Chapter 18

Slide 1:Chapter 18

International Trade and Aid � 2001 South-Western College Publishing

Slide 2:U.S. Merchandise Exports by Region, 1999 (estimated)

Canada & Mexico 36.2% Western Europe 24.0% Pacific Rim Countries 14.7% China & Japan 10.3% South/Central America 8.0% Rest of World 6.8%

Slide 3:Major U.S. Merchandise Exports and Imports, 1999 (billions $)

Capital goods,except automobiles 311 Industrial supplies and materials 147 Consumer goods 81 Automobile vehicles, engines, parts 75 Food, feeds, and beverages 45 Capital goods,except automobiles 297 Consumer goods 240 Industrial supplies and materials 222 Automobile vehicles, engines, parts 180 Petroleum & products 72 Food, feeds, and beverages 44 Exports Value Imports Value

Slide 4:Barriers to Free Trade

Tariff: a duty or tax levied on foreign imports for revenue or for protective purposes specific tariff - expressed in absolute terms, e.g., 25 cents per pound or per unit ad valorem tariff - expressed in relative or percentage terms, e.g., 15% of the value of the imported good

Slide 5:Arguments for Free Trade

Tariffs not essential to raise revenue Tariffs deny benefits of greater productivity and higher standard of living resulting from absolute and comparative advantage Tariffs restrict the free movement of goods and services Tariffs eliminate the advantages of specialization and exchange Tariffs prevent the optimal use of scarce resources The consumer ultimately pays the tariff

Slide 6:Arguments for Tariffs

They: Protect infant industries Equalize costs Protect U.S. jobs Protect high U.S. wages Protect against dumping Retain money at home Develop and protect defense industries Diversify industry

Slide 7:Effect of Tariffs on Trade in TVs

0 Qe 0 Q1 Q3 Q4 Q2 Price D S Quantity P1 A Quantity Quantity P2 Pe Price Price D S C B S1 S2 0 Qe S3 D S A P3 (a) No Trade (b) Tariff-Restricted Trade (c) Elimination of Trade as a Result of Tariff

Slide 8:Other Barriers to Free Trade

Non-Tariff Barriers: restrict imports, grant aid to domestic producers, encourage export of goods Import Quotas Tariff Quota Embargo Export Subsidy Voluntary Restraint Agreements Exchange Controls

Slide 9:Quotas

Import Quota - maximum absolute amount of a particular good that may be imported Tariff Quota - permits a certain amount of an imported good to enter at one tariff rates, but charges a higher tariff rate for amounts over the optimum

Slide 10:Embargo

Complete cessation of trade with a particular nation or of trade in certain products U.S.�s embargo on trade with Cuba U.N.�s embargo on trade with Iraq U.S.�s 1975 embargo on grain exports from the former U.S.S.R. in fear of domestic shortage U.S.�s 1986 embargo on trade with South Africa in protest of apartheid

Slide 11:Export Subsidy

A government payment to private firms: 1. to encourage the exportation of certain goods or 2. to prevent discrimination against exporters who may otherwise be forced to sell their products below domestic price

Slide 12:Voluntary Restraint Agreement

Agreement between two governments in which the government of the exporting country agrees to limit the amount of a product it sends to the importing country Prices of the imported goods rise and consumers pay E.g., 1981 agreement between the US and Japan in which Japan agreed to limit the number of cars exported, and Japanese car prices in the U.S. rose

Slide 13:Exchange Controls

Rationing of a nation�s scarce foreign exchange - limits overall imports into the nation Use of multiple exchange rates - different exchange rates are set for various goods

Slide 14:U.S. Trade Policy

Reciprocal Trade Agreements Act: 1934 agreement by which the president has authority to lower tariffs up to 50% if other nations make reciprocal concessions Most-favored-nation clause - bilateral agreements generalized to all nations Escape clauses - 1) permitting tariff rates to be raised if the Tariff Commission found that insufficiency of existing tariffs cause harm or seriously threaten domestic producers; 2) prohibiting tariff reduction that might threaten national security

Slide 15:The Export-Import Bank

Export-Import Bank chartered to finance exports from the U. S. Finances private exports and imports between the U.S. and other nations that cannot be financed at reasonable rates through normal international channels Also makes loans for private and government development projects in developing nations

Slide 16:Trade Expansion Act of 1962

Purposes: to stimulate U.S. economic growth and enlarge foreign markets for its products to strengthen economic relations with foreign countries through development of open/nondiscriminatory trading in the free world to prevent communist economic penetration of the free world

