24 McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. International Trade

Some Key Trade Facts U.S. trade deficit in goods $735 billion in 2012 U.S. trade surplus in services $196 billion in 2012 Canada largest U.S. trade partner Trade deficit with China $315 billion in 2012 Exports are 14% U.S. output LO1

Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods LO2

Comparative Advantage Assumptions Two nations Same size labor force Constant costs in each country Different costs between countries Comparative Advantage Country produces good with lowest domestic opportunity cost Total output is greatest LO2

Comparative Advantage Case for free trade Increase total output Efficient allocation of resources Promote competition LO2

Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4

The Case for Protection Military self-sufficiency Diversification for stability Infant industry Alleged exception to free trade Protection against dumping Increased domestic employment Smoot-Hawley Tariff Act Cheap foreign labor LO5

GATT Three principles Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO5

WTO Established by Uruguay Round of GATT 159 member nations in 2013 Oversees trade agreements and rules on disputes Critics argue may allow nations to circumvent environmental and worker protection laws LO5

European Union Initiated in 1958 as Common Market Abolished tariffs and import quotas between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency Increased output, faster economic growth LO5

NAFTA Agreement between U.S., Canada, Mexico Establishes free trade zone between the countries Trade has increased in all countries Enhanced standard of living LO5

Trade Adjustment and Offshoring Trade Adjustment Assistance Act Designed to help individuals hurt by international trade Increases political support for reducing trade barriers Offshoring of jobs Shifting of work previously done by American workers to workers abroad LO5