Gerber Ie7e PPT 13

International Economics
Seventh Edition
Chapter 13
The United States in the
World Economy
Copyright © 2018, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Learning objectives (1 of 2)
13.1 Identify major changes in U.S. economic relations
that have led to bilateral and plurilateral agreements.
13.2 Evaluate the relative importane of the North

American Free Trade Agreement, both for it accomplished
and as a model for subsequent agreements.
13.3 Explain when purchasing power parity estimates of

income per person are superior to the alternatives, and
when they are inferior.
Learning objectives (2 of 2)
13.4 State the reasons whey Mexico and Canada
sought free trade with the United States.
13.5 Differentiate free trade agreements from

preferential trade agreements and give examples of
each.
13.6 State whey it is difficult to have precise

estimates of job gains and losses due to trade, and
give specific examples of how imports may create
jobs and exports may occur after a loss of jobs.
Introduction:
A changing world economy
• For several decades after World War II, the world economy
was bipolar.
– Two economic systems: capitalism and communism.
– Two military superpowers: The United States and the Soviet Union.
• Since the late 1970s, a number of changes have reshaped

international economic relations:
– The economic success of China, followed by India;
– The rise of emerging markets as active players in the world economy;
– The break-up of the Soviet Union;
• These forces and others are reshaping the role of the United
States in the global economy.
Background and context (1 of 4)
• Due to its size, world trade is a lower share of the U.S. economy than in
most other high income countries.
– The trade-to-GDP ratio was less than 10 percent in the 1960s but climbed to
30 percent by the 2010s.
• The main trading partners have been relatively constant, with the
exception of China.
– China is #1 for imports, #3 for exports.
– NAFTA partners Canada and Mexico are #2 and #3 for imports and #1 and #2
for exports.
• Composition of trade has changed:

– Services have grown from 20 percent in 1980 to 30 percent today.
– Merchandise goods are the other 70 percent of exports.
▪ The U.S. is second largest exporter of merchandise goods, after China;
▪ Manufactures are over 50 percent of all exports.
• Recent U.S. trade strategy has downgraded the priority of
multilateral negotiations and upgraded bilateral and
plurilateral negotiations.
– The WTO has become too cumbersome due to the large number
of countries that participate;
– As quotas disappeared and tariffs were reduced, more
contentious issues have arisen.
▪ Agricultural subsidies;
▪ Intellectual property rights;
▪ Trade in services;
▪ Government procurement;
▪ Labor standards, etc.
– The end of the Cold War changed the U.S.’ strategic uses of
trade.
• The U.S. continues to support the WTO, but has
turned towards bilateral and plurilateral
agreements as an alternative.
– Currently has FTAs with 20 countries.
– Most partners are small economies, often strategic
partners for military or geo-political reasons.
– Exceptions include Canada, Mexico, and Korea, none
of which are small.
• FTA-related trade is about 47 percent of exports

and 34 percent of imports.
Regions and countries Exports Imports
(Millions) (Millions)
Middle East and North Africa
Israel (1985), Bahrain (2006), Morocco (2006), Oman 20,176 28,764
(2009), Jordan (2010)
Trans-Pacific
Singapore (2004), Australia (2005), Korea (2012) 97,193 100,925
Americas
Canada (1989), Mexico (1994), Chile (2004), Dominican 594,033 642,079
Republic-Guatemala-Honduras-El Salvador-Nicaragua-
Costa Rica (DR-CAFTA, 2006) Peru (2009), Panama
(2011), Colombia (2012)
Total merchandise trade with FTAs 711,402 771,768
Share of total merchandise trade (%) 47.3 34.4
Case study: Manufacturing in the
United States (1 of 2)
• The U.S. continues to have a large manufacturing sector.
– It peaked in 1979 in terms of employment;
– It continues to grow in terms of value added.
– The share of the labor force has fallen significantly.
• Some of the dislocation felt by U.S. workers is due to off-shoring,

some is relocation within the United States.
• Rapid productivity advances have also reduced the need for

relatively unskilled workers.
• Trade has played a role in the decline in manufacturing, but

economists are still divided as to its importance.
Case study: Manufacturing in the
United States (2 of 2)
The NAFTA market (1 of 2)
Population GDP (US$, GDP per GDP per
Country (Millions) Billions) Capita (US$) Capita (PPP)
Canada 35.8 1,552.4 43,332 45,553
Mexico 127.0 1,144.3 9,009 17,534
United States 321.6 17,947.0 55,805 55,805
Total 484.4 20,643.7 42,614 45,013
• The NAFTA market is more than 484 million people

