Detailed Notes on Trade Agreements, Tariffs, and Currency Exchange Rates

Exam Preparation

• Review institutional questions provided ahead of time.
• Expect similar questions as in the "ask your neighbor" round from previous practice.

Trade Agreements & Tariffs

• Post-Hawley Smoot Tariff resulted in a trade war during the Great Depression.
• The tariffs were counterproductive as they harmed economies.

General Agreement on Tariffs and Trade (GATT)

• Established to reduce tariffs and promote trade.
• Later transformed into the World Trade Organization (WTO).

Countervailing Duties

• Tariffs imposed as a reaction to unfair trade practices.
• Approved by the WTO after data estimation on the economic damage.

WTO Tariff Regulations

• Tariffs should decrease over time, and retaliation is permissible if unfair tariffs are raised.

National Security Exceptions

• Tariffs can be increased for national security reasons (e.g., semiconductor chips).
• Example: The US put tariffs on steel to protect its industry, but limits applied.

WTO Disputes

• The US has had disputes with China regarding tariffs and national security claims.
• Withdrawal from WTO compliance may undermine the established trade system causing market uncertainty.

Most Favored Nation (MFN)

• Countries must not discriminate regarding tariffs.
• Exceptions are allowed if resulting from a WTO decision or a Free Trade Agreement (FTA).

International Monetary Fund (IMF)

• Provides financial assistance to stabilize countries' economies and prevent trade wars.
• Example: Assistance to Argentina during economic crises.

Exchange Rates Overview

• Importance of understanding what causes exchange rate movements (Chapter 15).
• Distinction between systems: fixed exchange rate (China) and flexible exchange rate (Canada).

Demand and Supply of Currencies

• Explained through graphs showing yuan and Canadian dollars vs. US dollar actions.
• Demand shifts with changes in interest rates, affecting currency value.

Impact of Monetary and Fiscal Policy on Exchange Rates

• Fiscal policies leading to government borrowing can indirectly increase interest rates, impacting demand for US dollars.
• Lower interest rates can depreciate the dollar, aiding exports but costing imports.

Net Exports and Currency Values

• When the US dollar appreciates, it affects export attractiveness negatively, influencing trade deficits.

Real-World Example of Exchange Rates

• Historical context with significant dollar fluctuation affecting students studying abroad.
• Previous fiscal deficits corresponding with dollar fluctuations observed.

Final Notes for Discussion

• Homework is available on Canvas, and discussions count toward credit.