Even in the wilderness backpacking trip, Americans are not leaving the world behind.

Much of the backpacking equipment may be imported, not to mention the vehicle used to arrive at the trail, the coffee they sip etc.

Many American products are made with components from abroad or are manufactured there. For example many Chevrolets are made in Canada, the Gerber Baby Food Company is owned by a Swiss Company, Burger King is owned br a British Corporation.

Linkages: Several economic flows link the US Economy with the economies of other nations.

1. Good and Services flow

2. Capital and labor (resource) flows

3. Information and Technology flows 

4. Financial Flows

Currently, exports and Imports are 11% and 16% of GDP, respectively which is more than double their importance of 25 years ago.

The US is the world’s leading trading nation measured in total volume of trade but not relative to its GDP. The US share of world trade has diminished from a post WWII level of one third of total trade to 1/8 today.

DEPENDENCE

1. US depends on imports from many food items (bananas, coffee, tea, spices) raw silk, diamonds, natural rubber, and petroleum.

2. On export side agriculture relies on foreign markets for one quarter to one half its sales

Chemical, aircraft, auto, machine tools, coal, and computer industries also sell major portions of their output to international markets.

2002 trade deficit 484 Billion

Service surplus of 49 Billion

Slightly more than half of the U.S. trade is with industrially advanced nations.

Canada is the US most important trading partner quantitatively. 23% of US exports went to Canadians, who in turn provided 18% of US imports.

The US has sizable trade deficits with China and Japan.

Trade deficits must be financed by borrowing or earning foreign exchange which is accomplished by selling U.S. assets through foreign investment in the US. The US borrows from other nations. The US is the world’s largest debtor nation.

Facilitating factors that explain the growth of trade

1. Transportation Technology 

2. Communications 

3. Trade barriers declined dramatically since 1940

4. New participants in International Trade 

5. Asian Countries 

6. Former Eastern Bloc Countries

SPECIALIZATION AND COMPARATIVE ADVANTAGE

Adam Smith observed in 1776 that specialization in trade increase the productivity of a nation’s resources. His observation related to the principle of absolute advantage whereby a country should buy goods from other countries if they can supply it cheaper than we can.

FOREIGN EXCHANGE MARKETS

In a foreign exchange market various national currency’s are exchanged for one another so that international trade can take place.

Changing Rates: Appreciation and Depreciation 

1. If the demand for Yen rises the Dollar Price of Yen rises. That means the dollar depreciates relative to yen. This could happen for many reasons including an increase in US incomes that enable Americans to buy more Japanese goods or an increase in preference for Japanese Products. The result is that Japanese goods would become more expensive to Americans and US products would be less expensive in the US.

GOVERNMENT AND TRADE

1. Impediments 

2. Protective Tariffs 

3. Import Quotas 

4. Non Tariff Barriers 

5. Export Subsidies 

Why do Governments enact Trade Barriers 

MULTINATIONAL AGREEMENTS AND FREE TRADE ZONES

Trade Barriers cause Trade Wars

The Smoot Hawley Act was a classic example of this

The Reciprocal Trade Act of 1934 has the goal of reducing tariffs 

1. Gave President the power to negotiate reductions up to 50%

2. Most Favored Nations Clause 

GATT 1947 Reductions in Tariffs on a Multinational Basis

WTO

European Union

NAFTA North American Free Trade Agreement