Chapter 8

The Export-Import Sector

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 Chapter Objectives
• The basis for international trade
• U. S. imports and exports
• A summing up: C + I + G + Xn
• Specialization and exchange
• The world’s leading trading nations
• World trade agreements and free-trade
zones
• Outsourcing and off-shoring

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 The Basis for International Trade
• The basis for international trade is that if country
A can produce a commodity, product, or service
for country B at a lower cost than country B can
do it, country B produces something else and buys
the product from country A.
– In other words, if you can buy it cheaper than you can
make it you buy it
– This maxim is true for individuals and nations
– This is called specialization and exchange

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 Specialization and Exchange
• We have been a major exporter of wheat, corn, and soybeans since
colonial times
– Initially, we had an abundance of land
– Eventually we came to have a tremendous stock of farm equipment
• We used to be a major exporter of steel and textiles
– Now other nations produce these more cheaply
• After WWII, we produced more than sixty percent of the worlds oil
supply and exported much of this
– Now, we have exhausted most of our easily extractible reserves and
import more than sixty percent of our oil
– If we didn’t import oil, gasoline could easily be $10 a gallon
• Today we are a major exporter of computer software and
entertainment goods and services

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 Examples of Specialization and
Exchange

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 U.S. Imports and Exports
As Percentage of GDP, 1970-2005
Economic Report of the President, 2006

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 U.S. Balance of Trade, 2005 IN Billions of Dollars
www.bea.gov

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 Outsourcing and Off-Shoring
• Outsourcing
– When a company in the United States contracts some of
their jobs to other firms in the United States
• There is no job loss or job gain
• Off-Shoring
– When a company in the United States contracts some of
their jobs to firms outside the United States
• When jobs are transferred out of the United States, the
unemployment rates goes up

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 Outsourcing and Off-Shoring
• Since 1970
– At least five million relatively high paying
jobs have been off-shored
– Today, close to 85 percent of our labor force
is employed in the service sector
– Today, less than one percent of American
jobs are sent off-shore
• This is something most Americans can live with
• If your job in in this one percent, then this is a
different story

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 A Summing Up: C + I + G + Xn

Net exports = Xn

Xn = Exports - Imports

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 C + I + G + Xn

Why is the C + I + G + Xn line lower than the C + I + G line?

Answer: It is lower because net exports (Xn) are negative
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 World Trade Agreements and
Free Trade Zones
• The North American Free Trade Association
(NAFTA)
• The Central American-Dominican Republic
Free Trade Agreement (CAFTA)
• The European Union (EU)
• Mercosur
• The General Agreement on Trade and Tariffs
(GATT)
• The World Trade Organization (WTO)

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 CAFTA, The Central American-Dominican
Republic Free Trade Agreement

• CAFTA includes the Dominican

Republic as well as Costa Rica, El
Salvador, Guatemala, Honduras, and
Nicaragua
• CAFTA will eventually eliminate all
tariffs among these seven nations

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 NAFTA, The North American
Free Trade Agreement
• NAFTA was ratified by Congress in 1993
• NAFTA created a free trade area that includes
Canada, the United States, and Mexico
– Trade barriers in industrial goods were dismantled
– Agreements on services, investment, intellectual
property rights, agriculture, and strengthening of
trades rules were included
– There were also side agreements on labor
adjustment provisions, protection of environment,
and import surges

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 Countries of the European Union

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 The European Union (EU)
• This free trade association of 15 nations
was formed in 1992
– Freight was now able to move anywhere
within the EU without checkpoint delays and
paperwork
– So-called quality codes were ended
– Workers from any EU country could work
in any other member country

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 The European Union (EU)
• In 1999, 11 EU countries formed the European
Monetary Union (Now 12 member nations)
– The euro was established as a common currency
• Initially, the euro existed along with each
country’s own currency
• In 2002 new euro coins and paper money
replaced each country’s own national currencies
– This common currency is expected to make
trade among participating member nations
much easier to conduct

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 Mercosur
• Includes, Argentina, Brazil, Paraguay, and Uruguay
and associate members Bolivia, Peru, and Chile
• It is the fourth largest market after NAFTA, the EU,
Japan, and Chile
• It was formed in 1991
• It has succeeded in eliminating all internal
tariffs while imposing a common external tariff
on goods imported from countries outside the
union
• However, some trade restrictions still exist,
especially between Brazil and Argentina

