Unit 12: International Trade


International Trade

internationaltrade2Most nations throughout history have engaged in trade with other nations.  Suppose you live in a cold state like Wisconsin and you enjoy eating bananas.  How would you get one?  You could grow some, but it might prove to be an extremely expensive treat.   To enjoy bananas at a reasonable cost, someone in Wisconsin would want to engage in trade with someone from Honduras.  This unit explores the patterns and benefits of trade.

The most attractive feature of international trade is that it allows participating countries to increase their standard of livingThis is accomplished through efficiency and specialization.  Different nations specialize in the production of those goods and services for which their resources are best suited.  This is why countries want to trade with each other.  Trade involves the exchange of goods and services between countries.  The goods that we buy from other countries are called imports.  The goods that we sell to other countries are called exports.

Absolute Advantage and Comparative Advantage

Absolute advantage refers to how one country can produce a good or service more cheaply than another country.  This just means that for example, the United States can make aircraft cheaper than can say, Argentina.  Absolute advantage just looks at the production cost between two countries.  On the other hand, comparative advantage is the fundamental force that drives international trade.   Comparative advantage refers to the ability of a country to produce a good at a lower opportunity cost than another country. The reason comparative advantage is more important than absolute advantage is that  world output and consumption are maximized when each country specializes in producing and trading goods for which it has a lower opportunity cost or comparative advantage.  Economists don’t spend a great deal of time attempting to compute the goods in which countries have their comparative advantages.  International markets do that effectively on their own.  If a country has a comparative advantage in a good, it can produce that good cheaply relative to other goods.  Countries that engage in international trade naturally tend to export those goods for which they have a comparative advantage and import the rest.

The United States enjoys an abundance of money and human capital in comparison to most other countries.  This means that the United States is likely to have a comparative advantage in goods that are capital intensive.  To gain from international trade, the United States then specializes in exporting goods that use a high proportion of financial and human capital in their production.  That is why the United States is known for its exports of airplanes, financial services, and movies.  The example below should help to understand comparative advantage.

Let us compare the United States and Japan and see how comparative advantage, with its reliance on specialization, works.

Airplanes (per day)                Steel (tons per day)

Before Specialization

United States                       6                                            2,000

Japan                                     3                                            1,500

Total World Output           9                                            3,500


After Specialization

United States                    12                                                0

Japan                                    0                                            4,500

Total World Output          12                                            4,500


By moving towards specialization,  both countries were able to increase total world output.  This means there are more airplanes and steel available for consumption.  If we were to graph this using a production possibilities curve, this increase would be represented as economic growth ( a new line that is  upward and to the right of the original curve).

Balance of Trade

The value of a nation’s exports minus the value of its imports is called the balance of trade.  The United States during the last two decades has had a history of a negative balance of trade.  In 2017 our balance of trade was a negative $566 billion.  That means we purchased $566 billion dollars more in other country’s goods and services, than they purchased from us.  A trade deficit occurs when the value of a country’s imports exceeds the value of its exports.


The concern over continuing trade deficits and the rising international debt that accompanies them is that the United States is artificially enjoying a higher standard of living.  If we run a trade deficit of $566 billion for a year, that means the United States must come up with $566 billion from banks, businesses, and foreign lenders, to meet the shortfall.  As a country, “we are enjoying now, and paying later”.  You may be aware of some individuals who do this, and the problems that such a lifestyle produces.  Click here to view  historical data on the United States trade deficit. With the trade deficit of $566 billion for 2017 mentioned above, it marked the 42th straight year the United States has run a trade deficit.

1.  Balance of Trade Tracking Graph

2.  Ticker on the Number of American Companies sold to Foreign Interests

3.  US Trade Deficit Surges During Month of October 2017


Free Trade vs. Protectionism

Why do some individuals in society favor free trade, while others are opposed to it?  Why do world trade organization meetings bring out so many protesters?   This section will explore some of the arguments made in support of free trade, as well as those made for protectionism.

