International economics and trade - Business in United States of America
Definition: Exchange of commodities and currency among the governments, corporations, and residents of different nations, as well as the economic principles governing that exchange
Significance: With the advent of a national reliance on significant importing and exporting, the changes in international economics and the world trade policy have been important influences on manufacturing, on agriculture, and on employment. As the United States interacts economically with other countries, the monetary systems and policies, the labor standards or lack thereof, and the environmental standards and investment policies of these countries have the potential to affect conditions in the United States and to improve or worsen the domestic economy.
Trade in an international economy offers many advantages to participating countries. International trade makes a wider variety of products available to consumers. It has the potential to increase demand for products, thus increasing production, which creates a greater number of jobs. International trading provides a market for the surplus production of a nation. It is also procompetitive. Trade brings a greater level of competition into the market and eliminates monopolistic control of local markets. In addition, trade may have important effects on the diffusion and development of technology. International trade introduces technological advances into a larger market. This expansion of the market may also serve to stimulate greater research and development of technological advances.
International trade also has financial advantages for the trading partners. Trade stimulates national economies and thereby raises real income that in turn increases levels of savings. This situation then makes a greater amount of funds available for investment.
Although international trade in a free market, international economy provides many benefits to individual nations, there are also areas of concern. International trade enhances interdependency of countries and makes each country more vulnerable to the effects of natural disasters, political upheavals, and financial mismanagement that occur in the other countries. Labor standards and environmental standards are areas of potential problems. Products from countries with lower standards may have much lower prices and be more affordable than those produced in higher-wage environmentally conscious countries. Import of such products without high tariffs may reduce domestic manufacturing and therefore eliminate jobs.
Certain moral considerations also become issues in an international economy. Questions include whether it is morally correct to purchase goods made by exploited workers. Without international safety standards, international trade may pose serious health threats. Proponents of international cooperation and trade have addressed these issues by the creation of international organizations such as the World Trade Organization to police and regulate international trading.
International trade has a long history, going back to the early trade routes of the Roman Empire and before. However, until well into the twentieth century, trade was conducted on a country-to-country basis. Each country acted as an independent agent; there were no general trade agreements and no international control of trade. Developed countries imposed high tariffs and quotas on foreign goods and were primarily focused on protecting their domestic economies. Colonization of underdeveloped countries occurred more often than trade between them and developed countries. Countries followed a policy of self-sufficiency and avoided interdependence with other nations.
Until 1934, the United States followed a protectionist trade policy, using high tariffs and quotas. American exports fell significantly as other countries, primarily European, levied high tariffs against American goods in acts of retaliation. In 1934, the Reciprocal Trade Agreements Act (RTAA) was passed, giving the executive branch the power to reduce tariffs for the first time. The agreement lowered tariffs equally with the United States’ trading partners. By the early 1940’s, the United States had entered into bilateral trading agreements with approximately twenty-five countries, primarily European. These agreements were the first step in an effort of international economic cooperation. After World War II, relations between the United States and Europe moved further in the direction of political and economic cooperation.
The Bretton Woods Conference
In the years following World War II, a new attitude of alliance and cooperation developed between the United States and its trading neighbors. The war had caused serious devastation and severely affected the economies of many countries. In an effort to speed up the postwar recovery of these nations, delegates from forty-four Allied nations met for the United Nations Monetary and Financial Conference from July 1 to July 22, 1944. The conference was held in Bretton Woods, New Hampshire, and is usually designated as the Bretton Woods Conference. The conference’s purpose was to establish international regulation of economic activity. The conference successfully established the International Monetary Fund (IMF) to regulate the international financial system through a set of rules, procedures, and institutions, and the International Bank for Reconstruction and Development (IBRD), later part of the World Bank.
The conference also proposed the creation of the International Trade Organization to institute rules to govern international trade and to regulate trading activity. In March of 1948 at the United Nations Conference on Trade and Employment held in Havana, Cuba, there was agreement to establish the International Trade Organization, but the United States Senate failed to ratify the agreement and the organization was never established.
Exports of World Regions, Percentages by Sector, 2006
Source: Data from World Trade Organization, International Trade Statistics 2007 (Author: Geneva, Switzerland, 2007)
The General Agreement on Tariffs and Trade
Although the negotiations for the International Trade Organization were taking place, fifteen of the nations began separate negotiations on a treaty to procure more immediate reductions in tariffs. The implementation of the treaty was to become a function of the International Trade Organization. When the attempt to found the International Trade Organization failed, this treaty, the General Agreement on Tariffs and Trade (GATT), was the only mechanism in place to regulate trade. The reduction of all barriers to international trade, including tariffs, quotas, and subsidies, became the goal of GATT. This objective was to be accomplished through a series of agreements.
On January 1, 1948, twenty-three countries had signed the General Agreement on Tariffs and Trade agreement. The treaty was based on the concept of the unconditional most-favored nation. This concept means that any condition used in relation to a most-favored nation, one that has the least restrictions, must be used with all trading nations. The signatory nations of the GATT met at various time intervals in what were referred to as rounds to eliminate further trade barriers and to open the world market. Between 1949 and 1993, there were seven rounds of General Agreement on Tariffs and Trade. The Uruguay Round of 1986-1993 was particularly important for its achievements. In this round, the signatory nations created the Agreement on Agriculture, lowering tariffs and subsidies on agriculture, a trade area that had always been exempted. The round also created the World Trade Organization (WTO).
