1. International Trade
Chapter 17

2. The Key to Trade The key to trade is specialization
Different regions of a country specialize in certain economic activities
Example:
NYC – financial industry
Detroit – auto industry
Midwest – wheat
Florida – citrus fruit

3. Whatever countries specialize in, that is what they export
Export = goods and services a country produces and sells to other nations
Example:
Saudi Arabia – oil
Argentina – beef
Russia – steel
Niger – uranium
Import = goods and services one countries buys from other countries

4. Many imports are necessities
Without international trade, many products would not be available on the world market
Example:
Coffee would not be available outside of Colombia or Brazil
Bananas would not be available outside of Honduras
Many imports are necessities
Examples:
Some nations do not have iron ore and cannot make steel
Some nations do not have oil and cannot make gas

5. The Basis for Trade
In some cases it might be cheaper for a nation to import a product than to manufacture it
Absolute Advantage:
A country has this when they can produce a product more efficiently than another country can
Comparative Advantage:
The ability to produce a product relatively more efficiently, or at a lower cost

6. Gains from Trade
Every country is better off producing the products they produce relatively best
Specialization and trade increases world output
This explains the nature of trade between countries like the US and Colombia
The US has lots of iron and coal
They also have the money and labor to make tractors & farm machines
Colombia doesn’t have much money or skilled labor
It does have the land, labor and climate to produce coffee
So the US will trade farm machinery for coffee

7. Restricting International Trade
Trade restricted in two ways: tariffs and quotas
Protective Tariff = tax on imports to increase their price so it can compete with domestic products
helps domestic industry from being undersold by foreign ones
Revenue Tariff = tax on imports high enough to generate money for the gov’t without prohibiting imports
Until 1916, tariffs were the major source of revenue for the US government

8. Quotas:
Sometimes foreign goods cost so little that even a high tariff may not protect the domestic market
Can be set as low as zero to keep a product out
This might hurt Americans because the cost of the US product is too high and a foreign product may be cheaper

9. Arguments for Protection
Protectionists = people who want trade barriers to protect domestic industries
Free traders = people who favor few or no trade barriers
Reasons for trade barriers:
1) national defense
During war, a country might not be able to get critical supplies
Must decide which products are vital to national defense
USS Abraham Lincoln
USS George Washington

10. 2) promoting infant industries
New or emerging industries should be protected from foreign trade
They need to gain strength and experience before they can compete
Latin America puts tariffs as high as several hundred percent on American cars to protect their own car industry
Lobini H1 - Brazil

11. 3) Protecting domestic jobs
Biggest argument for barriers
American jobs are protected by tariffs and quotas
4) keeping the money at home
Limiting imports will keep American money in the US
Most of the time the money comes back though
Example:
US money for Japanese cars comes back when Japan buys cotton and airplanes

12. 5) balance of payments
The difference b/w money a country pays out to, and receives from, other nations when trading.
Barriers help balance the payments by restricting the amount of imports
However, when money returns to the US, it stimulates employment in other industries

13. The Free Trade Movement
Using trade barriers only works if the other nation does not retaliate with their own barriers
During Great Depression, the Hawley- Smoot Tariff raised tariff rates so high that the prices of imports rose almost 70%
In return, other countries raised their rates
World trade almost came to a halt

14. In 1934, the US passed the Reciprocal Trade Agreement Act
It didn’t take countries long to realize high tariffs hurt more than help
In 1934, the US passed the Reciprocal Trade Agreement Act
Reduced tariffs up to 50% if other countries did the same
Also had a “most favored nation clause” which allows a country to get the same rate the US negotiates with a 3rd country

15. GATT:
23 nations signed the General Agreement on Tariffs and Trade (GATT)
Lowered more tariffs and worked to do away with quotas
Later, the president was given the power to negotiate more tariff reductions
Over 100 countries agreed to reduce tariff levels by the early 1990’s

16. GATT was replaced by the WTO
International agency that administers trade agreements
Settles trade disputes b/w governments
Gives training and assistance for developing countries
Because of GATT and the WTO, international trade is flourishing
Tariffs have been greatly reduced

17. North American Free Trade Agreement (NAFTA):
Created by George HW Bush’s administration and finalized under Clinton’s administration
It makes most trade b/w the US, Canada, and Mexico free
There have been some negatives, but trade has grown dramatically between the three countries