Lecture Issues in economics today - Chapter 16

When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.
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Lecture Issues in economics today - Chapter 16 Chapter 16 NAFTA, GATT, WTO: Are Trade Agreements Good For Us? McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Chapter Outline • THE BENEFITS OF FREE TRADE • WHY DO WE NEED TRADE AGREEMENTS • TRADE AGREEMENTS AND INSTITUTIONS • ECONOMIC AND POLITICAL IMPACTS OF TRADE • THE BOTTOM LINE McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. NAFTA, GATT, and the WTO • NAFTA: North American Free Trade Agreement – An agreement between the United States, Canada and Mexico to have substantially free trade. (Some tariffs and quotas are permissible under certain circumstances.) • GATT: General Agreement on Tariffs and Trade – A multi-nation agreement specifying conditions under which tariffs, quotas and non-tariff barriers are permissible. • WTO: World Trade Organization – An organization designed to settle trade disputes. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The Benefits of Free Trade • Free trade makes each trading partner better off than it would have been without trade. • Countries export goods to other nations because the producing country can make the good at a lower opportunity cost than the importing country. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. A Simple Example Number of workers produces Amount of Output High Tech Low Tech High Low High Low Skill Skill Skill Skill US 1produces 1 2 produce 1 1 produces 4 1 produces 3 Mexico 3 produce1 4 produce 1 1 produces 3 1 produces1 US exports high-tech products to Mexico and Mexico exports low-tech products to the US and both are better off than if they produced the goods themselves. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Why Do We Need Trade Agreements? • It is logical to ask “if trade is so good why do we need an agreement to engage in it?” • The answer is that a country can make itself better off by engaging in Strategic Trade Policies designed to get more of the benefits from trade in a country than would exist under free trade. • Countries that do this increase the gains from trade to themselves but it is less than the losses to everyone else. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Example of Strategic Trade • Boeing vs. AIRBUS – Boeing had significant market power in the production of airliners prior to the existence of AIRBUS. – Britain and France gave AIRBUS protection against Boeing’s exports to European airlines. – In doing so they might have made themselves better off. Boeing was worse off by more than AIRBUS (and the European consumer and taxpayer) were made better off. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. What Trade Agreements Prevent (or discourage) • Tariffs – A tax on imports. • Quotas – A limit on imports. • Non-tariff barriers – A regulatory means of limiting imports. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Alphabet Soup: NAFTA • North American Free Trade Agreement • Creates a (relatively) free trade zone in North America. • Includes Canada, Mexico and the United States. • Passage – Envisioned by President Reagan in the 1980’s. – Negotiated by President Bush (G.H.W.) in the late 1980s and early 1990s. – Enacted by President Clinton. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Alphabet Soup: GATT • General Agreement on Tariffs and Trade • Came into existence shortly after WWII – Uruguay Round set the latest rules • A world agreement between more than 100 nations. • NOT a free trade agreement – It sets conditions under which tariffs, quotas and non-tariff barriers are acceptable. McGrawHill/Irwin ©2002TheMcGrawHillCo ...