and over 20 trillion in GDP
The NAFTA market (2 of 2)
• The NAFTA market is enormous.
– Comparable in size to the European Union.
– Living standards vary, but all three countries are upper
middle income (Mexico) or high income (Canada and the
United States).
• Mexico’s per capita income is higher when measured in

purchasing power parity (PPP).
– PPP adjusts for price differences;
– Mexico’s income per capita is $9009 in U.S. dollars at
market exchange rates, but buys goods and services in
Mexico that would cost $17,534 in the U.S.
The NAFTA: Canada and the U.S.
(1 of 4)
• Canada and the U.S. have the largest bilateral
trade relationship in the world.
– $671 billion in 2015
• Several factors contribute to this:

– Shared border, common language (outside the
province of Quebec), similar histories and cultures.
– Three stages of economic integration in the last 50+
years.
(2 of 4)
• Stages of recent Canadian-U.S. economic
integration:
– Auto Pact, 1965, created free trade in autos and
automotive products.
– Canada-U.S. Free Trade Agreement (CUSTA),
1989, created free trade in most goods and
services.
– North American Free Trade Agreement (NAFTA),
1994, extends CUSTA to Mexico, with some slight
modifications.
(3 of 4)
• Why Canada and the U.S. wanted closer ties:
– To obtain economies of scale and increased
competitiveness in the face of tougher
competition from emerging markets, particularly
in East Asia.
– To prevent the U.S. from escalating its use of ADD
and CVD against Canada;
– Canada and U.S. have extremely close political and
military relationship; formal trade opening helps
cement this relationship.
(4 of 4)
• Why many Canadians worried about free
trade with the United States:
– Canadians firms might be less competitive;
– Free trade might undermine Canada’s stronger
social programs, such as universal health care;
– Canadian culture might come to be dominated by
U.S. cultural industries: TV, movies, magazines,
newspapers, music, publishing, theatre, etc.
The NAFTA: Mexico and the U.S.
(1 of 3)
• Mexico-U.S. trade is one of the largest bilateral
trade relationships in the world.
– The U.S. is by far Mexico’s largest export market and
its largest source of imports;
– Mexico is the U.S.’ second most important export
market and its third most important source of
imports.
• Their shared border and proximity to each other’s

markets make the relationship close.
(1 of 3)
• Mexico’s move towards free trade with the
United States was driven by several factors.
– Mexico’s economy performed well in the period
after World War II, up until the 1980s.
– In 1982, it fell into a debt crisis which resulted in a
period known as the Lost Decade (1982-1989).
– It’s traditional economic strategy, called import
substitution industrialization, failed to pull it out
of its debt crisis.
(3 of 3)
• As a result of the debt crisis, the government
undertook widespread economic reforms:
– Extensive privatizations of government owned firms;
– Opening of trade through an elimination of many quotas
and a reduction in tariffs;
– Reduction of barriers to foreign direct investment;
– Joining of GATT (1986).
• President Salinas had two main goals for an

international agreement:
– Make the reforms permanent;
– Attract more foreign investment.
The NAFTA model
(1 of 5)
• The NAFTA was implemented on 1, January, 1994.
• Trade barriers fell significantly, particularly on goods and services

into Mexico, where tariffs and quotas were higher before the
agreement.
– Tariffs on sensitive items were reduced gradually over time in order to
give industries time to adjust.
• The agreement specifies North American content requirements in

order to qualify for free trade status.
– All FTAs require these rules as a way to prevent third parties from
using one of the partners as an export platform.
– Economists mostly dislike these provisions because they increase
trade diversion; e.g., apparel moved out of low cost countries in the
Caribbean and into Mexico.
The NAFTA model
(2 of 5)
• Dispute resolution is covered in three separate
formats:
– ADD;
– Investor-state disputes;
– General dispute provisions.
• Labor and environmental standards are a separate

area, covered in separate side agreements:
– North American Agreement on Labor Cooperation;
– North American Agreement on Environmental
Cooperation.
The NAFTA model
(3 of 5)
• The NAFTA has served as a model for subsequent
U.S. trade agreements. These agreements stress
traditional areas of FTAs but also incorporate
areas that were new to the NAFTA:
– Labor and environmental standards;
– Investor-state disputes.
• Since it was signed and implemented, two

societal concerns have become major topics:
– Migration;
– Drugs and drug related violence.
The NAFTA model
(4 of 5)
• Migration issues are not covered in the NAFTA.
• Approximately 11.7 Mexican migrants lived in the U.S. in

2014, equal to 28 percent of all immigrants.
– Approximately one-half are unauthorized and without legal papers.
– The wave of immigrants from the 1960s to the 2000s was the largest
of any country’s residents entering the U.S.
• The wave of migration has stopped in recent years.