Slide 17:Trade Act of 1974

Succeeded the Trade Expansion Act and gave the president authority to: reduce or raise U.S. tariffs during international trade negotiations impose import surcharges of up to 15% reduce/eliminate nontariff barriers, subject to congressional approval retaliate against unreasonable foreign restrictions on U.S. trade

Slide 18:GATT and Multinational Trade Negotiations

General Agreement on Tariffs and Trade (GATT) called for: equal and nondiscriminatory treatment of all nations in international trade reduction of tariffs through reciprocal trade agreements easing or elimination of import quotas

Slide 19:The Uruguay Round (1986-1993)

Intended to improve upon GATT and negotiate reductions in tariff/nontariff barriers, and address specific issues regarding property rights, agriculture, direct financial investments, electronic products, insurance, textiles/apparel Trade balancing: requirement that a foreign affiliate must export as much of its production as it imports for use as inputs.

Slide 20:World Trade Organization

Multinational organization of 135 nations intended to oversee international trade agreements and resolve trade conflicts

Slide 21:World Trade Organization

The WTO has four main objectives: ensure equal trading rights among members support free trade and the reduction and elimination of tariffs eliminate trade subsidies establish binding rules to ensure fairness and consistency in trade

Slide 22:North American Economic Integration

U.S. Canada Free Trade Agreement reduced several major nontariff barriers removed many restrictions on cross-border investments Rule of Origin: a trade term defining the minimum % of a country�s exported products that must be produced/ substantially changed within the border of the exporting country

Slide 23:North American Economic Integration

North American Free Trade Agreement (NAFTA) between U.S., Canada, and Mexico is the largest trading bloc in the world

Slide 24:Benefits of NAFTA

Benefits to U.S. expanded free trade increased competition more investment opportunities Benefits to Mexico open access to the U.S. greater capital investment in Mexico more stable economic environment

Slide 25:Trading in North America: U.S.-Canada

200 175 150 125 100 75 50 25 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 U.S. Imports from and Exports to Canada (billions $) Year Exports NAFTA Imports

Slide 26:Trading in North America: U.S.-Mexico

120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 U.S. Imports from and Exports to Mexico (billions $) Year Exports NAFTA Imports

Slide 27:Maquiladora Program

Maquiladoras: export-oriented plants usually near the U.S.-Mexico border that are exempt from paying import duties on raw materials and parts used in making final products

Slide 28:NAFTA Controversies

Labor: negative impact on employment Environment: looser environmental regulations and enforcement in Mexico Future Issues: Chile�s entrance to NAFTA border congestion environmental cleanup direct investment not occurring within Mexico

Slide 29:European Economic Integration

European Common Market European Economic Community (EEC) European Community (EC) European Union (EU) Trading Blocs and the WTO

Slide 30:EC Goals

To abolish tariff and import quotas among the member nations within 10-12 years To establish a common tariff applicable to all imports from outside the EEC area within 10-12 years To attain the free movement of capital and labor within the member nations To adopt a common policy regarding monopolies and agriculture

Slide 31:European Union

Maastricht Agreement EC became the EU European Monetary Unit (EMU, or euro) More members added Accounts for 40% of world trade After Canada, the U.S.�s largest export market

Slide 32:U.S. Trade with the EU

200 180 160 140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 U.S. Imports from and Exports to EU (billions $) Year Exports Imports

Slide 33:Trading Blocs and the WTO

Other trading blocs around the globe: the Caribbean Common Market (CARICOM), Asia-Pacific Economic Cooperation(APEC), Central American Common Market (CACM), and Common Market for Eastern and Southern Africa (COMESA), among others Trading blocs discriminate against non-members this is not a violation of WTO rules, but must be addressed through WTO talks in order to agree upon what is permissible in managing bloc trade

Slide 34:The World Bank

Established in 1945, consists of International Bank for Reconstruction and Development (IRBD) International Finance Corporation (IFC) International Development Association (IDA)

Slide 35:International Bank for Reconstruction and Development (IBRD)

Owned by governments of 181 countries Makes/guarantees loans for productive reconstruction and development Risks are shared by all member governments in proportion to their economic strength Program of structural -adjustment lending (loans to support programs of specific policy changes/institutional reform designed to use resources efficiently

Slide 36:International Development Association (IDA)

Provides assistance to very poor countries on financial terms than impose a lighter burden than other World Bank loans Funds are called �credits� to differentiate them from IBRD loans and have a 50-year maturity at no interest Funds come in the form of subscriptions, general renewals, and transfers from IBRD earnings

Slide 37:International Finance Corporation (IFC)

Promotes and provides support for the private sector in developing countries

Slide 38:Regional Development Banks

Inter-American Development Bank African Development Bank Asian Development Bank All are smaller than the World Bank, but purposes are similar.