Chapter2TheDynamicEnvironmentofInternationalTrade?McGraw-HillEducation.Allrightsreserved.Authorizedonlyforinstructoruseintheclassroom.

NoreproductionorfurtherdistributionpermittedwithoutthepriorwrittenconsentofMcGraw-HillEducation.LearningObjectives1of22-1 ThebasisforthereestablishmentofworldtradefollowingWorldWarII2-2 Theimportanceofbalance-of-paymentfigurestoacountry’seconomy2-3 Theeffectsofperfectionismonworldtrade2-4 TheseveraltypesoftradebarriersLearningObjectives2of22-5 TheprovisionsoftheOmnibusTradeandCompetitivenessAct2-6 TheimportanceofGATTandtheWorldTradeOrganization2-7 TheemergenceoftheInternationalMonetaryFundandtheWorldBankGroupTradeBarriers—AnInternationalMarketer’sMinefieldTariffandNontariffBarriersUntilrecently,usehasbeenreducedinrecentyearsElectionofnationalisticleadersthreatensthiseffortSomecountriesattempttocontroltradefortheirownadvantageAscompetitionincreases,sodoestendencytowardprotectionismGlobaltradebenefitsallProvidesmorebusinessopportunitiesformarketersProvideswiderselectionofgoodsandservicesforconsumersExhibit2.1TopTen2017U.S.TradingPartners

($inbillions,merchandisetrade)RankCountryTotalTradeExportsImportsBalanceblankTotal3889.71546.82342.9-796.11China636.0130.4505.6-375.22Canada582.4282.4300.0-17.63Mexico557.0243.0314.0-71.14Japan240.267.7136.5-68.85Germany171.253.5117.7-64.36SouthKorea119.448.371.2-22.97UnitedKingdom109.456.353.13.58France82.533.648.9-15.39India74.325.748.6-22.910Italy68.318.350.0-31.6Source:/foreign-trade/statistics/highlights/top/index.html,2018.TradeBalanceStatisticsStatisticsaregreatlydistortedImportsfromChinaincludepartsfromothercountriesOftenseeninelectronicimports2017AppleimportsfromChinaApproximately$16billioniniPhonesApproximately$8billioniniPadsExhibit2.2SourcesofDistortioninProminentTradeStatisticsValueofiPhoneShippedfromChinatoU.S.(componentsandlabor)Japan34%Germany17%SouthKorea13%UnitedStates6%China3.6%Others27%ValueofAppleiPadShippedfrom

ChinaGlobally(costsandprofits)Chineselabor2%Non-Chineselabor5%Costofmaterials31%Distributionandretail15%Appleprofits30%OtherU.S.profits2%SouthKoreanprofits7%Taiwaneseprofits2%Others’profits6%Sources:AndrewBatson,“NotReally‘MadeinChina’,”TheWallStreetJournal,December16,2010,pp.B1–2;“iPadded,”TheEconomist,January12,2012,p.84.TheTradeDeficitEventhoughtheJohnDeeretractorslinedupforshipmentfromitsWaterloo,Iowa,plantappearimpressive,theHyundaicarsstackedupbythewaterinUlsan,SouthKorea,headedfortheUnitedStatesdwarftheirnumbers.ThejuxtapositionofthetwopicturesaptlyreflectsthepersistenceofAmerica’sbroadermerchandisetradedeficit.?Lyroky/AlamyStockPhoto?Allstarphotos/NewscomTheTwentiethtotheTwenty-FirstCenturyTwentiethCenturyWWIleadtoeconomicdepressionTradewashaltedduetohightariffwallsUnitedStatessettospreadcapitalismafterWWIIBenefittedall,newmarketscreatedaseconomiesgrewGeneralAgreementonTariffsandTrade(GATT)Passedtopreventsituationsimilartopost-WWIReductionoftariffsandtradebarriersWorldTradeandU.S.Multinationals1of3U.S.MultinationalCorporations(MNCs)CompaniesbranchedouttoforeigneconomiesManyopportunitiesaseconomiesgrewafterWWIIU.S.dominancedeemedasthreateningbylate60sEuropeandLatinAmericaputlimitsonU.S.investmentsTheresultwasthateconomicpowerwasmoreevenlydistributedWorldTradeandU.S.Multinationals2of3BalanceofMerchandiseTradeRoleofU.S.inglobaltradeevolvedthroughtimeFavorablebalanceuntil1979,aconstanttradedeficitisnowthenormManyimportantquestionsraisedin1980sHowtocompeteinforeignmarketsFairnessofinternationaltradepoliciesWorldTradeandU.S.Multinationals3of3Manychangestoworldtradeby1990CreationoforganizationstofacilitatetradeNAFTA(nowUSMCA),EU,AFTA,APECPowerexpectedtoshifttomorecountriesNewmarketopportunitiesCountrieswithpowerinvestinginothercountriesCompaniesexpandingglobalreachBalanceofPayments1of3InternationalTradeFinancialtransactionsoccurwitheachtradeMoneyisconstantlyflowinginandoutofcountryImportanttokeeptrackoftransactionsBalanceofPayments2of3Balance-of-paymentsstatementRecordofallfinancialtransactionswithothercountriesCreditsanddebitsmustoffseteachotherDouble-entrybookkeepingsystemThreemainaccountsCurrentaccountOfprimaryinteresttointernationalbusinessCapitalaccountReservesaccountBalanceofPayments3of3BalanceofPaymentsintheU.S.HighmerchandisetradedeficityieldsanimbalanceValueofU.S.currencylowLesspurchasingpower,lessdemandforimportsU.S.productscheapforforeignbuyersHigherexportsExhibit2.5U.S.CurrentAccountBalance(%ofGDP)Source:WorldBank,2018Jumptolongdescription.Protectionism

