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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. CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements Key Terms world price tariff quota General Agreement on Tariffs and Trade (GATT) Uruguay Round World Trade Organization (WTO) Doha Round CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 3 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. CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 4 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. CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 5 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. CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 6 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. CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 7 Other Trade Restrictions Subsidies to exporters Low-interest loans to foreign buyers Domestic content requirements Health, safety, or technical standards CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 8 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 CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 9 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 CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE Free Trade by Multilateral Agreement (continued) 10 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. CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE General Agreement on Tariffs and Trade (GATT) 11 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 CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE U.S. Tariff Revenue as a Percentage of Merchandise Imports Since 1821 12 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 CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 13 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 CONTEMPORARY ECONOMICS © Thomson South-Western 18.2 Trade Restrictions and Free-Trade Agreements SLIDE 14 Common Markets The European Union North American Free Trade Agreement (NAFTA) CONTEMPORARY ECONOMICS © Thomson South-Western