Unit 4: Global Economic Concepts unıt outcomes: Evaluate factors and concepts significant to trade Chapter 15: Foreign Trade Pages 403 425 Globalization the trend of growing foreign trade and investment and the spread of international businesses and markets. Interesting facts: World trade grew almost four times as fast as world GDP between 1950 and 2003. Foreign investment has increased to well over US$1 trillion per day largely due to decreased costs from technological advances. Emerging economies currently account for almost half of global GDP and, if continues, by 2020 should account for almost 60%. Note second last paragraph on page 403. 1
Page 404 The above figure illustrates the value of exports as a percentage of their GDP. The above graph illustrates Canada's trading partners. Trends in Canadian Trade: The proportion of natural resources has gradually declined and the proportion of manufactured goods traded has increased. Currently, 70% 80% of Canada's trade is with the US. In 2010, Canada's largest export categories were motor vehicles and parts, industrial machinery, aircraft, and telecommunications equipment. Auto Pact (1965) allowed for free trade of cars (and buses and trucks), parts and tires. Fewer but larger assembly plants in Canada produced certain models for the entire North American market while other modls were imported from American factories. North American Free Trade Agreement (NAFTA) an agreement that set rules for international trade between the US, Canada, and Mexico. 2
What is Traded? 1. Resources what resources a country has to offer has a major impact on what it imports and exports. 2. Market Size items are produced in situations where businesses can take advantage of increasing returns to scale. 3. Climate Various climates are favorable for specific products which can be traded with other countries where it would not be cost effective to do so. Arguments For Free Trade(Against Trade Protection): 1. Product Variety provides consumers with a greater choice. 2. Competition Encourages businesses to produce goods as efficiently as possible which results in a lower price for consumers. 3. Specialization Countries can focus resources on products that it can make most efficiently which allows it a greater ability to purchase imports which increases world living standards. How do countries determine the product in which to specialize? Most countries either have either a comparative advantage or an absolute advantage. Absolute Advantage a country can produce more of one good than ano resources. The lawyer has the absolute advantage in regards to preparing wills. The carpenter has the absolute advantage in regards to building furniture. 3
Comparative Advantage the benefit enjoyed by a producer who can supply a certain item at a lower opportunity cost than another producer. This comes into play when one country has an absolute advantage in producing most or all goods and services compared to another country. law of comparative advantage states that maximum output is achieved when producers specialize in what they can make at a lower opportunity cost than can another producer. Ways in which Government Intervenes in International Trade: Tariffs an excise tax on imported goods. Consumers pay a higher price and buy less product. Governments gain additional tax revenue. Page 413 Import Quotas the most common non tariff barrier (NTB) which sets a limit on the quantity of a good that can be imported in a certain year. Government can impose the quota or put the foreign producer in a situation to "voluntarily" set their own quota for fear of other trade restrictions. Example: Japanese car imports in 1981 (p. 414) Foreign producers prefer quotas to tariffs. Government does not receive tax revenue. Foreign producers benefit from a higher price which offsets the smaller quantity sold. 4
Domestic Regulations regulations put in place that make trade expensive for foreign producers. Some examples would be licensing procedures, high safety and environmental standards, or rules which require government to buy domestic instead of foreign when possible Export Subsidies payments made by government to domestic exporters so they can reduce the prices they charge in foreign markets. This increases exports which, in turn, increases output and employment in the domestic market. Arguments Against Free Trade(For Trade Protection): 1. Domestic Employment Help stimulate domestic employment. 2. Infant Industries Protects young industries that are not big enough yet to take advantage of increasing returns to scale. 3. Terms of Trade If a country trades a large enough volume of a product, then it could influence the price in the global market which improves its terms of trade. 4. Environmental and Safety Standards Environmental damage could result from countries that have lax standards. 5. Low Wage Foreign Labour Domestic jobs are protected by limited imports produced by low wage foreign labour. 6. National Security People of an economy want to be self sufficient so that in times of conflict they can provide for themselves. 7. Cultural Sovereignty Some countries feel the need to protect their own cultural industries. 5
Trade Policies: National Policy (1879) a wide ranging tariff policy that was based on the infant industry argument. The Great Depression resulted in increased protectionism which made things worse by decreasing world trade. The resulting damage from protectionism gave rise to tradeliberating agreements. General Agreement on Tariffs and Trade (GATT; 1947) a trade agreement involving 22 countries. World Trade Organization (WTO; 1995) replaced GATT and includes almost 150 members. Based on the policy that member countries should treat all other members equally. Auto Pact In 2000, WTO decided that Canada broke trade rules and it no longer is in effect. Page 420 Free Trade Agreement (1988)- a free trade agreement that involves two trading partners. Signed by Canada and the US. Effects: > expanded trade flows. > Canadian total exports expanded faster than total imports. > Many workers lost jobs in formerly protected industries but this was also due to the shift from manufacturing to service and a global recessionary situation being experienced at the time. > Job losses have been replaced by expansions in the export sector. 6
Trading Blocks: a small group of countries involved in trade among themselves. Free Trade Area is tariff free but member countries can impose trade barriers on non member countries. Customs Union a stronger union that nt only includes free trade, but also common trade barriers with the rest of the world. Common Market a union that allows for free movement of labour and capital among member nations. Example: European Union which comprises most of teh countries in Europe. 7