1of5TheRealityofWorldTradeCountriesprotecttheirownmarketsWardoffunwantedforeigninvestmentsandimportsUsebarriersforprotectionTariffsQuotasExchangebarriersPsychologicalbarriersProtectionism

2of5ArgumentsforProtectionismProtectionofaninfantindustryProtectionofthehomemarketNeedtokeepmoneyathomeEncouragementofcapitalaccumulationMaintenanceofthestandardoflivingandrealwagesProtectionism

3of5ArgumentsforProtectionismcontinuedConservationofnaturalresourcesIndustrializationofalow-wagenationMaintenanceofemploymentReductionofunemploymentNationaldefenseEnhancementofbusinesssizeRetaliationandbargainingProtectionism

4of5ProtectionismcanbeharmfulContributestocountry’sindustrialinefficiencyDetractsfromnation’sadjustmenttoworldsituationTariffscostconsumersmoremoneyLesslikelytopurchase,whichinturnhurtstheeconomyProtectionism

5of5FreetradeistypicallybeneficialMorepeoplewillingtopurchaseHigherpurchasingpowerfortheaverageconsumerIncreasedincomeofallinvolvedMorejobopportunitiesExhibit2.6GrowthofConsumerPurchasingPower1990to2016(GDPpercapital,PPP,constant2011$s)Jumptolongdescription.Source:WorldBank,WorldDevelopmentIndicators,2018.TradeBarriers1of4GovernmentsestablishtariffandnontariffbarriersImplementedagainstforeignimportsandbusinessesIncludesquotas,boycotts,monetarybarriers,andmarketbarriersReasonsforbarriersDevelopnewdomesticindustriesProtectcurrentdomesticindustriesTradeBarriers2of4Tariff

barrierstendtoincrease:InflationarypressuresSpecialinterests’privilegesGovernmentcontrolandpoliticalconsiderationsineconomicaffairsThenumberoftariffsresultingfromcountriesimpactedbyyourcountry’stariffs(Reciprocity)TradeBarriers3of4Tariff

