The United States & The Global Economy

The United States & The Global Economy Chapter 6

Economic Interdependence • The U.S. economy is linked with other nations in a number of ways • Flows of goods & services • Capital & labor (resource flows) • Information & Technology • Financial flows

The U.S. & Trade Data • Trade deficit overall is 44 billion • Trade deficit w/ China is 21.5 billion • U.S. Oil Imports estimated 326.4 billion for 2010 • U.S. Oil Imports from OPEC 133 billion estimated for 2010

1. Canada 2. China 3. Mexico 4. Japan 5. Germany 6. Great Britain 7. South Korea 8. France 9. Taiwan 10. Netherlands U.S. Trade Partners

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

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

Specialization & Comparative Advantage • Adam Smith (1776) “Wealth of Nations” - Concept of Absolute Advantage – If cheaper, trade. • David Ricardo (Early 1800’s) Expands on this idea w/ concept of “Comparative Advantage” – Trade regardless. The underlying benefits will outweigh any marginal cost.

Foreign Exchange Markets • Countries require that their goods be purchased with their own currency. It is then necessary to have an “exchange” where countries can engage in trading their own currency for that of the trading partners. • Exchange Rates – The link between each countries currency.

Government & Trade • Protective Tariffs – enacted to protect domestic interests, tax on foreign goods. • Import Quotas – same basic principle, slightly less harsh than a protective tariff • Nontariff barriers – License requirements, basic red tape requirements that might hinder trade • Export Subsidies – Done in attempt to boost exports

Reasons for Barriers • Protectionist philosophy at home due to political or social pressure may cause some countries to enact such legislation. • Essentially, these barriers are still harmful towards the consumer as it limits competition.

Trade Milestones • Smoot-Hawley (1930) – Reaction to the Great Depression, now blamed for being a major cause of the Depression. • Reciprocal Trade Agreement Acts – Enacted to give President power to reduce tariffs, Favored Nations Clause • G.A.T.T. – 1947 – 1993 • N.A.F.T.A - 1993 • W.T.O – Current global organization that promotes trade

United Kingdom France Germany Italy Belgium Netherlands Spain* Greece* Austria Finland Sweden Luxembourg Ireland* Denmark Portugal* E.U. (European Union) 15 Member Industrial Block comprised of the following:

Results of the E.U. • For the E.U., it has been positive by achieving greater efficiency through geographic specialization. • Trade partners however face tariffs even though their exports to the E.U. have increased. • Great Britain, Sweden, & Denmark continue to use own currency however.

The United States & The Global Economy