World Trade Organization
The World Trade Organization was created on January 1, 1995, with seventy-five GATT signatory nations and the European Communities as founding members. During the next two years, the fifty-two remaining General Agreement on Tariffs and Trade signatory nations joined the World Trade Organization. The Democratic Republic of the Congo, which became a member in 1997, was the last of the GATT signatories to join. Non-GATT nations subsequently joined the WTO, bringing the membership to 153. This membership accounts for 95 percent of the total world trade. Unlike General Agreement on Tariffs and Trade, which was never an organization but rather a group of treaty signatories operating as a de facto organization, the World Trade Organization is an actual organization with a formal structure.
In general, the WTO deals with the rules of trade between nations. The goal of World Trade Organization is to improve the well-being of the people of its member countries by lowering trade barriers and making an arena for trade negotiations available. The mission of the WTO is a continual advance toward an ever freer trade environment and an open international market. The WTO watches over approximately sixty different agreements that are classified as international legal texts. Its responsibilities include negotiating and instigating new trade agreements, monitoring the adherence of its members to all of the World Trade Organization agreements that have been signed and ratified, and settling trade disputes among members.
The Uruguay Round, in which the World Trade Organization was created, also saw the signatory nations sign agreements in a broader range of trade activity. Four new areas of trade issues were addressed by four new agreements. The General Agreement on Trade in Service (GATS) brought the multilateral trading system into the service sector. The Trade Related Aspects of Intellectual Property Rights Agreement (TRIPS) established minimum standards for a considerable number of intellectual property rights. The Sanitary and Phyto-Sanitary Agreement (SPS) set up restrictions on member nations’ policies regarding animal and plant health and food safety. The Agreement on Technical Barriers to Trade (TBT) dealt with the elimination of obstacles of trade that might result from technical negotiations and standards. The TRIPS and TBT Agreements entered into force in 1994; the GATS and SPS Agreements did so in 1995.
In 2001, the WTO began a new round of negotiations, the Doha Development Agenda or Doha Round. These negotiations are addressing tariffs, nontariff trade barriers, and agriculture, all traditional areas of trade negotiation, but the round is also focusing on the issues of labor standards, environmental concerns, and patents.
The United States and Trade
The United States has been particularly active in encouraging the implementation of free trade and in opening its markets to developing countries. An early effort at opening markets was made during the 1980’s with the Caribbean Basin Initiative providing low tariff rates on a number of products from most of the Caribbean Basin nations. In 1991, the Andean Trade Preference Act (ATPA) extended tariff free access to American markets for a substantial variety of products from Bolivia, Peru, Colombia, and Ecuador. In 1994, the North American Free Trade Agreement (NAFTA) went into effect. The agreement implemented a program for phasing out tariffs on products traded between the United States, Canada, and Mexico.
Bergsten, C. Fred, ed. The United States and the World Economy. Washington, D.C.: Institute for International Economics, 2005. This excellent collection of essays written by senior staff members of the Institute for International Economics focuses on the changing role of the United States in the world economy and the need for changes in American trade policies. It also treats the impact of world trade on the American domestic economy.
Bernstein, William S. How Trade Shaped the World. New York: Atlantic Monthly Press, 2008. Bernstein recounts the history of trade from its primitive beginnings as barter to its complex modern forms. The historical focus adds a cultural aspect to the consideration of trade and broadens the reader’s view of trade and its importance.
Dam, Kenneth W. The Rules of the Global Game: A New Look at U.S. International Economic Policymaking. Chicago: University of Chicago Press, 2004. This in-depth treatment of U.S. policy making is useful for both students of economics and general readers. Dam explains how international economics operates, how policy is determined, and who makes decisions regarding policy. Chapters on foreign investment, the international monetary system, and foreign markets emphasize the impact of international economics on the United States.
Rivera-Batiz, Luis A., and Maria A. Oliva. International Trade: Theory, Strategies, and Evidence. New York: Oxford University Press, 2004. This detailed technical study of international trade is best suited for readers with an understanding of the basics of how international economics works. Chapter 16 is excellent for understanding the benefits and problems related to preferential trade agreements. Part 6 presents a very complete discussion of the role of the World Trade Organization in international trade.
Rosenberg, Emily S. Spreading the American Dream: American Economic and Cultural Expansion, 1890- 1945. New York: Hill &Wang, 1982. This study is useful for understanding the role of the government in the development of the U.S. domestic market and how the United States extended much of its economic practices and culture throughout the world.
Schott, Jeffrey J., ed. Free Trade Agreements: U.S. Strategies and Priorities. Washington, D.C.: Institute for International Economics, 2004. Edited by a member of the U.S. delegation to the Tokyo Round of the GATT agreements, this study is one of the most thorough presentations of the United States’ participation in free trade agreements. It elucidates why free trade agreements are replacing tariffs and deals extensively with NAFTA. It also discusses U.S. free trade agreements with Asian and African countries.
See also: Asian financial crisis of 1997; Bretton Woods Agreement; Canadian trade with the United States; Chinese trade with the United States; European trade with the United States; Export-Import Bank of the United States; Japanese trade with the United States; Latin American trade with the United States; Mexican trade with the United States; multinational corporations.
Canadian trade with the United States: Toward Free Trade
World Trade Organization (WTO)
Bretton Woods Agreement