barrierstendtoweaken:Balance-of-paymentspositionsSupply-and-demandpatternsInternationalrelations(tradewars)Tariffbarrierstendtorestrict:Manufacturers’supplysourcesChoicesavailabletoconsumersCompetitionTradeBarriers4of4AVarietyofNontariffBarriersQuotasandimportlicensesVoluntaryexportrestraints(VERs)BoycottsandembargoesMonetarybarriersStandardsAnti-dumpingpenaltiesDomesticsubsidiesandeconomicstimuliVoluntaryExportRestraintExampleNYKLine(NipponYusenKaisha)bringsautomobilesfromJapantoAqaba,Jordan,ontheRedSeafordeliverytoothercountriesinthearea,butnotforneighboringIsrael.BecauseoftheArabboycottofIsrael,separateshipmentsofcarsaremadetotheadjacentportofEilat.Ironically,automobilesnowareimportedintoneighboringJordanthroughasecondroute:throughtheIsraeliportofHaifa.?JohnGrahamEasingTradeRestrictions1of4TheOmnibusTradeandCompetitivenessActU.S.policyestablishedin1988HelpU.S.businessesbemoresuccessfulinworldmarketsCorrectperceivedinjusticesintradepoliciesManycountriesallowedtotradefreelywithU.S.SamecountriesdonotreciprocateaccessCoversthreeareasforimprovingU.S.tradeMarketaccess,exportexpansion,importreliefEasingTradeRestrictions2of4GeneralAgreementonTariffsandTrade(GATT)WorldwideagreementafterWorldWarIIThreemainprovisionsTradeshallbeconductedonanondiscriminatorybasisProtectionshallbeaffordeddomesticindustriesthroughcustomstariffs,notthroughsuchcommercialmeasuresasimportquotasConsultationshallbetheprimarymethodusedtosolveglobaltradeproblemsEasingTradeRestrictions3of4GeneralAgreementonTariffsandTrade(GATT)continuedEightroundsofnegotiationsinceinceptionTokyoRound(1974)Tariffcuts,butstillmanyissuesUruguayRound(1994)Sector-specificagreementsGATs,TRIMs,TRIPsCreationoftheWorldTradeOrganizationEasingTradeRestrictions4of4WorldTradeOrganization(WTO)ExpansionontheGATTstructureasastand-aloneinstitutionAll164membersmustparticipateandadheretorulesPanelofexpertstohearandresolvedisputesContinuousdiscussion,notjust“rounds”likeGATTMostlyaccepted,butsomedetractorsSomecountriesfindloopholestorulesTheInternationalMonetaryFundandWorldBankGroup1of2TwoGlobalInstitutionsHelpnationsbecomeandremaineconomicallyviableInternationalMonetaryFund(IMF)Goalsof188-countrymembershipStabilizeforeignexchangeratesEstablishfreelyconvertiblecurrencyDevelopedspecialdrawingrights(SDRs)TheInternationalMonetaryFundandWorldBankGroup2of2WorldBankGroupGoalsReducepovertyandimprovelivingstandardsPromotesustainablegrowthandinvestmentinpeopleMadeupoffiveinstitutionswithseparateobjectivesProvidesloans,technicalassistance,andpolicyguidancetohelpdevelopingnationsachievegoalsProtestsagainstGlobalInstitutions“Anti-capitalistProtesting”Emergedbeginningin1999FightagainstunintendedconsequencesofglobalismEnvironmentalharm,workerexploitationandjobloss,culturalextinction,higheroilprices,diminishedsovereigntySomeviolentprotests,terrorismNonviolentprotestshaveenactedpolicychangeTypesofProtest“Globalization”byGiffordMyers.PhotobyJohnGrahamGiffordMyersshowedthissculptureObject(Globalization)–2001inFaenza,Italy,asapeacefulprotest.?arindambanerjee/ShutterstockStarbucksmaybereplacingMcDonald’sastheAmericanbrandforeignersmostlovetohate.Herelocalpolicefailtostopanti–WorldTradeOrganizationriotersinSeattlefrombreakingwindowsclosetohome.AppendixofImageLongDescriptionsAppendix1Exhibit2.5U.S.CurrentAccountBalance(%ofGDP)Forthemajorityoftheperiod,theUnitedStateshadanunfavorablecurrentaccountbalance.Itwasonlyfavorableforafewyearsduringthemidtolate70s,withthebalancepeakingat1percentin1975.Startinginthe1980s,thebalancestartedtodecrease,reachingnegative3.5percentby1987.By1990,thebalanceofthecurrentaccountwasrestored.After1990,thecurrentaccountbalancestartedtodropagain,continuingtodecreaseeachyearuntili