it imports it has a it has a trade surplus. trade surplus.

► When the U.S. imports When the U.S. imports more than it exports it more than it exports it has a has a trade deficittrade deficit..

► The US has posted a The US has posted a trade deficittrade deficit since the since the 1960’s. 1960’s.

Trade Trade Barriers &Barriers &ProtectionismProtectionism

► ProtectionismProtectionism—the policy of using of trade barriers to —the policy of using of trade barriers to impede free trade.impede free trade.

► TradeTrade barrierbarrier—a means of preventing a foreign product —a means of preventing a foreign product from entering a nation’s territory.from entering a nation’s territory.

► ImportImport quotaquota—a limit on the amount of good that can be —a limit on the amount of good that can be imported.imported.

► TariffTariff—a tax on imported goods. A 10% tariff on a $20,000 —a tax on imported goods. A 10% tariff on a $20,000 Toyota raises the price to $22,000.Toyota raises the price to $22,000.

Trade Trade Barriers: Barriers:

EmbargoEmbargo

EmbargoEmbargo—A government ban on all trade with a —A government ban on all trade with a foreign nation.foreign nation.

The The Foreign Assistance ActForeign Assistance Act of 1961 banned all of 1961 banned all trade with Cuba.trade with Cuba.

The act also The act also imposes penalties on any country imposes penalties on any country that trades with Cubathat trades with Cuba..

Due to the trade embargo, Cuban streets are a “time warp”with most automobiles dating from the 1950’s.

Cuban family in a 1955 Chevy

Arguments for Free TradeArguments for Free Trade1.1. CompetitionCompetition—free trade —free trade

results in lower prices…results in lower prices…2.2. FunctionalismFunctionalism—cooperation —cooperation

in trade results in better all-in trade results in better all-around relations between around relations between countries…countries…

3.3. InterdependenceInterdependence—free —free trade makes war very trade makes war very expensive…expensive…

4.4. DemocratizationDemocratization—free trade —free trade often promotes democracy…often promotes democracy…

5.5. EconomicEconomic growthgrowth—free trade —free trade results in long-term growth results in long-term growth and creates jobs.and creates jobs.

Arguments Arguments Against Free Against Free

TradeTrade1.1. Short-term job loss & loss of domestic industryShort-term job loss & loss of domestic industry usually occurs. usually occurs.2.2. Smaller countries can become Smaller countries can become too dependenttoo dependent on a few on a few

products…products…3.3. National securityNational security can become endangered (if we rely on other can become endangered (if we rely on other

nations for nations for essentialessential resources)… resources)…4.4. Free trade can force countries to Free trade can force countries to lower environmental or lower environmental or

safety standardssafety standards to compete. to compete.

International International AgreementsAgreements

World TradeWorld Trade OrganizationOrganization—est. 1995, negotiates —est. 1995, negotiates agreements & resolves disputes.agreements & resolves disputes.

The EuropeanThe European UnionUnion—est. 1957, coordinates the —est. 1957, coordinates the economic policies of 27 nations…economic policies of 27 nations…

Many EU nations use a Many EU nations use a common currencycommon currency, called the , called the Euro.Euro.

NAFTANAFTA

► Is the Is the NORTH AMERICAN FREE TRADE AGREEMENT…NORTH AMERICAN FREE TRADE AGREEMENT…► Its goal is to create an economic “Its goal is to create an economic “United States of United States of

North AmericaNorth America”…”…► By By eliminating trade barrierseliminating trade barriers between the US, Canada between the US, Canada

and Mexico.and Mexico.► So far, So far, 70% of all tariffs70% of all tariffs have between the three have between the three

countries have been cancelled.countries have been cancelled.

The The ResultResults s of of NAFTANAFTA Before NAFTA, high tariffs made Mexican products Before NAFTA, high tariffs made Mexican products EXPENSIVE…EXPENSIVE…

And this kept American factories And this kept American factories in business.in business. With the cancellation of tariffs, however, Mexican-made products With the cancellation of tariffs, however, Mexican-made products

became became MUCH CHEAPER…MUCH CHEAPER… So American factories began to So American factories began to close down…close down… And And reopen reopen in Mexico…in Mexico… Resulting in the Resulting in the loss of hundreds of thousands of manufacturing jobsloss of hundreds of thousands of manufacturing jobs

in the US.in the US.

