Download 18.2 Trade Restrictions and Free-Trade Agreements

18.2 Trade Restrictions
and Free-Trade Agreements
Objectives
 Identify the two main trade restrictions
and evaluate their impact on U.S. prices.
 Explain why nations seek free-trade
agreements.
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18.2 Trade Restrictions
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Key Terms
 world price
 tariff
 quota
 General Agreement on Tariffs and Trade (GATT)
 Uruguay Round
 World Trade Organization (WTO)
 Doha Round
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18.2 Trade Restrictions and Free-Trade Agreements
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Trade Restrictions
 For internationally traded goods, such as wheat,
oil, gold, or steel, a price is established on the
world market.
 The world price is the price at which a good is
traded internationally; determined by the world
supply and world demand for the good.
 With free trade, any U.S. consumer can buy any
amount desired at the world price.
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Tariffs
One way the government can put foreign
producers at a disadvantage is to impose
a tariff on imports.
Simply put, a tariff is a tax on imports.
The tariff reduces the quantity of imports
supplied.
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Quotas
A quota is a legal limit on the amount of a
particular commodity that can be imported.
Quotas usually target imports from
particular countries.
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Tariffs and Quotas Compared
Tariffs and quotas both restrict supply,
thereby increasing the price, which hurts
U.S. consumers and helps U.S. producers.
The primary difference is that the revenue
from a tariff goes to the U.S. government,
whereas the revenue from the quota goes
to whoever has the right under the quota
to sell foreign goods in the U.S. market.
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Other Trade Restrictions
Subsidies to exporters
Low-interest loans to foreign buyers
Domestic content requirements
Health, safety, or technical standards
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Problems with Trade Restrictions
Response from other countries
Need to protect other stages of production
Social waste
High transaction costs
Slowing of the introduction of new goods
and better technologies
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Free Trade
by Multilateral Agreement
World trade offers many advantages to the
trading countries.
Examples
Increased consumption possibilities
Access to markets around the world
Lower costs through economies of scale
Improved quality from competitive pressure
Lower prices
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Free Trade
by Multilateral Agreement (continued)
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Because of these advantages, the trend
around the world is towards freer trade.
One way to ensure freer trade is for
nations to enter multilateral trade
agreements.
These are agreements entered into by
more than two nations.
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General Agreement
on Tariffs and Trade (GATT)
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 General Agreement on Tariffs and Trade
(GATT)—An international tariff-reduction treaty
adopted in 1947 that resulted in a series of
negotiated “rounds” aimed at freer trade
 Uruguay Round—The most recently completed
and most comprehensive of the eight postwar
multilateral trade negotiations under GATT;
created the World Trade Organization
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U.S. Tariff Revenue as a Percentage
of Merchandise Imports Since 1821
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 Over the years, tariffs
have been up and
down, spiking during
the Great Depression.
 Overall, however, the
trend has been toward
lower tariffs.
Figure 18.2
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World Trade Organization (WTO)
World Trade Organization (WTO)—The
legal and institutional foundation of the
multilateral trading system that succeeded
GATT in 1995
Doha Round—The first round of WTO
negotiations aims to help developing
countries by reducing barriers that harm
their exports
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Common Markets
The European Union
North American Free Trade Agreement
(NAFTA)
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