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The Export-Import
Sector
Chapter 08
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives

After this chapter you should be able to:
1.
2.
3.
4.
5.
6.
7.
Explain and discuss the basis for international trade.
Demonstrate the relationship between specialization and
exchange.
Summarize post-World War II trends in our imports and
exports.
Distinguish between outsourcing and off-shoring.
Analyze the graphing of the C + I + G + Xn line.
Discuss the imports and exports of the world’s leading trading
nations.
Summarize the world trade agreements and discuss free-trade
zones.
8-2
The Basis for International Trade

Start with trade between individuals.
•
•
•

Why do we (often, but not always) hire people to provide services
for us, such as building a deck, recovering our sofa, baking a
wedding cake, or changing the oil in our cars?
These activities have opportunity costs. The time it takes you to
“Do It Yourself” could be used to do something else.
The person you hire is probably a specialist who can do it better
and more efficiently. – unless you really enjoy the DIY project or
do not have the resources to hire someone.
This process is called specialization and exchange.
What is prudence in the conduct of every private family, can scarce be folly
in that of a great kingdom. If a foreign country can supply us with a
commodity cheaper than we can make it, better buy it of them with some
part of the produce of our own industry, employed in a way in which we have
some advantage. (Adam Smith, The Wealth of Nations, 1776)
8-3
Specialization and Exchange

Specialization and exchange increases an individual’s
productivity.
•
•

When families live relatively self-sufficiently, they lived on
farms where they grew their own food, wove their own cloth,
built their own homes, made their own tools, clothes, and
even pins, needles, and nails.
By specializing, we get good at producing a good or service
and can sell it for a relatively low price.
Nations can also increase their productivity by
specializing and trading with countries that are more
efficient at producing certain goods or services.
•
•
•
Some nations have abundant fertile farm land; others do not.
Some nations have a labor force with specific skills; others do
not.
But self-sufficiency can also be a source of economic power.
8-4
Examples of Specialization and Exchange
Production of Trains and Planes before Specialization
Table 1
Algeria
Zaire
Trains
Production of Trains and Planes with Specialization
Table 2
Planes
5
10
10
5
Trains
Algeria
Zaire
Planes
0
20
20
0
Consumption of Trains and Planes with Specialization
When each country
makes what it makes
best and trades it, it
expands its consumption
possibilities.
Table 3
Trains
Planes
Algeria
10
10
Zaire
10
10
8-5
U.S. Exports and Imports

We have been a major exporter of wheat, corn, cotton,
and soybeans since colonial times.
•
•

Initially, we had an abundance of land.
Eventually we came to have a tremendous stock of farm
equipment.
During the 20th Century, the U.S. became a global
power in part because it was self-sufficient in
agriculture and manufacturing.
•
•
•
U.S. was the “arsenal of democracy.”
This self-sufficiency continued until well into the1970s, when
our relatively small export-import sector began to grow
significantly.
Positive balance of trade: Exports > Imports
8-6
U.S. Exports and Imports (Continued)

The relationship between the U.S. and the global
economy began to change in the 1970s.
•

We used to be a major exporter of steel and textiles.
•

Now other nations produce these more cheaply.
After WWII, we produced more than 60% of the world’s
oil supply and exported much of this.
•

Negative balance of trade: Imports > Exports
Now, we have exhausted most of our easily extractible reserves
and import more than 60% of our oil..
Today, the U.S. is a major exporter of:
•
Computer software; entertainment goods and services; financial,
legal, medical, construction and industrial engineering services;
telecommunications; management and consulting; and travel
services and tourism.
8-7
U.S. Imports and Exports as percentage
of GDP, 1970–2009
Note the growing gap between imports and exports through 2005.
Source: Bureau of Economic Analysis. www.bea.gov
.
8-8
U.S. Balance of Trade, 2009
(in billions of dollars)*
*Numbers may not add up due to rounding.
Source: http://www.bea.gov.
8-9
Questions for Thought and Discussion

Can you think of an example of how specialization
results in trade?

How is trade among nations similar to trade among
individual people? How is trade among nations
different than trade among individual people?

Are there circumstances that would make
specialization a bad idea for nations to specialize and
trade? Are there certain industries that are important
to maintain domestically? Why?