The The Results Results

of of NAFTANAFTA

► US US exports to Mexico grew by 242%exports to Mexico grew by 242% between 1993 and 2007… between 1993 and 2007…► And the US unemployment rate fellAnd the US unemployment rate fell steadily from 6.9% in steadily from 6.9% in

1993 to 4% in 2000. 1993 to 4% in 2000. ► American wages also grew by American wages also grew by almost 24%--almost 24%--► Which indicates that as Which indicates that as low-paid factory jobslow-paid factory jobs disappeared… disappeared…► They were replaced by They were replaced by high-skilledhigh-skilled, , higher-paying jobs.higher-paying jobs.

Essential StandardsEssential Standards► The student will explain how changes in The student will explain how changes in

exchange ratesexchange rates can impact the purchasing can impact the purchasing power of individuals in the US and in other power of individuals in the US and in other countries.countries.

► The student will define exchange rates as the The student will define exchange rates as the price of one nation’s currency in terms of another price of one nation’s currency in terms of another nation’s currency.nation’s currency.

► The student will locate information on exchange The student will locate information on exchange rate.rate.

► The student will interpret exchange rate tables.The student will interpret exchange rate tables.► The student will explain why, when exchange The student will explain why, when exchange

rates change and some groups benefit and others rates change and some groups benefit and others lose.lose.

The Value ofThe Value ofCurrencyCurrency

► Because there are Because there are hundreds of currencies hundreds of currencies in the world…in the world…

► So we need a way to So we need a way to convert one currency convert one currency into another.into another.

► A Foreign Exchange A Foreign Exchange Market is a market for Market is a market for buying and selling buying and selling currency.currency.

► Once the value of one Once the value of one currency is determined currency is determined in relation to another, in relation to another, a a foreign exchange foreign exchange raterate for the two has for the two has been established.been established.

Foreign Exchange RatesForeign Exchange Rates► In the U.S. the In the U.S. the foreign foreign

exchange ratesexchange rates are are expressed in two ways:expressed in two ways:

1.1. How many foreign How many foreign units= one US dollar.units= one US dollar.

2.2. How many dollars= one How many dollars= one foreign unitforeign unit

► Example: If one dollar Example: If one dollar equals .50 British equals .50 British Pounds…Pounds…

► ……then one British then one British Pound equals…Pound equals…

► $2.00$2.00

Devaluation & AppreciationDevaluation & Appreciation

►When one nation’s When one nation’s currency decreases in currency decreases in value relative to value relative to another, another, devaluation devaluation has occurred.has occurred.

►When one nation’s When one nation’s currency increases in currency increases in value relative to value relative to another, another, appreciationappreciation has occurred.has occurred.

Why Has the Dollar’s Value Fallen?Why Has the Dollar’s Value Fallen?► The primary reason is due to our The primary reason is due to our

current current trade deficit…trade deficit…► We’re buying more from the rest We’re buying more from the rest

of the world of the world than they’re buying than they’re buying from us.from us.

► As long as that goes on, we're As long as that goes on, we're shipping to other countries shipping to other countries pictures of pictures of American presidents American presidents on little bits of paperon little bits of paper and they're and they're sending us automobiles and T-sending us automobiles and T-shirts…shirts…

► At some point they At some point they don't wantdon't want any any more of our pictures of American more of our pictures of American presidents…presidents…

► And when people And when people DON’T WANTDON’T WANT an item…an item…

► What happensWhat happens to that item’s to that item’s value? value?

► IT IT DROPS!DROPS!

Why the Why the

Weak Weak Dollar is Dollar is

Bad Bad NewsNews► Americans are Americans are COMPLETELY dependentCOMPLETELY dependent on foreign products… on foreign products…

► And the weak dollar makes those products And the weak dollar makes those products MORE EXPENSIVE…MORE EXPENSIVE…► Say a pair of Nike sneakers (made in Say a pair of Nike sneakers (made in ChinaChina) costs ) costs $80…$80…► If the value of the dollar drops by If the value of the dollar drops by 20%,20%, those shoes will now cost… those shoes will now cost…► $96.$96.► A weak dollar causes the A weak dollar causes the cost of living to INCREASEcost of living to INCREASE for most for most

Americans.Americans.