Why Countries Trade Why Trade There are two

Why Countries Trade

Why Trade? There are two theories on why countries trade, they both agree that countries should produce those things that they are most efficient at making

Absolute Advantage Theory that we should produce what is efficient, and trade the surplus for things that we aren’t efficient at making

Absolute Advantage Theory that we should produce what is efficient, and trade the surplus for things that we aren’t efficient at making Ex. – we export machinery to Central America, they export bananas to us

Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making

Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making Ex. – US makes both watches and airplanes more efficiently than Switzerland

Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making Ex. – US makes both watches and airplanes more efficiently than Switzerland • However, we are 3 x more efficient in airplanes, 2 x in watches

Comparative Advantage Theory that we should produce those things at which we are relatively more efficient at making Ex. – US makes both watches and airplanes more efficiently than Switzerland • However, we are 3 x more efficient in airplanes, 2 x in watches • Therefore, we should specialize in airplanes

Barriers to Trade Tariffs – taxes on imports

Barriers to Trade Tariffs – taxes on imports 3 types of tariffs:

Barriers to Trade Tariffs – taxes on imports 3 types of tariffs: Revenue – intended to raise money

Barriers to Trade Tariffs – taxes on imports 3 types of tariffs: Revenue – intended to raise money Protective – to protect US made goods

Barriers to Trade Tariffs – taxes on imports 3 types of tariffs: Revenue – intended to raise money Protective – to protect US made goods Restrictive – to reduce/eliminate flow on a product to the country

Barriers to Trade Quotas – limit on the amount of goods let into a country (made illegal by GATT General Agreement of Tariffs and Trade)

Barriers to Trade Quotas – limit on the amount of goods let into a country (made illegal by GATT General Agreement of Tariffs and Trade) VER (Voluntary Export Restraints) countries volunteer to set their own quota on exports to help another country out

Barriers to Trade Regulations and Certification – imports must meet these

The Costs and Benefits of Trade Barriers Why restrict trade?

The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry

The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry National Security – produce necessary military products itself

The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry National Security – produce necessary military products itself Protection of domestic jobs – foreigners work for less

The Costs and Benefits of Trade Barriers Why restrict trade? Infant Industry – needs to protect young growing industry from well-established industry National Security – produce necessary military products itself Protection of domestic jobs – foreigners work for less Maintaining economic stability – can be greatly disrupted by other countries’ problems

Balance of Trade Since 1980, US imports more than it exports (negative balance of trade)

Balance of Trade Since 1980, US imports more than it exports (negative balance of trade) Can be bad for employment, taxes, profits, economic growth

Balance of Trade Since 1980, US imports more than it exports (negative balance of trade) Can be bad for employment, taxes, profits, economic growth Good for fighting inflation, providing low cost goods

Politics The US has backed away from Free Trade, and pushed for Fair Trade

Politics The US has backed away from Free Trade, and pushed for Fair Trade Opposed to the policy of dumping (selling of products for less than that country can produce them for)

Politics The US has backed away from Free Trade, and pushed for Fair Trade Opposed to the policy of dumping (selling of products for less than that country can produce them for) In 1989, we published a list of Unfair Trade Countries, and threats of retaliation from the US have improved conditions