How do exchange rates affect the balance of trade?
8-10
Outsourcing and Off-Shoring

Outsourcing: When a company in the U.S. contracts
some of their jobs to other firms. These firms may be in
the U.S. or overseas.
•
•
•
Example: Wal-Mart hires company that specializes in janitorial
services.
Example: A school district hires a food services company to run
the cafeteria.
If the outsourcing is to a another firm in the U.S., there may no
net job loss or job gain for the U.S. as a whole.
 Individual workers may lose their jobs, but one American’s job
loss is another American’s jobs gain.
 However, if the outsourced firm is more efficient, there may be
job losses.
8-11
Outsourcing and Off-Shoring (continued)

Off-Shoring: When a company in the U.S. contracts
some of their jobs to firms outside the U.S.
•
•

Example: Company shuts down textile mill in South Carolina and
replaces it with one in China.
When jobs are transferred out of the U.S., the unemployment
rates goes up.
Since 1970, at least 5 million relatively high paying jobs
have been off-shored.
•
•
Service sector jobs are now being sent abroad.
But many services are not vulnerable to offshoring.
8-12
A Summing Up: C + I + G + Xn

Net Exports = Xn
•

If balance of trade is positive, Xn is positive number.
•

The impact of Xn is to increase GDP.
If balance of trade is negative, Xn is negative number.
•

Xn = Exports – Imports
The impact of Xn is to decrease GDP.
Because the U.S. has a negative trade balance, we will
draw the new line below the C + I + G line.
•
We simplify the model by assuming Net Exports are independent
of personal income.
8-13
C + I + G +Xn = GDP

When exports are increased or imports decreased,
GDP will grow.
8-14
Questions for Thought and Discussion

How is outsourcing related to the principle of
specialization and trade? Why do firms outsource work
to other firms?

How is offshoring related to the principle of
specialization and trade? How does offshoring affect
each of the following: U.S. workers? U.S. consumers?
U.S.-based businesses?

Explain the impact of exports and imports on an
economy. Are exports good for GDP? Are imports good
for GDP?
8-15
World Trade Agreements and Free Trade
Zones

Free trade zones:
•
•
•
•
•

North American Free Trade Agreement (NAFTA)
The Central American-Dominican Republic Free Trade
Agreement (CAFTA)
The European Union (EU)
China-Asean Free Trade Area
Mercosur
World Trade Agreements:
•
•
The General Agreement on Trade and Tariffs (GATT)
The World Trade Organization (WTO)
8-16
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.
Impact on U.S. economy:
•
•
The threat of moving operations to Mexico has had a
depressing effect on American factory wages.
Furthermore, our trade deficits with both Mexico and Canada
have gone up substantially since the passage of NAFTA.
8-17
U.S. Trade with Mexico and Canada, 1993
and 2009
8-18
CAFTA, The Central American-Dominican
Republic Free Trade Agreement

CAFTA includes the U.S., the Dominican Republic,
Costa Rica, El Salvador, Guatemala, Honduras, and
Nicaragua.

CAFTA will eventually eliminate all tariffs among these
seven nations.
8-19
The European Union (EU)

This free trade association of 27 nations dates back to
the 1950s but became a truly common market 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.
In 1999, 11 EU countries formed the European Monetary
Union, which established the euro as a common
currency.


In 2002, new euro coins and paper money replaced each
country’s own national currencies.
This common currency is expected to make trade easier to
conduct among participating member nations.
8-20
China-Asean Free Trade Area

Formed in 2010 by China and 10 other Asian nations.
•

Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand, and Vietnam.
Third-largest free trade zone.
8-21
Mercosur





Includes, Argentina, Brazil, Paraguay, and Uruguay and
associate members Bolivia, Peru, and Chile.
It is the fourth largest market after NAFTA, the EU, and
China-Asean.
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.
8-22
Questions for Thought and Discussion

Is trade with Mexico, Canada, and China beneficial to the
U.S.?

What have been the primary features of the different free
trade agreements and how has this impacted the U.S.
economy?

Is the development of the Euro a good thing for trade in
the European Union? Why would a common currency be
good for trade?
8-23
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 will
 Reduce tariffs worldwide by an average of 40%.
 Lower other barriers to trade such as quotas on certain
products.
 Provide patent protection for American software,
pharmaceuticals, and other industries.
8-24
Protecting Intellectual Property and Opening
Markets for Services

Will GATT help or hurt the United States?
•
•
•
•
•
For U.S. industries, 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 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.
GATT brings agriculture under international trade rules for the
first time.
 European farm subsidies dwarf those paid to American
farmers.
 Proportionally, the Europeans will have to reduce their
subsidies a lot more than the U.S., making American crop
exports even more competitive.
8-25
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:
1.
2.
3.

Liberalization of trade
Nondiscrimination–the most-favored-nation principle
No unfair encouragement of exports
The WTO has a Dispute Settlement Body to handle
disagreements among member nations
•
Many politicians in the U.S. have very reluctantly accepted the
jurisdiction of the WTO.
 The U.S. has won almost all the more than two dozen cases
in which the U.S. was the complaining party.
 The U.S. has also lost some cases in which other
governments were the complaining parties.
8-26
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.
8-27
Nondiscrimination: The Most-FavoredNation 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.
8-28
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.
8-29
Objections to WTO

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.

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.
8-30
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
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 1 or 2 dollars a day.
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 U.S. 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.
8-31
Questions for Thought and Discussion

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?

Can the environment be protected under the conditions
of free trade? Are we in the race to the bottom in terms
of wages, working conditions, and environmental quality
because of globalization?
8-32