Chapter 18

International Trade and Aid

© 2001 South-Western College Publishing

2

U.S. Merchandise Exports by Region, 1999 (estimated)

Canada & Mexico

36.2%

Western Europe

24.0%

Pacific Rim

Countries 14.7%

China & Japan

10.3%

South/Central America

8.0%Rest of World 6.8%

3

Major U.S. Merchandise Exports and Imports, 1999 (billions $)

Capital goods,except automobiles 311

Industrial supplies and materials 147

Consumer goods 81

Automobile vehicles, engines, parts 75

Food, feeds, and beverages 45

Capital goods,except automobiles 297

Consumer goods 240

Industrial supplies and materials 222

Automobile vehicles, engines, parts 180

Petroleum & products 72

Food, feeds, and beverages 44

ExportsExports Value ImportsImports Value

4

Barriers to Free Trade

Tariff: a duty or tax levied on foreign imports for revenue or for protective purposes–specific tariff - expressed in absolute terms, e.g., 25 cents per pound or per unit–ad valorem tariff - expressed in relative or percentage terms, e.g., 15% of the value of the imported good

5

Arguments for Free Trade

Tariffs not essential to raise revenue Tariffs deny benefits of greater productivity and

higher standard of living resulting from absolute and comparative advantage

Tariffs restrict the free movement of goods and services

Tariffs eliminate the advantages of specialization and exchange

Tariffs prevent the optimal use of scarce resources The consumer ultimately pays the tariff

6

Arguments for Tariffs

They: Protect infant industries Equalize costs Protect U.S. jobs Protect high U.S. wages Protect against dumping Retain money at home Develop and protect defense industries Diversify industry

7

Effect of Tariffs on Trade in TVs

0 Qe 0 Q1 Q3 Q4 Q2

Price

D

S

Quantity

P1

A

Quantity Quantity

P2

Pe

Price Price

D

S

C

BS1

S2

0 Qe

S3

D

S

AP3

(a) No Trade

(b) Tariff-

Restricted Trade

(c) Elimination of

Trade as a Result of

Tariff

8

Other Barriers to Free Trade

Non-Tariff Barriers: restrict imports, grant aid to domestic producers, encourage export of goods– Import Quotas

– Tariff Quota

– Embargo

– Export Subsidy

– Voluntary Restraint Agreements

– Exchange Controls

9

Quotas

Import Quota - maximum absolute amount of a particular good that may be imported

Tariff Quota - permits a certain amount of an imported good to enter at one tariff rates, but charges a higher tariff rate for amounts over the optimum

10

Embargo

Complete cessation of trade with a particular nation or of trade in certain products– U.S.’s embargo on trade with Cuba

– U.N.’s embargo on trade with Iraq

– U.S.’s 1975 embargo on grain exports from the former U.S.S.R. in fear of domestic shortage

– U.S.’s 1986 embargo on trade with South Africa in protest of apartheid

11

Export Subsidy

A government payment to private firms: 1. to encourage the exportation of certain goods or

2. to prevent discrimination against exporters who may otherwise be forced to sell their products below domestic price

12

Voluntary Restraint Agreement

Agreement between two governments in which the government of the exporting country agrees to limit the amount of a product it sends to the importing country

Prices of the imported goods rise and consumers pay

E.g., 1981 agreement between the US and Japan in which Japan agreed to limit the number of cars exported, and Japanese car prices in the U.S. rose

13

Exchange Controls

Rationing of a nation’s scarce foreign exchange - limits overall imports into the nation

Use of multiple exchange rates - different exchange rates are set for various goods

14

U.S. Trade Policy

Reciprocal Trade Agreements Act: 1934 agreement by which the president has authority to lower tariffs up to 50% if other nations make reciprocal concessions

– Most-favored-nation clause - bilateral agreements generalized to all nations

– Escape clauses - 1) permitting tariff rates to be raised if the Tariff Commission found that insufficiency of existing tariffs cause harm or seriously threaten domestic producers;

2) prohibiting tariff reduction that might threaten national security

15

The Export-Import Bank

Export-Import Bank chartered to finance exports from the U. S.

Finances private exports and imports between the U.S. and other nations that cannot be financed at reasonable rates through normal international channels

Also makes loans for private and government development projects in developing nations

16

Trade Expansion Act of 1962

Purposes: to stimulate U.S. economic growth and enlarge

foreign markets for its products to strengthen economic relations with foreign

countries through development of open/nondiscriminatory trading in the free world

to prevent communist economic penetration of the free world

17

Trade Act of 1974

Succeeded the Trade Expansion Act and gave the president authority to:– reduce or raise U.S. tariffs during

international trade negotiations

– impose import surcharges of up to 15%

– reduce/eliminate nontariff barriers, subject to congressional approval

– retaliate against unreasonable foreign restrictions on U.S. trade

18

GATT and Multinational Trade Negotiations

General Agreement on Tariffs and Trade (GATT) called for:– equal and nondiscriminatory treatment of all

nations in international trade– reduction of tariffs through reciprocal trade

agreements– easing or elimination of import quotas

19

The Uruguay Round (1986-1993)

Intended to improve upon GATT and negotiate reductions in tariff/nontariff barriers, and address specific issues regarding property rights, agriculture, direct financial investments, electronic products, insurance, textiles/apparel– Trade balancing: requirement that a foreign

affiliate must export as much of its production as it imports for use as inputs.

