Economics Chapter 17

Free Trade

Positives: -More movement of goods -Increased exports of some products -Lower manufacture costs -(Maybe) Lower prices to consumers Negatives: -Increased imports of some products - Job loses -Closing factories

Other Trade Barriers

- Many imported foods are subject to health inspections far more rigorous then those given to domestic foods. For years this tactic was used to keep beef grown in Argentina out of the United States. - Another tactics is to require a license to import. If the government is slow to grant the license, or if the license fees are too high, international trade is restricted.

GATT/WTO(World Trade Organization)

-159 members -Enables the President to negotiate tariff reductions with trading partners -Has allowed international trade to flourish -In 1947, 23 countries signed the General Agreement on Tariffs and Trade. The GATT extended tariff concessions and worked to do away with import quotas. Later, the Trade Expansion Act of 1962 gave the president of the United States the power to negotiate further tariff reductions. As a result of this legislation, more than 100 countries had agreed to reduce the average level of tariffs by the early 1990s. More recently, the GATT was replaced by the World Trade Organization (WTO)-an international agency that administers previous GATT trade agreements, settles trade disputes between governments, organizes trade negotiations, and provides technical assistance and training for developing countries

NAFTA

-Created world's largest free trade zone -Removed or reduced many but not all tariff barriers among US, Canada, and Mexico -In any trade deals, there winners and losers -Now known as USMCA -The North American Free Trade Agreement (NAFTA) is an agreement to liberalize free trade by reducing tariffs among three major trading partners: Canada, Mexico, and the United States. It was proposed by the Bush administration and concluded by the Clinton administration in 1993. Before NAFTA, United States goods entering Mexico faced an average tariff of 10 percent. At the same time, approximately half of the goods entering the United States from Mexico were duty-free, while the other half faced an average tax of only 4 percent. NAFTA was controversial specifically because some workers would be displaced when trade barriers were lowered.

Trade Deficit

A persistent trade imbalance tends to reduce the value of a country's currency on foreign exchange markets. The devalued currency then causes a chain reaction that affects income and employment in that country's industries. - Example: The large deficit in the United States balance of payments in the mid-1980s and late 1990s flooded the foreign exchange markets with dollars. An increase in the supply and demand curves, causes the dollar to lose some of its value. The weaker dollar causes unemployment to rise in import industries as imports become more expensive, and it causes unemployment to go down in export industries as their goods become more competitive.

Protective Tariff

A protective tariff is a tariff high enough to protect less-efficient domestic industries. - Example: Suppose that it costs $1 to produce a mechanical pencil in the United States and the exact same pencil can be imported for 35 cents from another country. If a tariff of 95 cents is placed on each imported pencil, the cost climbs to $1.30 - more than the cost of the American-made one.

Trade Surplus

A weak currency tends to cause trade surpluses, which eventually pull up the value of the currency. As a result, the United States and many other countries no longer design economic policies just to improve their trade position.

Comparative advantage

Comparative advantage is the ability of a country to produce a product relatively more efficiently, or at a lower opportunity cost. - Example: "A" can produce 40 pounds of coffee OR 8 pounds of nuts. The opportunity cost of producing 1 pound of nuts is 5 pounds of coffee (40/8 = 5). If "B"s opportunity cost is higher, then "A" has a comparative advantage.

absolute advantage

Country's ability to produce more of a given product than any another country; Doing something with less resources; Outproduce competitors in all goods resources - Example: If "A" country and "B" country both devote all their efforts to making coffee and "A" can make more, "A" has an absolute advantage.

Arguments for protectionism

Defense: Support of domestic industries prevents country becoming too dependent on foreign suppliers for critical materials and technologies Infant Industries: New or emerging industries should be protected until they can compete on their own Protecting Jobs: Protect domestic industry from cheap foreign labor

Unfair Trade Practices

Dumping: -Selling products in a foreign market below their cost to produce in order to capture a market (Cheap labor also counts) -A trade crisis emerged in mid-1997 when charges of dumping, or selling products abroad at less than it cost to produce them at home, were levied against Japan and Russia. Price Fixing: -Setting artificial prices among a group of companies to discourage competition Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand. -Considered a monopoly or cartel -Their companies that want to take advantage of consumers and gain more Subsidies: -Payment directly to companies to support part of their competitors -A subsidy is a sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. Kickbacks, Discounts, Free Loans, Bribes: -Attempts to influence foreign officials to give preferential treatment A kickback is a payment made to someone who has facilitated a transaction or appointment, especially illicitly. -A discount is a deduction from the usual cost of something, typically given for prompt or advance payment or to a special category of buyers. -A loan where the borrower does not have to pay interest for a particular period of time. -A sum of money or other inducement offered or given to bribe someone

Trade affects on the value of the dollar

Ever since the dollar started to float in 1971, the Federal Reserve System has kept a statistic that measures the international value of the dollar. Called the trade-weighted value of the dollar, it is an index showing the strength of the dollar against a group of foreign currencies. When the index falls, the dollar is weak in relation to other currencies. When the index rises, the dollar is strong.