– The border is harder to cross due to increased enforcement;
– Receiving communities are less welcoming;
– But primarily because the share of the Mexican population that is in
its prime migration age (18-40) is falling.
The NAFTA model
(5 of 5)
• Drugs and drug violence are not covered in
the NAFTA.
– U.S. policies are guided by President Nixon’s
declaration of a “war on drugs” in 1969.
– Mexico has attempted to help enforce these
policies but it is hampered by several factors:
▪ Illegal gun flows from the U.S. into Mexico;
▪ Enormous profits in the U.S. market have created
incentives for Mexican cartels;
▪ Weak law enforcement institutions in Mexico.
Case study: Mexico’s collective
agriculture and the NAFTA (1 of 2)
• Mexico has large scale and small scale agriculture.
– Many large farms have done well with the NAFTA rules;
– Many small farms have not, particularly subsistence corn farmers and
many ejidos.
▪ Ejidos are collective farms with:
▪ Individual land holdings free of restrictions on planting and harvesting;
▪ Prohibitions on selling or renting out the land.
• Mexican governments have been concerned about small scale

agriculture;
– Collective ownership of ejidos may reduce incentives to invest;
– Poverty is concentrated in small scale farming sector;
– The government wanted to move farmers out of agriculture into city
jobs and factory work.
Case study: Mexico’s collective
agriculture and the NAFTA (2 of 2)
• To move people out of agriculture, the Mexican government
implemented three policies.
– One, subsidies to small farmers were cut;
– Two, the collective farms were allowed to be privatized and sold off;
– Three, corn tariffs that were scheduled to be reduced over a 15-year
period were quickly eliminated.
• Large farms increased corn output, small farms were unable

to compete.
• The further impoverishment of many small farms during

NAFTA led many to blame the trade agreement rather than
Mexican policies.
New and old agreements (1 of 6)
• The U.S. and many advanced economies have a variety
of preferential agreements.
– Unilateral preferences for less developed economies.
▪ Generalized System of Preferences (122 countries);
▪ Caribbean Basin Initiative (17 countries);
▪ African Growth and Opportunity Act (39 countries).
• Preferential agreements offer market access to the U.S.

for many goods and services and do not demand
reciprocity.
– Mostly these are with small countries that do not trade
very much with the United States because of distance, size,
or type of products.
• The U.S. is currently negotiating three FTAs:
– Trans-Pacific Partnership (TPP) comprising 12 Pacific basin
countries.
– Asia-Pacific Economic Cooperation (APEC) comprising 21
Pacific basin countries.
▪ APEC has become a forum for discussing issues and seems unlikely
to develop into an FTA.
▪ APEC, unlike the TPP, includes China.
– Transatlantic Trade and Investment Partnership (T-TIP)
comprising the European Union and the U.S.
• Each of these uses the NAFTA as a starting point for the

issues and approaches they address.
• Labor and environmental clauses are included as side agreements
to all the FTAs the U.S. has signed since the NAFTA.
– The basis of the NAFTA side agreements was that each country enforces their
own rules, but rules must be enforced.
– Outside parties cannot investigate or take actions for non-enforcement.
– The rules are effective only if public awareness can force a government to take
action.
• The TPP proposal goes further.

– Labor and environment are in the agreements and not side agreements;
– It allows for trade sanctions if countries are not enforcing their standards.
– It defines labor standards consistent with the ILO standards presented in
Chapter 8.
– It defines environmental standards as consistent with international
commitments, e.g., wildlife trading, protection of endangered species, habitat
protection, etc.
• Critics of labor and environmental clauses come in
two forms:
– Some economists think they should not be included in trade
agreements;
▪ We don’t know which standards are best;
▪ We disagree on the content;
▪ Different countries have different needs;
▪ They will lead to protectionism.
– The lack of enforcement make the clauses ineffective.
• Supporters argue that the TPP addresses some if not all these
issues.
– To some degree, these clauses are included to maximize political
support.
• The U.S. has bilateral investment agreements with 42
countries.
– Set the terms for dispute resolution, treatment of foreign investors.
– Mostly eliminate performance requirements and require national
treatment.
• Investor-state relations rules are included in nearly all FTA

