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Chapter 18

International Trade and Aid

© 2003 South-Western College Publishing

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U.S. Merchandise Exports by Region - 2002

South/Central America 8%

Canada & Mexico

36%

Western Europe

24%

Pacific Rim Countries

15%

China & Japan 10%

Rest of World 7%

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Major U.S. Merchandise Exports and Imports, 2001 (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 $ 298

Consumer goods 284

Industrial supplies and materials 200

Automobile vehicles, engines, parts 190

Petroleum & products 74

Food, feeds, and beverages 61

ExportsExports Value ImportsImports Value

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Barriers to Free Trade

TariffTariffA duty or tax levied on foreign imports for revenue or for protective purposes

Specific tariffSpecific tariffExpressed in absolute terms, e.g., 25 cents per pound or per unit

Ad valorem tariffAd valorem tariffExpressed in relative or percentage terms, e.g., 15% of the value of the imported good

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Arguments for Free Trade Not essential to raise revenue Deny benefits of greater productivity and

higher standard of living resulting from absolute and comparative advantage

Restrict the free movement of goods and services

Eliminate the advantages of specialization and exchange

Prevent the optimal use of scarce resources Consumer ultimately pays the tariff

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Arguments for Tariffs

Protect infant industries Equalize costs Protect U.S. jobs Protect high U.S. wages Protect against dumping

Selling surplus produces in a foreign market at a price below the price at which they are sold in the domestic market

Retain money at home Develop and protect defense industries Diversify industry

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Effect of Tariffs on Trade in TVsPrice

Pe 0 Qe 0 Q1 Q3 Q4 Q2

D

S

Quantity

P1

A

Quantity Quantity

P2

Price Price

D

S

C

BS1

S2

0 Qe

S3

D

S

AP3

(a) No Foreign Trade

(b) Tariff-Restricted Trade

(c) Elimination of Trade as a Result of Tariff

In the absence of foreign trade, the equilibrium price and quantity are illustrated in panel (a) domestic demand is totally satisfied by domestic supply. Panel (b) presents the situation when the U.S. becomes an open market with no tariffs. The domestic supply and demand curves are represented by D and S.

If foreign producers can produce and ship television sets for a delivered price of P1, the applicable supply curve becomes S1. The supply curve becomes perfectly elastic indicating that with free trade, an unlimited quantity of imports is available at that price market share for domestic produces at P1 has declined to OQ1 & the foreign producer market share is Q1Q2 new equilibrium position occurs at point B

When a tariff is now applied, the perfectly elastic supply curve shifts upward to S2 reflecting the higher price brought about by the tariff new equilibrium at point C domestic producers increase their market share from OQ1 to OQ3 and the foreign market share declines to Q3Q4 & consumers end up paying a higher price per set with fewer units purchased

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Other Barriers to Free Trade

Non-Tariff Barriers: restrict imports, grant aid to domestic producers, encourage export of goodsImport QuotasTariff QuotaEmbargoExport SubsidyVoluntary Restraint AgreementsExchange Controls

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Quotas

Import QuotaImport QuotaMaximum absolute amount of a particular good

that may be imported

Tariff QuotaTariff QuotaPermits a certain amount of an imported good to

enter at one tariff rates, but charges a higher tariff rate for amounts over the optimum

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Embargo

Complete cessation of trade with a particular nation or of trade in certain productsU.S.’s embargo on trade with CubaU.N.’s embargo on trade with IraqU.S.’s 1975 embargo on grain exports from the

former U.S.S.R. in fear of domestic shortageU.S.’s 1986 embargo on trade with South

Africa in protest of apartheid

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Export Subsidy

A government payment to private firms designed to either toEncourage the exportation of certain goods or Prevent discrimination against exporters who may

otherwise be forced to sell their products below domestic price

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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 countryPrices of the imported goods rise and consumers pay Example: 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

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Exchange Controls

Devices thatRation a country’s scarce foreign exchange

or

Set up multiple exchange rates different exchange rates are set for various goods

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U.S. Trade Policy Reciprocal Trade Agreements Act of 1934

Agreement by which the president has authority to lower tariffs up to 50% if other nations make reciprocal concessions

Most-favored-nation clauseGeneralizes concessions in bilateral agreements to

all nations

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U.S. Trade Policy

Escape clausesEscape clausesPermits tariff rates to be raised if the

domestic producers were suffering under the existing tariff &

Prohibits tariff reduction that might threaten national security

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The 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

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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

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Trade Act of 1974

Succeeded the Trade Expansion Act and gave the president authority toreduce or raise U.S. tariffs during international

trade negotiations impose import surcharges of up to 15%reduce/eliminate nontariff barriers, subject to

congressional approvalretaliate against unreasonable foreign restrictions

on U.S. trade

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GATT and Multinational Trade Negotiations

General Agreement on Tariffs and Trade (GATT) called forEqual and nondiscriminatory treatment of all

nations in international tradeReduction of tariffs through reciprocal trade

agreementsEasing or elimination of import quotas

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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

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World Trade Organization

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

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World Trade Organization

Four main objectivesensure equal trading rights among memberssupport free trade and the reduction and

elimination of tariffseliminate trade subsidiesestablish binding rules to ensure fairness

and consistency in trade

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North American Economic Integration

U.S. Canada Free Trade Agreementreduced several major nontariff barriersremoved many restrictions on cross-border

investments Rule of Origin

Trade term defining the minimum percentage of a country’s exported products that must be produced/ substantially changed within the border of the exporting country

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North American Free Trade Agreement - NAFTA

Agreement between U.S., Canada, and Mexico is the largest trading bloc in the world

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Benefits of NAFTA

Benefits to U.S.expanded free

tradeincreased

competitionmore investment

opportunities

Benefits to Mexicoopen access to the

U.S.greater capital

investment in Mexicomore stable economic

environment

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Maquiladora Program

MaquiladorasMaquiladoras: 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

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NAFTA Controversies

LaborNegative impact on employment in certain

industries and areas manufacturing

Environment Looser environmental regulations and enforcement

in Mexico

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NAFTA Controversies

Future Issues Increased cost of imported components to the U.S,U.S. companies must now pay taxes on income and

assets in MexicoChile’s entrance to NAFTA Expansion of NAFTA encompassing all of the

Americas

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European Economic Integration

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

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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

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European Union

Maastricht Agreement EC became the EUEuropean Monetary Unit (EMU, or euro)

More members added

Accounts for 40% of world trade

After Canada, the U.S.’s largest export market

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Trading in North America

0

50

100

150

200

250

90 91 92 93 94 95 96 97 98 99 00 01

Years

Imports from Canada

Exports to Canada

Bill

ion

s of

U.S

. Dol

lars

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Trading in North America

Imports from Mexico

Exports to Mexico

Bill

ion

s of

U.S

. Dol

lars

0

50

90 91 92 93 94 95 96 97 98 99 0 1

Years

100

150

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Trading Blocs and the WTO

Other trading blocs around the globeCaribbean Common Market (CARICOM)Asia-Pacific Economic Cooperation (APEC)Central American Common Market (CACM)Common Market for Eastern and Southern Africa

(COMESA), among others Trading blocs discriminate against non-members

Not a violation of WTO rules, butMust be addressed through WTO talks in order to

agree upon what is permissible in managing bloc trade

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The World Bank

Established in 1945, consists of

International Bank for Reconstruction and Development (IRBD)

International Finance Corporation (IFC)

International Development Association (IDA)

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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

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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

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International Finance Corporation (IFC)

Promotes and provides support for the private sector in developing countries

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Regional Development Banks

Inter-American Development Bank African Development Bank Asian Development Bank

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