Protectionism

Person who would protect domestic producers with tariffs, quotas, and other trade barriers Some people, known as protectionists, favor trade barriers that protect domestic industries. - Protectionists argue that without trade barriers, a country could become so specialized that it would end up becoming too dependent on other countries. - The infant industries argument-the belief that new or emerging industries should be protected from foreign competition-is also used to justify trade barriers. Protectionists claim that these industries need to gain strength and experience before they can compete against developed industries in other countries. Trade barriers would give them the time they need to develop. - A third argument-and one used most often-is that tariffs and quotas protect domestic jobs from cheap foreign labor. Protectionist measures provide temporary protection for domestic jobs. This is especially attractive to people who want to work in the communities where they grew up.

Barriers To Trade: Quota Import Licenses and Inspections Embargo Tariffs Subsidies

Quota= Limit on the amount of a good that can be allowed into a country Import Licenses and Inspections= A document issued by a national government authorizing an inspection of certain goods and inspection of goods being imported into the nation Embargo= Prohibition on the export or import of a product Tariffs= Tax placed on an imported product Subsidies= Government payment to encourage or protect a certain economic activity

Trade Balance

The balance of payments-the difference between the money a country pays out to, and receives from, other nations when it engages in international trade. Protectionists argue that restrictions on imports help the balance of payments by restricting the amount of imports. What protectionists overlook, however, is that the dollars return to the United States to stimulate employment in other industries. As a result, most economists do not believe that interfering with free trade can be justified on the grounds of helping the balance of payments.

Free Trade

The lowering of elimination of tariff and other barriers by mutual consent of the trading countries - Free traders admit that national security is a compelling argument for trade barriers. They believe, however, that the advantages of having a reliable source of domestic supply must be weighed against the disadvantages that the supply will be smaller and possibly less efficient than it would be with free trade. - Many people are willing to accept the infant industries argument, but only if protection will eventually be removed so that the industry is forced to compete on its own. The problem is that industries used to having some protection are normally unwilling to give it up. - (protecting domestic jobs) Most free traders believe that it is best not to interfere, and thereby keep pressure on threatened industries to modernize and improve. If prices get too high, substitute products will be found and protected jobs will still be lost. Free traders argue that the profit-and-loss system is one of the major features in the American economy. Profits reward the efficient and hard working, while losses eliminate the inefficient and weak.

Revenue Tariff

The revenue tariff is a tariff high enough to generate revenue for the government without actually prohibiting imports. From the Civil War to 1913, tariffs provided about one-half of the government's total revenue. In 1913 the federal income tax was passed, which gave the government a new and more lucrative source of revenue. - Example: If the tariff on imported mechanical pencils were 40 cents, the price of the imports would be 75 cents, or 25 cents less than the American-made ones. As long as the two products are identical, people would prefer the imported one because it was less expensive--so the tariff would raise revenue rather than protect domestic producers from foreign competition.

Foreign Exchange

Value of currencies relative to other currencies determined by supply and demand Foreign currencies can be bought and sold on a foreign currency exchange Companies can pay or be paid in a foreign currency This market includes banks that help secure foreign currencies for importers, as well as banks that accept foreign currencies from exporters. - Example: Suppose that one pound sterling, L1, is equal to $1.58. If the business suits are valued at L1,000 in London, the American importer can go to an American bank and buy a L1,000 check for $1,580 plus a small service charge. The American firm then pays the British merchant, and the suits are imported.

Currency Conversion

You need: -A quantity of a currency -A conversion factor (exchange rate) The problem: -Exchange rates can be expressed two ways Did you convert correctly: -If your converting correctly from a less valuable to a more valuable currency- always end up with a LESS of the more valuable currency -If your converting from a more valuable to a less valuable currency-always end up with MORE of the less valuable currency