The United States & The United States & The Global EconomyThe Global Economy

Chapter 6Chapter 6

Economic InterdependenceEconomic Interdependence

The U.S. economy is linked with The U.S. economy is linked with other nations in a number of waysother nations in a number of ways

Flows of goods & servicesFlows of goods & services Capital & labor (resource flows)Capital & labor (resource flows) Information & TechnologyInformation & Technology Financial flowsFinancial flows

The U.S. & Trade DataThe U.S. & Trade Data

Trade deficit overall is 44 billionTrade deficit overall is 44 billion Trade deficit w/ China is 21.5 billionTrade deficit w/ China is 21.5 billion U.S. Oil Imports estimated 326.4 U.S. Oil Imports estimated 326.4

billion for 2010billion for 2010 U.S. Oil Imports from OPEC 133 U.S. Oil Imports from OPEC 133

billion estimated for 2010billion estimated for 2010

U.S. Trade PartnersU.S. Trade Partners

1. Canada1. Canada 2. China2. China 3. Mexico 3. Mexico 4. Japan4. Japan 5. Germany5. Germany

6. Great Britain6. Great Britain 7. South Korea7. South Korea 8. France8. France 9. Taiwan9. Taiwan 10. 10.

NetherlandsNetherlands

Trade TendenciesTrade Tendencies

The United States trades more in The United States trades more in terms of volume than any other terms of volume than any other country in the world although not as country in the world although not as dominant as they previously had dominant as they previously had been. Other countries are increasing been. Other countries are increasing on their own and narrowing the gap.on their own and narrowing the gap.

Moving Towards a Global Moving Towards a Global EconomyEconomy

Trade has increased greatly since Trade has increased greatly since World War II. The attitude of the U.S. World War II. The attitude of the U.S. and the world in general has moved and the world in general has moved from isolationist at times to full from isolationist at times to full blown dependence. Tariff legislation blown dependence. Tariff legislation is written to favor trade and we are is written to favor trade and we are seeing economic summits and other seeing economic summits and other organizations that clearly promote a organizations that clearly promote a global economy.global economy.

Specialization & Comparative Specialization & Comparative AdvantageAdvantage

Adam Smith (1776)Adam Smith (1776) “Wealth of “Wealth of Nations” - Concept of Absolute Nations” - Concept of Absolute Advantage – If cheaper, trade.Advantage – If cheaper, trade.

David Ricardo (Early 1800’s)David Ricardo (Early 1800’s) Expands on this idea w/ concept of Expands on this idea w/ concept of “Comparative Advantage” – Trade “Comparative Advantage” – Trade regardless. The underlying benefits regardless. The underlying benefits will outweigh any marginal cost.will outweigh any marginal cost.

Foreign Exchange MarketsForeign Exchange Markets

Countries require that their goods be Countries require that their goods be purchased with their own currency. It purchased with their own currency. It is then necessary to have an is then necessary to have an “exchange” where countries can “exchange” where countries can engage in trading their own currency engage in trading their own currency for that of the trading partners. for that of the trading partners.

Exchange Rates – The link between Exchange Rates – The link between each countries currency. each countries currency.

Government & TradeGovernment & Trade

Protective TariffsProtective Tariffs – enacted to protect – enacted to protect domestic interests, tax on foreign goods.domestic interests, tax on foreign goods.

Import QuotasImport Quotas – same basic principle, – same basic principle, slightly less harsh than a protective tariffslightly less harsh than a protective tariff

Nontariff barriersNontariff barriers – License – License requirements, basic red tape requirements, basic red tape requirements that might hinder traderequirements that might hinder trade

Export SubsidiesExport Subsidies – Done in attempt to – Done in attempt to boost exportsboost exports

Reasons for BarriersReasons for Barriers

Protectionist philosophy at home due Protectionist philosophy at home due to political or social pressure may to political or social pressure may cause some countries to enact such cause some countries to enact such legislation.legislation.

Essentially, these barriers are still Essentially, these barriers are still harmful towards the consumer as it harmful towards the consumer as it limits competition.limits competition.

Trade MilestonesTrade Milestones

Smoot-Hawley (1930) – Reaction to the Smoot-Hawley (1930) – Reaction to the Great Depression, now blamed for being a Great Depression, now blamed for being a major cause of the Depression.major cause of the Depression.

Reciprocal Trade Agreement Acts – Reciprocal Trade Agreement Acts – Enacted to give President power to reduce Enacted to give President power to reduce tariffs, Favored Nations Clausetariffs, Favored Nations Clause

G.A.T.T. – 1947 – 1993G.A.T.T. – 1947 – 1993 N.A.F.T.A - 1993N.A.F.T.A - 1993 W.T.O – Current global organization that W.T.O – Current global organization that

promotes tradepromotes trade

E.U. (European Union) 15 E.U. (European Union) 15 Member Industrial Block Member Industrial Block

comprised of the following:comprised of the following: United KingdomUnited Kingdom FranceFrance GermanyGermany ItalyItaly BelgiumBelgium NetherlandsNetherlands Spain*Spain* Greece*Greece*

AustriaAustria Finland Finland SwedenSweden LuxembourgLuxembourg Ireland*Ireland* DenmarkDenmark Portugal*Portugal*

Results of the E.U.Results of the E.U.

For the E.U., it has been positive by For the E.U., it has been positive by achieving greater efficiency through achieving greater efficiency through geographic specialization.geographic specialization.

Trade partners however face tariffs Trade partners however face tariffs even though their exports to the E.U. even though their exports to the E.U. have increased.have increased.

Great Britain, Sweden, & Denmark Great Britain, Sweden, & Denmark continue to use own currency continue to use own currency however.however.