ECONOMICS TOPIC 10 LESSON 2

ECONOMICS TOPIC 10 LESSON 2

Trade Barriers and Agreements

ESSENTIAL QUESTION

How might scarcity divide our world or bring it together?

TRADE BARRIER

A trade barrier, or trade restriction, is a means of preventing a foreign product or service from freely entering a nation’s territory.

 Tariff

One common trade barrier is a tariff, or a tax on imported goods.

Quotas and VERs

Another kind of barrier is an import quota. Import quotas place a limit on the amount of a good that can be imported. 

By contrast, a voluntary export restraint (VER) is a voluntary limit set by the exporting country, restricting the quantity of a product it will sell to another country. 

Multiple Choice

Compare and Contrast What is one way in which voluntary export restraints and import quotas are different?

• A VER is set by the importing country, and an import quota is set by the exporting country.

• A VER is an informal trade barrier, and an import quota is a formal trade barrier.

• A VER is a limit on imports, and an import quota is a limit on exports.

• A VER is voluntary, and an import quota is mandatory.

Higher Prices for Foreign Goods

Trade barriers can help domestic producers compete with foreign firms. By limiting imports from those firms, or by making the prices of those imports higher, trade barriers give a competitive advantage to domestic companies.

Although domestic producers may benefit, consumers can lose out. Restrictions on imports result in higher prices.

Trade Wars

Trade barriers may also fuel international conflict. When one country restricts imports, its trading partner may retaliate by placing its own restrictions on imports. If the first country responds with further trade limits, the result is a trade war, a cycle of escalating trade barriers.

Multiple Choice

Identify Cause and Effect Why are trade wars harmful?

• They make it impossible for the countries involved to trade with other countries.

• They lead to a general economic slowdown because of reduced trade.

• They increase international trade and stimulate the economies of the countries involved.

• They reduce the price of imported goods and services.

Protecting Jobs

One argument for protectionism is that it shelters workers in industries that may be hurt by foreign competition. 

Ideally, the laid-off workers would take new jobs in other industries. In practice, however, many of these workers would find retraining or relocation difficult. 

Protecting Infant Industries

Another argument for protectionism is that industries in the early stages of development need time and experience to become efficient producers. Tariffs that raise the price of imported goods provide a period of time for these infant industries to become more competitive.

Safeguarding National Security

Certain industries may require protection because their products are essential to defending the country. In the event of a war, the United States would need an uninterrupted supply of steel, energy, and advanced technologies.

Multiple Choice

Distinguish Which of the following is an argument frequently given for protectionism?

• to protect jobs

• to protect free trade

• to protect the government

• to protect multinationals

Roots of Free Trade

Today’s free trade movement began in the 1930s. The Smoot-Hawley Act caused a rapid decline in international trade. To encourage trade, Congress passed the Reciprocal Trade Agreements Act of 1934. It gave the president the power to reduce tariffs by as much as 50 percent.

That law also allowed Congress to grant most-favored nation (MFN) status to U.S. trading partners. Today, MFN status is called normal trade relations status, or NTR. All countries with NTR status pay the same tariffs, though imports from non-NTR nations may be taxed at a higher rate.

World Trade Organization

In 1995, the World Trade Organization (WTO) was founded with the goal of making global trade more free. The WTO works to ensure that countries comply with GATT, to negotiate new trade agreements, and to resolve trade disputes. 

Open Ended

Analyze Charts Using the chart, name one way trade barriers benefit workers and one way trade agreements benefit consumers.

Multiple Choice

Identify Cause and Effect What effect does a free trade agreement have on the countries that sign it?

• They import and export goods using identical quotas.

• They import and export goods freely to other countries.

• They import and export goods only among themselves.

• They import and export goods among themselves with low or no trade barriers.

European Union

The European Union developed slowly over several decades. In 1957, six western European nations set up the Common Market to coordinate economic and trade policies. In the years that followed, more countries joined the Common Market. In 1986, the member nations agreed to eliminate tariffs on one another’s exports. They created a single market, called the European Economic Community (EEC).

USMCA (NAFTA)

The USMCA is a mutually beneficial win for North American workers, farmers, ranchers, and businesses. The Agreement is creating more balanced, reciprocal trade supporting high-paying jobs for Americans and grow the North American economy.

CAFTA-DR

In 2003, the United States government reached a free trade agreement with five nations in Central America. At the time, the deal was called the Central American Free Trade Agreement (CAFTA). The next year, when the Dominican Republic joined the pact, the name was changed to CAFTA-DR. 

The Debate Over Free Trade

While the world’s economies have moved toward free trade, controversy on trade continues.

Meetings of the World Trade Organization have also spurred large protests. A 1999 WTO meeting in Seattle, Washington, drew as many as 50,000 angry demonstrators. 

Multiple Choice

Determine Relevance Which of the following was an argument in favor of NAFTA?

• It would increase exports to Canada and Mexico.

• It would decrease imports from Europe.

• It would decrease immigration from Mexico.

• It would convince other nations to sign the FTAA agreement.

The Role of Multinationals

Still, host nations worry about the effect of multinationals on their countries. In a small country with a fragile economy, multinationals can gain excessive political power. In addition, host nations fear that multinationals could drive out domestic industries and exploit local workers. To protect domestic industries, some host nations have created rules requiring multinationals to export a certain percentage of their products.

Open Ended

Analyze Maps The engines made for cars sold in the U.S. are manufactured in 15 countries. On which two continents are most of those countries?

Multiple Choice

Identify Central Issues Which reason expresses one of the concerns about multinationals?

• They might export too many products.

• They might exploit local workers.

• They might take over the government.

• They might sell goods for too little.

Open Ended

How might scarcity divide our world or bring it together?