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 World Trade Agreements
• The General Agreement on Trade and Tariffs
(GATT)
– GATT was drafted in 1947 and has since been
signed by more than 146 nations
• The latest version was ratified by Congress in 1994
– GATT
• Reduces tariffs worldwide by an average of 40%
• Lowers other barriers to trade such as quotas on certain
products
• Provides patent protection for American software,
pharmaceuticals, and other industries

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 World Trade Agreements

• Will GATT help or hurt the United

States?
– Although some industries will be affected
adversely, the positive appears to outweigh
the negative
• On the average, foreign countries have more
trade restrictions and tariffs on U. S. goods than
we have on theirs
– GATT should help the U. S. more than it hurts

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 World Trade Agreements

• Will GATT help or hurt the United

States?
– GATT will, for the first time protect
intellectual property rights like patents,
trademarks, and copyrights
– GATT will also open markets for service
industries such as accounting, advertising,
computer services, and engineering
• These are fields in which Americans excel

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 World Trade Agreements
• Will GATT help or hurt the United
States?
– GATT brings agriculture under
international trade rules for the first time.
• European farm subsidies dwarf those paid to
American farmers
• Proportionally, the Europeans will will have to
reduce their subsidies a lot more than the United
States, making American crop exports even more
competitive

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 The World Trade Organization
(WTO)
• The WTO was set up in 1995 as a successor
to GATT
• The WTO is based on three major principles
– Liberalization of trade
– Nondiscrimination – the most-favored-nation
principle
– No unfair encouragement of exports

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 Liberalization of Trade
• Trade barriers, which were reduced
under GATT, should continue to be
reduced
– Trade barriers have been falling within free
trade zones such as NAFTA and the
European Union

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 Nondiscrimination:
The Most-Favored-Nation Principle
• Under the most-favored-nation principle,
members of WTO must offer one member
the same trade concessions as any other
member.
– This is a lot like when the teacher says that if
you bring candy to class, you must bring some
for everyone

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 No Unfair Encouragement of
Exports
• No unfair encouragement of exports
encompasses export subsidies, which are
considered a form of unfair competition
– American and European governments have long
subsidized their farmers
– This enables the producers to sell their crops well
below cost
– This sets the price of agriculture staples so low that
small farmers in developing countries can’t compete
– These small farmers are eventually forced off their
land by subsidized imports and have no means to
survive

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 The WTO Dispute Settlement Body
• The WTO has a Dispute Settlement Body to
handle disagreements among member nations
– Many politicians in the United States have very
reluctantly accepted the jurisdiction of the WTO
• The United States has won almost all the more than two
dozen cases in which the U. S. was the complaining party
• The United States has also lost some cases in which other
governments were the complaining parties.

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 Objections

• Environmentalists argue that elitist trade

and economics bodies make
undemocratic decisions that undermine
national sovereignty on environmental
regulation
• Unions charge that unfettered trade
allows unfair competition from countries
that lack labor standards

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 Objections

• Human rights and student groups say the

IMF and the World Bank prop up
regimes that condone sweatshops and
pursue policies that bail out foreign
lenders at the expense of local economies

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 Summary
• The debate is not just about “free trade”
but also about “fair trade”
– Many Americans, as well as citizens of other
leading industrial nations, have strong
reservations about ceding some national
sovereignty to international organizations
• Especially the WTO

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 Summary

• The debate is not just about “free trade”

but also about “fair trade”
– Much concern centers on the possible loss of
jobs and the reduction of wages in their
countries if their workers were forced to
compete with low-wage workers in the
poorer countries
• Many earn just one or two dollars a day

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 Summary

• The debate is not just about “free trade” but

also about “fair trade”
– Is it fair to make American factories, which have
relatively high environmental standards, compete
with Third World factories that are not similarly
burdened?
– If the United States and other industrial countries
are subject to the rules and regulations of the WTO,
their own governments would be unable to prevent a
flood of cheap imports

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 Current Issue: Is Your School
Sweatshirt Sewn in A Sweatshop?

• If it is, do school administrators and

students bear any responsibility for the
abysmal working conditions and measly
pay of the workers making their college
paraphernalia?

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