1. The U. S. has committed itself to creating a free trade zone between the U.S.
ID: 1096919 • Letter: 1
Question
1. The U. S. has committed itself to creating a free trade zone between the U.S., Canada and Mexico. Why might this be important? Relative to imports and exports to other nations, what is the size of these two North American trading partners trade relationship with the U.S.?
2. What is the law of comparative advantage, and why is it important in international trade?
3. At one time, it was believed that the way for a nation to prosper was to export as much as possible while importing as little as possible. More money would flow into a country than out of a country. Is this really a sound economic strategy? What is the relationship between exports and imports?
4. Suppose that in the absence of trade, the U.S. price for bicycles was higher than the world price for bicycles. Would allowing international trade, mean that the U.S. would import or export bicycles? Who in the U.S. would benefit and who would lose with a free trade policy, and would the gains be greater than the losses?
5. What are the commonly used arguments for the use of tariffs?
6. How do subsidies distort trade patterns and lead to inefficiencies?
Explanation / Answer
1. U.S. foreign trade and global economic policies have changed direction dramatically during the more than two centuries that the United States has been a country. In the early days of the nation's history, government and business mostly concentrated on developing the domestic economy irrespective of what went on abroad. But since the Great Depression of the 1930s and World War II, the country generally has sought to reduce trade barriers and coordinate the world economic system. This commitment to free trade has both economic and political roots; the United States increasingly has come to see open trade as a means not only of advancing its own economic interests but also as a key to building peaceful relations among nations.
The United States dominated many export markets for much of the postwar period -- a result of its inherent economic strengths, the fact that its industrial machine was untouched by war, and American advances in technology and manufacturing techniques. By the 1970s, though, the gap between the United States' and other countries' export competitiveness was narrowing. What's more, oil price shocks, worldwide recession, and increases in the foreign exchange value of the dollar all combined during the 1970s to hurt the U.S. trade balance. U.S. trade deficits grew larger still in the 1980s and 1990s as the American appetite for foreign goods consistently outstripped demand for American goods in other countries. This reflected both the tendency of Americans to consume more and save less than people in Europe and Japan and the fact that the American economy was growing much faster during this period than Europe or economically troubled Japan.
2. A principle that states that every nation, worker, or production entity has a production activity that incurs a lower opportunity cost than that of another nation, worker, or production entity, which means that trade between the two can be beneficial to both if each specializes in the production of a good with lower relative opportunity cost. This law is most often studied in the confines of international trade, but it also applies to labor and other types of production.
5. The arguments for protective tariffs are that it protects domestic goods and services from foreign goods and services. This protects specific jobs identified with the protected goods and services. Additionally, an argument can be made that a protective tariff can be used for fledgling enterprises that cannot compete with established foreign firms. A country may also want to use protectionist measures for national security or international prestige reasons. For example, let's say the US wants to be able to make tanks in the event of a war, therefore, they need the infrastructure to produce steel and automobiles in the event that trade and supply routes are disrupted in the case of international conflict.
The arguments against tariffs are that prices are artificially high and this hurts consumers. For example, if people could get their wheat a lot cheaper, say a couple dollars a bushel, from another country then more people could afford to eat bread, and the consumer could use that money on other things. However, if a government imposes a tariff, then the consumer would have to spend more money on bread and would have less money to buy other things.
Another problem with tariffs is that the targeted countries may impose similar tariffs on other goods. These tariff wars significantly hamper trade and although not the cause of the Great Depression, caused the great depression to be great (not my quote...).
Another problem with tariffs is that it keeps inefficient production tied up in areas that might not be the best place for those resources. For example, let's say your country is really good at making computers, but you have a protective tariff that allows your country to make widgets at the cost of consumers. If those tariffs would be removed, your country would then produce computers more efficient and consumers would get cheaper widgets and therefore everyone is happy.
Sorry for rambling, but that should be a start for you!
6. A subsidized product comes from a company, or industry that has received a subsidy--a type of economic assistance. Governments use subsidies to decrease the prices of goods lower than the price determined by the free market. Subsidies can benefit industries and consumers, but they can also be controversial.
Externalities
Subsidies are designed to maximize the consumption of a good that involves positive externalities--a benefit caused by a good's consumption that affects people who did not consume the good. For example, if a person plants trees, other people also enjoy cleaner air and an attractive view.
Types
There are many types of subsidies. The government may directly give a corporation cash, which is called a direct transfer. The government may also provide tax deductions, referred to as a tax subsidy, or trade protection subsidies, which involve the use of taxes or quotas to limit imports.
Examples
Examples of subsidized industries include education, agriculture, healthcare and public transportation.
Advantages
Subsidies lower the prices on certain goods, which usually leads to an increase in consumption. If subsidized goods have positive externalities, increased consumption benefits society.
Disadvantages
Subsidies are often controversial. Although subsidies may help one industry, they can also harm another by distorting price levels. In addition, subsidies require tax dollars. They also distort the free market, which can lead to inefficiency.
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