As the United States continues to lose manufacturing jobs to foreign countries, there is a growing interest in taking action to protect American manufacturers from foreign imports. If you look at our countries recent trade deficits, it would appear that as a nation we are addicted to products from foreign countries.  Should the United States take action to protect American businesses, or should it allow its citizens to continue to enjoy cheap consumer goods from around the world?

The Case For Free Trade

Free trade is a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions. Restrictions to trade include taxes and tariffs, and other non-tariff barriers, such as legislation and quotas.  Much of the argument in support of free trade has been made in the paragraphs above on comparative advantage.  Countries that engage in free trade will be able to increase their standard of living.  The case for free trade is one of the cornerstones of economics.  If efficient allocation of scare resources is a strong point of capitalism, then there is no reason why it shouldn’t be applied across national boundaries.  Those who believe in free trade think that if we can remove tariffs, import quotas, and other barriers to free trade, we will be better off.  There are those who disagree with free trade policies.  Their argument is made below.

The information in the paragraph above explains why free trade is desirable from the field of economics. But why are large, multinational corporations in favor of free trade?  Their belief may come from a different perspective. If you recall from unit 8, the concept of externalities was discussed. Corporations view regulations as “takings.” The argument is that regulations take corporate property–profits, for example, by making corporations comply with health, safety, and environmental regulation–just as government takes private property when it builds or widens a road.  Therefore, corporations should be compensated for takings that result from regulation. As the argument goes, if government wants corporations to protect the environment, the government should pay the corporations for the cost of doing so. This argument gets rid of “external costs” or “social costs”–costs that corporations impose on others and future generations by the pollution and exhaustion of natural resources, for example. The argument turns social costs into compensation for takings.  In other words, corporations want to operate free from “external” considerations such as the environment or pollution and have those “costs” passed on to the public.

The Case For Protectionism

Protectionism means different things to different people.  For our purposes, it will mean the government’s use of restrictions to protect domestic producers from foreign competition.

Free trade is often opposed by domestic industries that would have their profits and market share reduced by lower prices for imported goods (dumping). For example, if United States tariffs on imported sugar were reduced, US sugar producers would receive lower prices and profits, while US sugar consumers would spend less for the same amount of sugar because of those same lower prices. Economics says that consumers would necessarily gain more than producers would lose. However, domestic sugar producers have large financial incentives to politically oppose the lifting of tariffs. More generally, producers often favor domestic subsidies and tariffs on imports in their home countries, while objecting to subsidies and tariffs in their export markets.  Another criticism of free trade is that Latin America performed poorly since tariff cuts in 1980s and 1990s, compared to protectionist China and Southeast Asia.  Harvard economist Dani Rodrik says trade barriers should help poor nations build domestic industries and give rich nations time to retrain workers.

As reported by Manufacturing and Technology News (September 20, 2011) the Quarterly Census of Employment and Wages reports that in the last 10 years, the US lost 54,621 factories, and manufacturing employment fell by 5 million employees.  Over the decade, the number of larger factories (those employing 1,000 or more employees) declined by 40 percent.  US factories employing 500-1,000 workers declined by 44 percent;  those employing between 250-500 workers declined by 37 percent, and those employing between 100-250 workers shrunk by 30 percent.  http://www.manufacturingnews.com/  These losses are net of new start-ups. Not all the losses are due to offshoring. Some are the result of business failures.

  1.  What Is the Matter With Free Trade?

There are four main arguments for protectionism that are detailed below.  Those in favor of free trade would be highly critical of all four arguments.

The National Security Argument

This argument advances the idea that by protecting critical defense industries, a nation will not be dependent on foreign countries for essential defense related goods.  For example, what if an American bomb or aircraft was dependent on parts from a foreign country, and we were at war with that country?  Or what happens if nuclear material ends up in the wrong hands?  Many economists have found holes in such arguments, but our government to some degree has bought into it.

The Infant Industry Argument

This argument focuses on the perceived need for new industries to be protected from foreign competition so they can “catch up”.  This argument seems to not have much relevance to older industries like steel and textiles, but perhaps there is some validity to industries in the rapidly changing world of technology.  But even here, a better case might be made for developing countries to have their infant industries protected from mature industries in the United States, Europe, or Japan.