20

World Trade Organization

Multinational organization of 135 nations intended to oversee international trade agreements and resolve trade conflicts

21

World Trade Organization

The WTO has four main objectives: ensure equal trading rights among members support free trade and the reduction and

elimination of tariffs eliminate trade subsidies establish binding rules to ensure fairness

and consistency in trade

22

North American Economic Integration

U.S. Canada Free Trade Agreement– reduced several major nontariff barriers– removed many restrictions on cross-border

investments– Rule of Origin: a trade term defining the

minimum % of a country’s exported products that must be produced/ substantially changed within the border of the exporting country

23

North American Economic Integration

North American Free Trade Agreement (NAFTA) between U.S., Canada, and Mexico is the largest trading bloc in the world

24

Benefits of NAFTA

Benefits to U.S. expanded free trade increased

competition more investment

opportunities

Benefits to Mexico open access to the

U.S. greater capital

investment in Mexico more stable economic

environment

25

Trading in North America: U.S.-Canada

200

175

150

125

100

75

50

25

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999

U.S

. Im

port

s fr

om a

nd

Exp

orts

to C

anad

a (b

illio

ns $

)

Year

Exports

NAFTAImports

26

Trading in North America: U.S.-Mexico

120

100

80

60

40

20

01990 1991 1992 1993 1994 1995 1996 1997 1998 1999

U.S

. Im

port

s fr

om a

nd

Exp

orts

to M

exic

o (b

illio

ns $

)

Year

Exports

NAFTA

Imports

27

Maquiladora Program

Maquiladoras: export-oriented plants usually near the U.S.-Mexico border that are exempt from paying import duties on raw materials and parts used in making final products

28

NAFTA Controversies

Labor: negative impact on employment Environment: looser environmental

regulations and enforcement in Mexico Future Issues:

– Chile’s entrance to NAFTA – border congestion – environmental cleanup – direct investment not occurring within Mexico

29

European Economic Integration

European Common Market European Economic Community (EEC) European Community (EC) European Union (EU) Trading Blocs and the WTO

30

EC Goals

To abolish tariff and import quotas among the member nations within 10-12 years

To establish a common tariff applicable to all imports from outside the EEC area within 10-12 years

To attain the free movement of capital and labor within the member nations

To adopt a common policy regarding monopolies and agriculture

31

European Union

Maastricht Agreement – EC became the EU– European Monetary Unit (EMU, or euro)

More members added Accounts for 40% of world trade After Canada, the U.S.’s largest export

market

32

U.S. Trade with the EU

200

180

160

140

120

100

80

60

40

20

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

U.S

. Im

port

s fr

om a

nd

Exp

orts

to E

U (

billi

ons

$)

Year

Exports

Imports

33

Trading Blocs and the WTO

Other trading blocs around the globe: the Caribbean Common Market (CARICOM), Asia-Pacific Economic Cooperation(APEC), Central American Common Market (CACM), and Common Market for Eastern and Southern Africa (COMESA), among others

Trading blocs discriminate against non-members – this is not a violation of WTO rules, but– must be addressed through WTO talks in order to

agree upon what is permissible in managing bloc trade

34

The World Bank

Established in 1945, consists of International Bank for Reconstruction

and Development (IRBD) International Finance Corporation (IFC) International Development Association

(IDA)

35

International Bank for Reconstruction and Development (IBRD)

Owned by governments of 181 countries Makes/guarantees loans for productive

reconstruction and development Risks are shared by all member governments in

proportion to their economic strength Program of structural -adjustment lending

(loans to support programs of specific policy changes/institutional reform designed to use resources efficiently

36

International Development Association (IDA)

Provides assistance to very poor countries on financial terms than impose a lighter burden than other World Bank loans

Funds are called “credits” to differentiate them from IBRD loans and have a 50-year maturity at no interest

Funds come in the form of subscriptions, general renewals, and transfers from IBRD earnings

37

International Finance Corporation (IFC)

Promotes and provides support for the private sector in developing countries

38

Regional Development Banks

Inter-American Development Bank African Development Bank Asian Development Bank

All are smaller than the World Bank, but purposes are similar.