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Chapter 8
THE EXPORT-IMPORT SECTOR
Chapter 8
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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 freetrade zones.
8-2
The Basis for International Trade
 Trade between individuals.
 Why do we hire people to provide services for us?
 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 a specialist who can do it better and
more efficiently.
 This process is called specialization and exchange.
8-3
Specialization and Exchange
 Specialization and exchange increases an individual’s
productivity.
 Nations can increase 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
Planes
5
10
10
5
When each country makes
what it makes best and
trades it, it expands its
consumption possibilities.
Production of Trains and Planes with Specialization
Table 2
Trains
Algeria
Zaire
Planes
0
20
20
0
Consumption of Trains and Planes with Specialization
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 the 1970s, when
our relatively small export-import sector began to grow
significantly.
Positive balance of trade: Exports > Imports
8-6
U.S. Exports and Imports
 The relationship between the U.S. and the global
economy began to change in the 1970s.

Negative balance of trade: Imports > Exports
 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.

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,
1970–2012
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, 2012
(in billions of dollars)*
*Numbers may not add up due to rounding.
Source: 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 job gain.
However, if the outsourced firm is more efficient, there may be job
losses.
8-11
Outsourcing and Off-Shoring
 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.
Many services are not vulnerable to off-shoring.
8-12
Summing Up: C + I + G + Xn
 Net Exports = Xn

Xn = Exports – Imports
 If balance of trade is positive, Xn is positive number.

The impact of Xn is an increase GDP.
 If balance of trade is negative, Xn is negative number.

The impact of Xn is a 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 off-shoring related to the principle of
specialization and trade? How does off-shoring 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
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.
8-16
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-Association of Southeast Asian Nations (ASEAN) Free
Trade Area
 Mercosur
 World Trade Agreements:
 The General Agreement on Trade and Tariffs (GATT)
 The World Trade Organization (WTO)
8-17
Trade with Mexico and Canada, 1993 and 2012
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 7 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.
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
•
•
•
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
 Does 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 protects intellectual property rights like patents, trademarks, and
copyrights.
 GATT opens 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 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:



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-Favored-Nation
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
 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.
•

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.
•


Especially the WTO
Many earn just $1 or $2 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