The Cheap Foreign Labor Argument

The reasoning in this argument  is that how are American workers able to compete with foreign workers who are paid extremely low wages.  The question then is how to deal with low-wage competition.  Free traders would say let’s deal with it by letting foreign countries produce the products that require backbreaking, low paying work. Those who favor protectionism, would say there are certain industries that need protection.

1. International Comparison of Hourly Compensation Costs

2.  China’s Average Hourly Labor Cost at $1.36 per Hour

3.  Suicides, Nets and Other Issues at Chinese Factories


The Employment Argument

This argument believes that restricting imports will increase domestic jobs.  There is little doubt that workers in the steel, textile, and auto industries have lost hundreds of thousands of jobs.  As free traders see it, if we restrict imports on these goods then other countries would retaliate by restricting imports of American goods that we excel in making.  For example, textile workers may lose 5,000 jobs, but the airline industry may pick up 5,000 or more jobs.  What should employers or the government do to help out displaced workers?  From an economist’s point of view, displaced workers should be retrained and possibly relocated to work in efficient industries.  The federal government should provide assistance in the retraining and relocation efforts.


Methods Used by Governments to Protect Industries

There are a number of methods available to governments to protect workers and industries.  Each is discussed below.

Embargo.  An embargo is a law that bars or forbids trade with another country.  The United States currently has an embargo with Cuba.  This means it is illegal to trade with these countries.  With the recent death of Fidel Castro, there is a chance that in the near future the embargo will be lifted. Embargos are generally not effective, because it is difficult to get other countries to agree to participate.

Tariff.  Throughout our nation’s history up until World War I, the tariff was the main source of federal income. A tariff is a tax on an import.  In earlier times they were known as custom duties.  Tariffs raise prices on imports and generate money for the government. In the early history of the United States, the government did not have to impose an income tax because it generated much of the income it needed through the collection of tariffs.  The United States, which has lower tariffs than most countries, charges less than 10 percent of the value of most imports.  During the Great Depression, many countries raised tariffs, helping to make the economic recovery even more difficult.  Tariffs raise the price of goods and services in the importing country.  Realizing their negative effect, the General Agreement on Tariffs and Trade was began in 1947.  The governments that participate meet periodically to negotiate lower tariff rates.  They now meet under a new name, the World Trade Organization. There are two main reasons governments use tariffs. The first, as described above, is to collect money to operate the government. The second reason is to impose tariffs is to protect domestic industries from foreign competition.

The history of tariffs in the United States starts with the 1789 Tariff Act. Its goal was spelled out as: “Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise… ”  The goal behind tariffs is to make foreign goods more expensive.  This, it is hoped, will generate a demand for cheaper domestic made goods.

The issue of trade and tariffs became a major issue in 2018 when President Trump began instituting tariffs against a number of countries. He believes that the implementing of tariffs will level the playing field between the United States and countries such as China. Some economists believe that slapping tariffs on goods will make it likely that the taxed country will retaliate and impose tariffs on US goods. This concern has some merit from history. In 1930 the United States, during the beginning of the Great Depression, imposed tariffs on hundreds of goods (Smoot-Hawley Act).  Foreign countries, mostly in Europe, responded by imposing tariffs on American made goods. Some economists cite the world-wide imposition of tariffs in the 1930’s as a contributing cause to the Great Depression.

1. Trade and Tariff Indicator Interactive Maps

2. U.S. Historical Tariff Rates

“I don’t know much about the tariff. But I know this much. … When we buy the manufactured goods abroad we get the goods and the foreigners get the money.  When we buy the manufactured goods at home, we get both goods and money.”  Abraham Lincoln


Quota.   A quota is a limit on the quantity of a good that can be imported in a given time period.  Our government has imposed quotas on products such as sugar, textiles, and automobiles.  By limiting supply, quotas have the effect of making those products more expensive.

