Chapter 17:2 Trade Barriers and Agreements

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1 Chapter 17:2 Trade Barriers and Agreements

2 Pro_23:26 My son, give me thine heart, and let thine eyes observe my ways. Eze_36:26 A new heart also will I give you, and a new spirit will I put within you: and I will take away the stony heart out of your flesh, and I will give you an heart of flesh.

3 Objectives: o We will define various types of trade barriers. o We will analyze the effects of trade barriers on economic activities. o We will evaluate the benefits and costs of participation in international trade agreements and the role of multinational corporations in a global economy.

4 Trade Barriers: o A trade barrier or trade restriction is a means of preventing a foreign product or service from freely entering a nation s territory. o One common trade barrier is a tariff or a tax on imported goods.

5 Trade Barriers: o The U.S. continues to collect tariffs on steel, foreign-made cars, and many other products. o If you travel abroad, you may have had to pay a tax on foreign goods you brought back to the U.S. o These custom duties are another form of tariff.

6 Quotas and VERS: o Another kind of barrier is an import quota. o Import quotas place a limit on the amount of goods that can be imported. o Tariffs and quotas are laws set by the importing country.

Quotas and VERS: o By contrast, the voluntary export restraint (VER) is a voluntary limit set by the exporting country, restricting the quantity of a product

7 Quotas and VERS: o By contrast, the voluntary export restraint (VER) is a voluntary limit set by the exporting country, restricting the quantity of a product it will sell to another country. o A nation that adopts a VER seeks to reduce the risk that the importing country will impose damaging trade barriers itself.

8 Other Barriers to Trade: o Other government actions may also create trade barriers. o For example, a government may require foreign companies to obtain a license to sell goods in that country.

9 Other Barriers to Trade: o High licensing fees or slow licensing processes act as informal trade barriers. o Health, safety, or environmental regulations can also act as trade barriers. o For example: a nation treats the fruit it grows, with a particular insecticide.

10 Other Barriers to Trade: o The U.S. antipollution standards that require cars to be equipped with catalytic converters is another example. o Cars that do not meet this requirement cannot be exported to the United States. o Finally, a nation may impose trade barriers and other economic sanctions for political reasons.

11 Other Barriers to Trade: o Sanctions are actions a nation or group of nations takes in order to punish or put pressure on another nation. o Another is an embargo a ban on trade with a particular country.

12 Effects of Trade Barriers: o Increased Prices for Foreign Goods: Trade barriers can help domestic producers compete with foreign firms. o By limiting imports from those firms, or by making the prices of those imports higher, trade barriers help domestic companies.

13 Effects of Trade Barriers: o However this may cause domestic companies no incentive to keep prices low and harm the consumer. o Trade Wars: A cycle of escalating trade barriers, often cause economic hardship for both sides.

14 Arguments for Protectionism: o Use of trade barriers to shield domestic industries from foreign competition. o Protectionists have generally used three main arguments to support their views, Saving jobs, protecting infant industries, and safe-guarding national security.

15 Arguments for Protectionism: o Protecting Jobs: Laid off workers would take new jobs in other industries. o In practice, many of these workers would find retraining or relocation difficult. o Hence the rationale in protecting jobs.

Arguments for Protectionism: o Protecting Infant Industries: o Another argument for protectionism is that industries in the early stages of development need time and experience to become

16 Arguments for Protectionism: o Protecting Infant Industries: o Another argument for protectionism is that industries in the early stages of development need time and experience to become efficient producers. o Tariffs that raise the price of imported goods provide a period of time for these infant industries to become more competitive. o Once that happens the tariff can be eliminated.

17 Arguments for Protectionism: o Three problems may arise with such protective tariffs. o First, a protective infant industry may lack the incentive to grow up that is to become more efficient and competitive.

18 Arguments for Protectionism: o Second, once an industry has been given tariff protection, lawmakers may find it difficult for political reasons to take the protections away. o Third, a protected industry can keep its prices relatively high, increasing costs to consumers.

Arguments for Protectionism: o Safeguarding National Security: Certain industries may require protection because their products are essential to defending the country.

19 Arguments for Protectionism: o Safeguarding National Security: Certain industries may require protection because their products are essential to defending the country. o In the event of a war the United States would need an uninterrupted supply of steel, energy, and advanced technologies. o For this reason, the government wants to ensure that such domestic industries remain active.

20 Trade Agreements: o In opposition to protectionism, is the principle of free trade. o Free trade involves the lowering of elimination of protective tariffs and other trade barriers between two or more nations. o Supporters argue that free trade is the best way to pursue comparative advantage, raise living standards, and further cooperative relationships among nations.

21 Trade Agreements: o In 1995, the World Trade Organization (WTO) was founded with the goal of making global trade more free. o The WTO works to ensure that countries comply with GATT, to negotiate new trade agreements, and to resolve trade disputes. o Various conferences, or rounds of tariff negotiations have advanced the goals of GATT and the WTO. o Today the WTO also acts as a referee enforcing the rules agreed upon the member countries.

The European Union: o Is an example of a signed agreement of many nations that set to abolish tariffs and trade restrictions among member nations and adopt uniform tariffs for all countries that are

22 The European Union: o Is an example of a signed agreement of many nations that set to abolish tariffs and trade restrictions among member nations and adopt uniform tariffs for all countries that are not members. o The most successful example is the European Union (EU). o It is the largest trading bloc in the world. o They also have a single monetary system and currency. o It is called the Euro.

24 Free Trade Agreements: o Other nations have free-trade zones where a group of countries agrees to reduce or eliminate trade barriers. o One such pact, the North American Free Trade Agreement (NAFTA) created a freetrade zone linking the U.S., Canada, and Mexico. o The agreement included the elimination of tariffs after certain amount of years and trucks have access between the three nations.

25 Free Trade Agreements: o Other trade agreements include: o APEC o ASEAN o The Debate over Free trade: Concern that it gave too much economic power to large multinational corporations.

26 The Role of Multinationals: o Multinational is a large corporation that sells goods and services throughout the world. o Often times, a corporation of this kind would build production facilities in a foreign country benefits both the multinational and the host nation. o By locating abroad, the corporation avoids some shipping fees and tariffs.

27 The Role of Multinationals: o It may also benefit from cheaper labor. o The host nation benefits by gaining jobs and tax revenue. o Still host nations worry about the effect of multinationals on their countries. o In a small country with a fragile economy, multinationals can gain excessive political power. o In addition, host nations fear that multinationals could drive out domestic industries and exploit local workers.

29 POP QUIZ!!!!!!!!!!

30 Teachers, attorneys, accountants, doctors, nurses, dentists, athletes, and entertainers are examples of what type of industry? A Service B Tech C Manufacturing D None of the Above

31 The United States shipping F-35 Raptor fighters to Israel who purchased the planes is an example of the United States doing what? A Exporting B Importing C Marginal Revenue D Average Cost

32 When Honda CRVs and Accords are shipped from Japan to the United States, the United States is: A Exporting B Importing C Marginal Revenue D Average Cost

33 The currency of the European Union is the: A Gyro B Cry Yo C Euro D Mark

Resource Distribution and Trade

International Trade Resource Distribution and Trade Each country of the world possesses different types and quantities of land, labor, and capital resources. By specializing in the production of certain