Tariff Tax placed on imports to increase their price in the domestic market.
2 Types Protective tariff – tariff high enough to protect less- efficient domestic industries. Revenue tariff – tariff high enough to generate revenue for the government without actually prohibiting imports.
Quotas Keeps foreign goods out of the country. Can be as low as 0 to keep everything out.
Need quotas because sometimes even high tariffs can’t keep certain foreign goods from being imported.
Examples Bush administration put a quota on steel. This protected American steel jobs, but it made steel cost more.
Embargo Completely restricts all trade with a particular country. Involuntary
Free Traders – favor fewer or even no trade restrictions
5 Arguments 1. National Defense 2. Promoting Infant Industries 3. Protecting Domestic Jobs 4. Keeping the Money at Home 5. Balance of Payments
National Defense Argue that nations without trade barriers become too dependent on other nations. Might need supplies for wartime and could be unable to get them.
Infant Industries New industries should be protected from foreign competition Want trade barriers (for at least a short time)
Domestic Jobs Tariffs and quotas protect domestic jobs from cheap foreign labor. Most used argument.
Keeping Money at Home Limiting imports will keep American money in the United States. Counter-argument: American money that goes abroad will come back anyways.
Balance of Payments Difference between the money paid and received from other nations when they engage in international trade.
WTO World Trade Organization Created in 1974 by 23 countries
Signed the GATT (General Agreement on Tariffs and Trade)
WTO is an international agency that administers previous GATT trade agreements, settles trade disputes, organizes trade organizations, and provides technical assistance and training for developing countries.
NAFTA North American Free Trade Agreement Between Mexico, Canada, and the U.S. Proposed by Bush Sr. and finalized by Clinton in 1993
Reduces tariffs among the 3 countries. Helps ensure that we stay trading partners. Example of free trade theory.
Foreign Exchange The changing of foreign currencies when goods and services are bought and sold
Exchange Rate Fix the price of one currency so you can compare it to another. $1.00 (U.S. $) =.84 cents (Euro)
Trade Deficit When the imports exceed the number of exports. The U.S. has a trade deficit right now.