While most economists are unanimous in their support for free trade, there is disagreement over what to do about our trade deficit, loss of jobs, and the working conditions of the world’s poor.


Issues of Global Trade in the Twenty-first Century

The concept of free trade is facing growing resistance from people in both wealthy and poor countries.  A new term, globalization, has become the battleground for the two opposing sides.  Supporters of free trade see globalization as a way to bring the benefits of capitalism and an increased standard of living to poorer nations.  Opponents of free trade believe that globalization represents an increase in the standard of living for a small few ( the wealthy and transnational corporations) and a decrease in the standard of living for everyone else.  Below is an outline of the two sides viewpoints.

The View From Those Who Favor Globalization

The list below represents ideas on why free trade and globalization have benefited people throughout the world.

1.  Increased Trade Means More Jobs and Higher Wages.  Increased trade means more jobs in the export sector  which pay more than jobs on the average.

2.  Globalization Means Governments Can Protect the Environment Better.  Economic growth gives poor governments money to clean up the environment.

3.  Living Standards Go Up From Foreign Investment.   Foreign companies invest money and create jobs in poorer countries which increases the standard of living.

4.  Globalization Helps to Keep the Peace.  If countries are engaged in trade and have a commercial relationship, they are less likely to engage in violent or political conflict.

5.  The WTO gives consumers more choices.  There are a number of items that we consume that we wouldn’t be able to if not for trade.

6.  Trade Raises Incomes.  If countries lower trade barriers, then trade increases, which means national and personal incomes will increase.

7.  Trade Stimulates Economic Growth.   Because of international trade, 12 million people in the United States owe their jobs to exports.  Jobs in export industries tend to pay better than non-export related jobs.

8.  The WTO System Shields Governments From Narrow Interests.  Lobbying from interest groups might not focus on the interests of the whole economy.  The WTO prevents one industry in a country from keeping out investment and competition in other industries.


The View From Those Who Are Opposed to Globalization

1.  The WTO Only Serves the Interests of Multinational Corporations.   WTO rules and regulations are established in secret meetings and are formed by the input of corporations.  Environmental, human rights, and labor groups are not allowed a place at the negotiation table.

2.  The WTO is a Stacked, Secretive Court.  In trade disputes, the WTO’s dispute panels consist of three trade bureaucrats who are not screened for conflicts of interests.

3.  The WTO Tramples Over Labor and Human Rights.   The interests of labor groups and human rights groups are ignored.  Developing countries consider labor standards to be “barriers to free trade”.  Potential solutions are blocked by the WTO, which has ruled, for example, that it is illegal for a government to ban a product based on the way it is produced ( e.g., with child labor).

4.  The WTO is Destroying the Environment.  Multinational corporations use the WTO to dismantle environmental protection that they perceive as a barrier to free trade.  For example, in 1998, the WTO declared illegal a provision of the Endangered Species Act, which required that shrimp sold in the United States to be caught with an inexpensive device that allows endangered sea turtles to escape.

5.  The WTO is Involved in the Deaths of Many Human Lives.  The WTO has fiercely defended the intellectual copyrights and patents of multinational corporations at the expense of the health and lives of many people around the world.   For example,  the South African government was threatened with a WTO sanction over proposed national health care laws that would encourage the use of generic drugs over name brand drugs.

6.  The United States Adoption of the WTO was Undemocratic.   Congress approved the WTO on December 1, 1994, under a “fast track” arrangement during a lame-duck session of Congress.  “Fast track” limits public debate by not allowing amendments.  Had the agreement been voted on as a treaty, requiring two-thirds majority in the Senate, it probably would have been defeated.

7.  The WTO Undermines Local Development and Penalizes Poor Countries.  Local policies that reward companies for hiring local residents, use domestic materials, or adopt environmentally sound practices are considered illegal under the WTO, which requires all members to follow the “most favored nation” provision to all member countries and all corporations from these countries equally, regardless of their track record.

