26 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Some Key Trade Facts • U.S trade deficit in goods • $529 billion in 2015 • U.S trade surplus in services • $220 billion in 2015 • Canada largest U.S trade partner • Trade deficit with China • $366 billion in 2015 • Exports are 13% U.S output LO1 Economic Basis for Trade • Nations have different resource • • • LO2 endowments Labor-intensive goods Land-intensive goods Capital-intensive goods Comparative Advantage • Assumptions • Two nations • Same size labor force • Constant costs in each country • Different costs between countries • Comparative Advantage • Country produces good with lowest domestic opportunity cost • Total output is greatest LO2 Comparative Advantage • Case for free trade • Increase total output • Efficient allocation of resources • Promote competition LO2 • • • • • LO4 Trade Barriers and Export Subsidies Tariffs • Revenue tariff • Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy The Case for Protection • Military self-sufficiency • Diversification for stability • Infant industry • Alleged exception to free trade • Protection against dumping • Increased domestic employment • Smoot-Hawley Tariff Act • Cheap foreign labor LO5 GATT • Three principles • Equal, nondiscriminatory trade between member nations • Reduction in tariffs • Elimination of import quotas LO5 WTO • Established by Uruguay Round of • • • LO5 GATT 161 member nations in 2015 Oversees trade agreements and rules on disputes Critics argue may allow nations to circumvent environmental and worker protection laws European Union • Initiated in 1958 as Common Market • Abolished tariffs and import quotas • • • LO5 between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency Increased output, faster economic growth NAFTA • Agreement between U.S., Canada, • • • LO5 Mexico Establishes free trade zone between the countries Trade has increased in all countries Enhanced standard of living Trade Adjustment and Offshoring • Trade Adjustment Assistance Act • Designed to help individuals hurt by • LO5 international trade • Increases political support for reducing trade barriers Offshoring of jobs • Shifting of work previously done by American workers to workers abroad