INTERNATIONAL TRADE

International Trade - DefinitionInternational Trade - Definition

International trade involves the exchange of goods or services between nations.

This is described in terms of – ExportsExports: the goods and services : the goods and services soldsold in foreign in foreign

markets. markets. – ImportsImports: the goods or services : the goods or services bought bought from from

foreign producers. foreign producers.

Free Trade vs. Trade BarriersFree Trade vs. Trade Barriers

Nations can trade freely with each other or there are trade barriers.– Free Trade: Nothing hinders or gets in the

way from two nations trading with each other.

– Trade Barriers: Trade is difficult because things get in the way.

There are costs and benefits related to free trade as well as trade barriers.

Free Trade - BenefitsFree Trade - Benefits

When nations specialize and trade, total world output When nations specialize and trade, total world output or sales is increased. or sales is increased.

Companies can produce for foreign markets as well Companies can produce for foreign markets as well as domestic markets (markets in the home country). as domestic markets (markets in the home country).

This means there is potential for making more money This means there is potential for making more money as there are more markets to sell goods or services as there are more markets to sell goods or services in.in.

More variety of goods are available from a world More variety of goods are available from a world market than just a domestic market.market than just a domestic market.

Prices of goods are decreased through increased Prices of goods are decreased through increased competition.competition.

Free Trade - CostsFree Trade - Costs

The domestic (home) country can lose money because the foreign goods allowed into the market increase competition and make it less likely people will buy domestic products. – Example: In the U.S., people might want to buy a

foreign automobile like a Honda or Toyota instead of an American made car.

Increased competition means lower prices. Less money will go into the domestic market

place and this can cause factories to be closed and jobs to be eliminated.

Trade Barriers – Three TypesTrade Barriers – Three Types

Barriers to trade are things that hinder or get in the way of trading.

They can be cultural, physical , or economic.– Cultural barriers: language, currency,

belief system.– Physical barriers: mountains, rivers, etc.

• Example: The Alps Mountains in Europe– Economic barriers: government rules that restrict,

block or discourage international trade between countries.

Trade Barriers - EconomicTrade Barriers - Economic

The most common trade restrictions are: – tariffs, which are taxes on imports.– quotas, which are limits on the

quantity that can be imported.– embargos, which are a complete trade

block usually for political purposes.

TariffsTariffs

A A tarifftariff is a tax put on goods imported from abroad is a tax put on goods imported from abroad and sometimes referred to as custom duties.and sometimes referred to as custom duties.

It is the most used and most familiar type of trade It is the most used and most familiar type of trade restriction.restriction.

The effect of a tariff is to raise the price of the The effect of a tariff is to raise the price of the imported product. imported product.

It makes imported goods more expensive so that It makes imported goods more expensive so that people are more likely to purchase domestic people are more likely to purchase domestic products. products.

The money received from the tariff is collected by the The money received from the tariff is collected by the domestic government. domestic government.

QuotasQuotas

A A quota quota is a limit on the amount of goods that can be is a limit on the amount of goods that can be imported. imported.

Putting a quota on a good creates a shortage, which Putting a quota on a good creates a shortage, which causes the price of the good to rise and makes the causes the price of the good to rise and makes the imported goods less attractive for buyers. This imported goods less attractive for buyers. This encourages people to buy domestic products. encourages people to buy domestic products.

A quota on shoes, for example, might limit foreign-A quota on shoes, for example, might limit foreign-made shoes to 10,000,000 pairs a year. If Americans made shoes to 10,000,000 pairs a year. If Americans buy 200,000,000 pairs of shoes each year, this would buy 200,000,000 pairs of shoes each year, this would leave most of the market to American producers.leave most of the market to American producers.

EmbargoesEmbargoes

Embargoes are a government order which completely prohibits trade with another country.

If necessary, the military actually sets up a blockade to prevent movement of merchant ships into and out of shipping ports.

Embargoes (con’t)Embargoes (con’t)

The embargo is the harshest type of trade barrier and is usually enacted for political purposes to hurt a country economically and thus undermine the political leaders in charge.

Such was the case with the Cuban embargo which has been in place since the 1960s.

Trade Barriers - BenefitsTrade Barriers - Benefits

Most barriers to trade are designed to prevent imports from entering a country.

Trade barriers provide many benefits:– protect homeland industries from competition– protect jobs– help provide extra income for the government. – Increases the number of goods people can choose

from.– Decreases the costs of these goods through

increased comp

Trade Barriers - CostsTrade Barriers - Costs

Tariffs increase the price of imported goods.

Less competition from world markets means there is an increase in the price.

The tax on imported goods is passed along to the consumer so the price of imported goods is higher.