Presentation on Basis for International Trade

made by Anish Kumar

The Basis for International Trade

The basis for international trade is that a nation can import a particular good or service at a lower cost than if it were produced domestically In other words, if you can buy it cheaper than you can make it you buy it This maxim is true for individuals and nations This is called specialization and exchange

Examples
We have been a major exporter of wheat, corn, and soybeans since colonial times Initially, we had an abundance of land Eventually we came to have a tremendous stock of farm equipment We used to be a major exporter of steel and textiles Now other nations produce these more cheaply

World Trade Agreements and Free Trade Zones

The North American Free Trade Association (NAFTA) The European Union (EU) The General Agreement on Trade and Tariffs (GATT) The World Trade Organization (WTO)

NAFTA

NAFTA was ratified by Congress in 1993 NAFTA created a free trade area that includes Canada, the United States, and Mexico Agreements on services, investment, intellectual property rights, agriculture, and strengthening of trades rules were included There were also side agreements on labor adjustment provisions, protection of environment, and import surges

The European Union

This free trade association of 15 nations was formed in 1992 Freight was now able to move anywhere within the EU without checkpoint delays and paperwork So-called quality codes were ended Workers from any EU country could work in any other member country

The General Agreement on Trade and Tariffs (GATT)

GATT was drafted in 1947 and since been signed by more than 146 nations The latest version was ratified by Congress in 1994 Reduces tariffs worldwide by an average of 40% Lowers other barriers to trade such as quotas on certain products Provides patent protection for American software, pharmaceuticals, and other industries

The World Trade Organization

The WTO was set up in 1995 as a successor to GATT The WTO is based on three major principles Liberalization of trade Nondiscrimination No unfair encouragement of exports

Liberalization of Trade
Trade barriers, which were reduced under GATT, should continue to be reduced Trade barriers have been falling within free trade zones such as NAFTA and the European Union

No Unfair Encouragement of Exports

No unfair encouragement of exports encompasses export subsidies, which are considered a form of unfair competition American and European governments have long subsidized their farmers This enables the producers to sell their crops well below cost This sets the price of agriculture staples so low that small farmers in developing countries cant compete These small farmers are eventually forced off their land by subsidized imports and have no means to survive

Nondiscrimination: The Most-Favored-Nation Principle

Under the most-favored-nation principle, members of WTO must offer one member the same trade concessions as any other member. This is a lot like when the teacher says that if you bring candy to class, you must bring some for everyone

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