Economics U$A: 21st Century Edition
International Trade (International)
The U.S. auto industry lost a lot of mileage in 1973 with the rise of the more efficient Japanese imports. In the 1970s, the “trigger/price mechanism” was developed in order to differentiate between fair and unfair trade practices. Debate over the North American Free Trade Agreement (NAFTA) included accusations that American jobs would suffer and American firms would relocate south of the border. Others insisted that increased trade would create new American jobs and industries. These stories illustrate the pros and cons of free trade.
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To illustrate the concepts of specialization and comparative advantage, showing that trade benefits society as a whole but can hurt certain groups. Conversely, tariffs, quotas, and other trade restrictions can protect certain groups and industries but generally restrict the amount of goods available and raise prices. Trade is one dimension of globalization; others include immigration and foreign direct investment.
- If two countries have different opportunity costs in the production of a good, then the country with the lower opportunity cost has the comparative advantage.
- It is more efficient from a world economic point of view for nations to specialize in the production of those goods for which they have a comparative advantage and to trade for other goods.
- Free trade generally benefits society as a whole because it results in the least costly way of producing goods. However, in each country, there are industries that may not be able to compete effectively in world markets and, therefore, may decline. Thus free trade can hurt certain industries and certain groups in the economy.
- Countries may decide to restrict imports in order to protect industries and jobs and for national security reasons. Trade restrictions include tariffs and quotas. Protectionism benefits certain groups at the expense of the economy as a whole.
- Immigration and foreign direct investment are other channels of investment that can both substitute for and be complementary to trade.
Meet the Series Experts
John Dingell, Jr.
Dean of the U.S. House of Representatives and currently its longest-serving member, having been a U.S. Congressman from Michigan since 1955. Earlier, he served as a research assistant to United States Circuit Judge Theodore Levin and as Assistant Prosecuting Attorney of Wayne County, Michigan. He was elected as a Democrat to the Eighty-fourth Congress by special election to fill the vacancy caused by the death of his father, Representative John D. Dingell, Sr. In Congress, he has served as Chair of the Committee on Energy and Commerce and on the Subcommittee on Commerce, Manufacturing, and Trade. He has also served on the Subcommittee on Communications and Technology, the Subcommittee on Energy and Power, and the Subcommittee on Environment and Economy. He attended Capitol Page School in Washington, D.C., and was a page in the House of Representatives from 1938 to 1943, prior to his service in the U.S. Army during World War II. He received his B.S. from Georgetown University and J.D. from Georgetown University Law School.
Luis De la Calle
Managing Director and founding partner of De la Calle, Madrazo, Mancera, S.C. (CMM), specializing in international trade. He also teaches at the Instituto Tecnológico Autónomo de México (ITAM). Prior to joining the private sector, he served as Under Secretary for International Trade Negotiations in Mexico’s Ministry of the Economy, under former presidents Vicente Fox and Ernesto Zedillo, negotiating several of Mexico’s bilateral free trade agreements and regional and multilateral agreements with the World Trade Organization. He also served as Executive Secretary of the National Foreign Investment Commission, Trade and NAFTA Minister at the Mexican Embassy in Washington, D.C., and Country Economist for the Czech and Slovak Republics and Poland. He has many publications and writes a biweekly column for the Mexican daily El Universal. Dr. De la Calle received his Ph.D. in Economics from the University of Virginia.
William A. Brock
U.S. Senator from Tennessee, 1971–1977, Congressman from Tennessee, 1963–1971, and U.S. Trade Representative and Secretary of Labor under Ronald Reagan. He resigned his cabinet post to become Chairman of the Republican National Committee, 1977–1981. In the Senate, Brock was a favorite of the conservative movement, and he continued in Republican politics, after he lost his bid for re-election to the Senate, to become the campaign manager for Senator Bob Dole’s presidential campaign. He then became a consultant in the Washington, D.C., area and ran unsuccessfully for the Senate, from Maryland, in 1994. Mr. Brock received his B.A. from Washington and Lee University.
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4. Imported French wine is $1.25 per liter. Under the market conditions shown in this graph, we can conclude that:
the U.S. will tend to import French wine.
- economies of scale
Efficiencies that result from carrying out a process (such as production or sales) on a large scale.
Pertaining to deeper integration and more rapid interaction of economies through production, trade, and financial transactions.
- immigration and foreign direct investment
The notion that immigration creates an incentive for a company from one country to make a physical investment into building a factory in another country.
- product life cycle
The period of time over which an item is developed, brought to market, and eventually removed from the market.
- protectionism and job security
The argument that the losses in consumer surplus created by imposing tariffs on foreign goods are justifiable because they preserve employment in certain occupations, usually those with significant lobbying and political influence.
- protectionism and national defense
The argument that the losses in consumer surplus created by imposing tariffs on goods critical for national defense are justified so that a country does not become dependent on potential enemies during times of war.
A limit imposed on the amount of a commodity that can be imported annually.
- specialization and trade
When individuals or countries specialize in producing the goods and services for which they have the lowest opportunity cost and trade with other individuals or countries in order to consume more and reach a higher standard of living than would be possible in the absence of trade.
A tax imposed by the government on imported goods (designed to cut down on imports and thus protect domestic industry and workers from foreign competition).
- trade and efficiency
The use of trade policy that maximizes total surplus, both for consumers by importing items produced at lower costs in other countries and for producers by exporting items produced at lower costs domestically than is possible in other countries.