agreements signed by the U.S.
– Set forth the rules regarding treatment of foreign investment and
dispute resolution.
– This is viewed by some as necessary because trade often requires
investment in the country making the purchase.
– For example, after sale services for software or complicated machinery.
• Investor-state relations clauses are designed to avoid unfair
treatment by a host government;
– They are one of the most controversial elements of trade agreements
because the explicitly let private firms sue governments.
– The goal is to create a level playing field where domestic firms are
subject to the same rules and standards as foreign owned firms.
• Critics of these clauses worry that they prevent

governments from imposing new regulations.
• Proponents argue that they create a fairer environment

for foreign investors and do not prevent host
governments from introducing new regulations.
Trade and jobs (1 of x)
• Estimates of job losses or gains are flawed.
– Most estimates assume that imports reduce jobs by some factor
proportionate to the quantity, and exports increase jobs in a
similar way.
– Imports may create jobs: For example if an industry is more
competitive because some of its components are made more
efficiently abroad.
▪ Example: Automobile industry is probably more competitive in the
U.S. because of parts made in Mexico.
– Exports may be due to the loss of jobs: For example, if a firm
off-shores and exports components to its new foreign affiliate.
• Pro-trade groups always show a net gain in jobs from trade;

anti-trade groups always show the opposite.
Trade and jobs (2 of x)
• Regardless of job gains or losses, the quantity is very small
relative to the size of the U.S. economy.
– Gross job gains are 10-16 million per year; gross job losses are
slightly less.
– Net gains are 1-3 million per year, unless there is a recession.
– Trade agreements represent a small fraction of that amount.
• The primary determinants of the number of jobs are:

– Size and growth of the labor force;
– Fiscal and monetary policies;
– Labor market policies.
Trade and jobs (3 of 3)
Exports Imports Deficits
FTAs
Total (billions US$) 711.4 771.8 -60.6
Share (%) 47.3 34.4 8.2
Rest of world
Total (billions US$) 793.2 1,469.9 -676.7
Share (%) 52.7 65.6 91.8
• The table is for merchandise trade (goods) only; the U.S. has a surplus in
services trade.
• Trade deficits are much smaller with countries that have signed FTAs with
the U.S.
Case study: The African Growth and
Opportunity Act
• The AGOA is an example of a preferential trade agreement.
• The U.S. has unilaterally offered duty-free access to its market

to a group (39) of low and middle income African countries.
– Not all goods are covered, but most are.
▪ Car parts and apparel producers in Africa have obtained the largest
benefits.
▪ Sensitive goods that are excluded include cotton, peanuts, and sugar.
• Most AGOA nations export less than $1 million to the U.S.

▪ Many of the exporters sell oil, not manufactured goods.
▪ Distance limits trade;
▪ As does the fact that 14 of the 39 countries are land-locked.
The End

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International Economics

13.2 Evaluate the relative importane of the North

13.3 Explain when purchasing power parity estimates of

13.5 Differentiate free trade agreements from

13.6 State whey it is difficult to have precise

• Since the late 1970s, a number of changes have reshaped

• Composition of trade has changed:

• FTA-related trade is about 47 percent of exports

• Some of the dislocation felt by U.S. workers is due to off-shoring,

• Rapid productivity advances have also reduced the need for

• Trade has played a role in the decline in manufacturing, but

• The NAFTA market is more than 484 million people

• Mexico’s per capita income is higher when measured in

• Several factors contribute to this:

• Their shared border and proximity to each other’s

• President Salinas had two main goals for an

• Trade barriers fell significantly, particularly on goods and services

• The agreement specifies North American content requirements in

• Labor and environmental standards are a separate

• Since it was signed and implemented, two

• Approximately 11.7 Mexican migrants lived in the U.S. in

• The wave of migration has stopped in recent years.

• Mexican governments have been concerned about small scale

• Large farms increased corn output, small farms were unable

• The further impoverishment of many small farms during

• Preferential agreements offer market access to the U.S.

• Each of these uses the NAFTA as a starting point for the

• The TPP proposal goes further.

• Investor-state relations rules are included in nearly all FTA

• Critics of these clauses worry that they prevent

• Proponents argue that they create a fairer environment

• Pro-trade groups always show a net gain in jobs from trade;

• The primary determinants of the number of jobs are:

• The U.S. has unilaterally offered duty-free access to its market

• Most AGOA nations export less than $1 million to the U.S.

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