International Trade
Lecture 5

Trade and Trade Barriers

1. David Ricardo – countries specialize in production of products which they have low opportunity costs
   1. Opportunity costs – the cost of giving up the next best option
   2. Example – If U.S. to export more corn and wheat, than more land is needed.
      1. Opportunity cost – less houses and factories are built
      2. Trade offs
   3. Gains from trade
      1. If the price of oil is high compared to wheat, then Saudi Arabia will reap more of the gains from trade
      2. If oil is relatively cheap, then the United States will gain more
      3. Countries strive to get larger share
   4. Problems
      1. Nations do not want to become dependent on other countries
         1. Especially in food and natural resources, like oil
      2. Trade – causes resources to shift
         1. U.S. – manufacturing plants shut down
         2. Factory workers become unemployed
            1. Transfer workers to new industry
            2. Job training
            3. Assistance
      3. Countries actively intervene in trade
2. Types of Protection
   1. Tariffs – A tax placed on imported goods
      1. Raises the price of those goods
      2. Consumers buy less imports
      3. Protects domestic industry from foreign competition
      4. Gov. raises revenue
   2. Import Quotas – A limit on the quantity that can be imported
      1. Increases the price of imported goods
      2. Consumers buy less
      3. Protects domestic industry
      4. Gov. gets no revenue
         1. Foreign producers earn rents from higher market prices
   3. Export Quotas – a nation limits the quantity of an item that can exported
      1. Example: Voluntary Export Constraints – Japan voluntary imposed quotas on itself for Japanese cars sold to U.S. during 1980s
         1. U.S. threatened to impose trade barriers
         2. Japan exported its best, luxury cars to U.S.
         3. Honda, Nissan, and Toyota started producing cars in the U.S.
         4. Note – give time to Ford, GM, and Chrysler to retool and build better cars
            1. U.S. producers raised the price of cars to make more money and did nothing
         5. Note – Dangerous to subsidize a domestic industry that is having problems
   4. Export Subsidies – reduces the price of an exported product
      1. Decreases market prices (to foreigners)
      2. Foreigners buy more
      3. Boosts exports
      4. Expands the exporting industry, creating jobs
      5. Note – a subsidy is paid for by gov. imposing a tax on something else
   5. Currency Devaluations – a country devalues its currency
      1. Currency appreciates
         1. Money is stronger
         2. Consumers buy more imports
         3. Exporters export less (more expensive)
         4. Dutch Disease – countries with abundant resources have low economic growth
            1. Currency tends to appreciate
            2. Difficult to develop an exporting industry
            3. Legal structure problems
      2. Currency depreciates
         1. Money is weaker
         2. Consumers buy less imports
         3. Exporters export more (less expensive)
      3. Asian tigers and China weaken their currencies
         1. U.S. strengthens the U.S. dollar
         2. U.S. dollar is international currency
         3. Finance high U.S. debt and U.S. trade deficits
   6. Nontariff Barriers (NTBs) – complicated gov. regulations to reduce trade
      1. Health and safety standards
      2. Compliance with environmental regulations
      3. Licensing and labeling requirements
      4. Domestic content requirements - gov. requires a min. percentage be from domestic producers
      5. Gov. is a large consumer; may have rules to buy from domestic industry first
   7. Strategic Trade Practices – gov. subsidizes research and development of a product
      1. Provides subsidies to help an industry
         1. Low interest loans
         2. Tax abatements
         3. Gov. invests in building, etc.
      2. Economies of scale – supply a large international market
   8. Dumping – practice of selling an item for less abroad than at home
      1. Creates monopoly power
      2. Drive competitors out of business
   9. Countervailing Trade Practices – defensive measures to counter the advantage gained by another state
      1. Prevent antidumping
      2. Impose tariffs or quotas

GATT and WTO

1. General Agreement on Tariffs and Trade (GATT)
   1. Founded in 1948
   2. GATT reduce trade barriers through rounds
      1. Reciprocal - member nations lowered trade barriers together
      2. Reduced tariffs to less than 4% on average
         1. 1/10 of the level of 1948
      3. Uruguay round created WTO
      4. Countries reduced tariffs, but increased non-tariff trade barriers
2. World Trade Organization (WTO)
   1. Comprised of 153 members (as of 2010)
   2. WTO accounts for over 90 percent of world trade
   3. Headquartered in Geneva, Switzerland
   4. More enforcement power than GATT
      1. Review national trade policies
      2. Provide technical assistance and training to Less Developed Countries (LDCs)
      3. Transparency – countries must disclose trade regulations
      4. Help settle trade disputes
         1. WTO can impose trade sanctions on member states that violate trade agreements
         2. WTO ruled against U.S.
            1. Dolphins caught with tuna
            2. Turtles caught in shrimp nets
   5. Protest – many WTO meetings have large protests
      1. Usurps sovereignty from countries
      2. Should focus beyond trade
         1. Environmental problems
         2. Good wages and safe working conditions for workers
      3. Tool of large corporations
3. North-South Trade Issues
   1. Since World War II, LDCs have seen economic growth
   1. Exporting more manufactured goods
   2. Multinational Corporations (MNCs) expanded production in LDCs
   3. Trade accounts for as much as 75 percent of many LDCs' foreign exchange earnings
   4. Note – countries had to change legal structure
      1. Investors do not invest in dangerous countries
      2. Example – Venezuela
         1. Socialistic – gov. expropriating (nationalizes) industries
         2. International investors will not invest there
         3. If country becomes capitalistic again, it takes years for investors to return (afraid country will revert)
         4. Companies that lost assets may never invest there again
      3. OPEC – nationalized oil fields from U.S. corporations
   2. Africa and also in Latin America
      1. Suffer chronic trade deficits
      2. Large international debt from developed countries
      3. U.S. and others keep them poor and dependent
      4. Use GATT and WTO to bring down LDC tariff barriers
         1. Exposing the LDCs infant industries to fierce competition from developed countries
         2. Export (high-tech) manufactured goods to LDCs
         3. LDC exports resources and raw materials
      5. Note – legal structure problems
   3. Regional Trade Blocs – promote internal free trade while retaining trade barriers with nonmember nations.
   4. Largest trade blocs
      1. North American Free Trade Agreement (NAFTA)
      2. European Union (EU)
   5. Violates GATT and WTO principles of nondiscrimination
      1. By permitting internal free trade while still imposing trade restrictions on external trade
      2. Benefit – stepping stones to global free trade
      3. Problem – protectionism
   6. EU
      1. Enhance production specialization and efficiency
      2. Freedom of movement for labor, capital, goods, and services within Europe
      3. Difficult for outsiders to penetrate EU markets
      4. Common currency – Euro
      5. Created institutions
         1. European Parliament European Court of Justice
         2. European Central Bank
   7. NAFTA – trade bloc for U.S., Canada, and Mexico
      1. Founded in 1993
      2. Preempt – Japan
         1. Japanese were heavily investing in Mexico
         2. NAFTA reduce Japan’s influence
      3. Talk to expand NAFTA to South American countries
4. Trade Sanctions – imposes punishment on a country
   1. Boycotts, restrictions, or embargoes
   2. Force a country to do something
   3. U.S. imposed sanctions on Cuba in 1950s
      1. President Fidel Castro's communist regime
      2. Outlawed trade between U.S. businesses and Communist bloc countries
   4. Trade sanctions do not work
      1. Third party nations become the middlemen, circumventing the trade embargo
      2. Food embargos – starve the people; leaders never go hungry
      3. Example
         1. Cuba and Mexico have free trade
         2. Mexico and U.S. have free trade via NAFTA
         3. Americans eat Cuban sugar