8.  The WTO is Increasing Inequality.   The gap between the rich and poor has increased over the last few decades that have emphasized free trade.  WTO rules have increased the pace of this inequality, by opening up countries for foreign investment and by making it easier for production to go where the labor is cheapest and environmental costs are low.  This has the effect of pulling down wages and environmental standards because countries have to compete with one another globally.

9.  The WTO Undermines National Sovereignty.   By creating a court that does not have an allegiance to any nation, but the power to penalize economically countries which do not follow its rulings, the WTO has replaced national elected governments, with an unaccountable government created by corporations.  Under the WTO, governments have a very difficult time acting in the public interest.

1.  W.T.O. Rules Against Popular U.S. Meat Labeling Law

2.  Corporation Sues Canada for $250 million over Fracking Ban

3.  Law Preventing Teen Smoking Ruled Against by WTO

4.  Trade Rules in TTP Would Forbid Favoring Local Businesses


Free Trade or Fair Trade?

Since the end of World War II, there has been an effort by nations to meet and negotiate a reduction in trade barriers.  The General Agreement on Tariffs and Trade (GATT) was created in 1947 with twenty-three countries participating.  It has expanded to 110 nations and since 1995 is now overseen by the World Trade Organization (WTO).  The WTO is an international organization that oversees trade between countries.  But over the past few decades, regional trading blocs have emerged.  A regional trading bloc is an agreement among a group of countries that provides for lower trade barriers, such as tariffs, for its members, compared to the rest of the world.  The European Union is a trading bloc, as is the North American Free Trade Agreement (NAFTA).   NAFTA went into effect on January 1, 1994.  It is a trade agreement between the United States, Canada, and Mexico.   The goal is to phase out tariffs between the three countries.   The NAFTA document is 1,700 pages long. The treaty itself is “only” 741 pages, but there are an additional 348 pages of annexes and 619 pages of footnotes and amplifications. Do you think that free trade and 1,700 pages of bureaucratese amount to a contradiction?

Supporters of free trade agreements such as NAFTA, believe it will stimulate growth in the economies of all member nations.  Most economists support free trade and regional trading blocs as an economic concept.  But many economists, as well as politicians and world citizens,  have become aware of some of the problems associated with free trade and are now advocating for something called “fair trade”.  What is fair trade?  As in most economic concepts, there are many definitions.  Supporters of fair trade would say that regional trade agreements such as NAFTA, or international trade organizations such as the WTO,  are created for the benefit of wealthy nations.   Fair trade, then means a trade agreement where all member countries receive fair and equal benefits.   Critics of free trade contend that agreements such as NAFTA are designed to benefit the business community, and in particular,  large multinational corporations.  Fair trade emphasizes that other segments of society, such as labor and environmental groups,  should have a voice in constructing trade agreements.  Fair trade agreements emphasize  environmental sustainability, respect for cultural identity, public accountability, financial and technical support from wealthy nations to poorer nations, and that workers be paid a living wage.  Visit the link below to see how fair trade has influenced the coffee industry.


1.  What “Free trade” Has Cost the World

2.  How Decisions Made by the WTO and NAFTA Overrule US Law

3.  Fair Trade Coffee

4.  One Year After New US-Korea FTA, Exports Down 9%, Imports From Korea up 30%

5.  Youtube Video On Trans-Pacific Trade Agreement

6.  What Is Really Behind the EU-US Free Trade Agreement

7.  How the TPP is Good for Corporations, But Bad For Everyone Else

8.  European and Pacific Trade Agreements Harm Explained

9.  Caught on Tape: What Happened to a European Parliament Member When He Tried to Read the TTIP Text



What Do Free Trade Agreements Really Mean to Workers

Firstly ‘trade’, which goes on all the time anyway, is not the same as ‘trade agreements’, which are effectively irreversible commitments made at the level of international law, i.e. beyond changes at the state or federal level. Trade agreements are negotiated by governments but on behalf of corporations, and in the interests of transnational corporations. Although the pretense is maintained that ‘trade’ is primarily about goods, most trade for modern economies such as the United States or Great Britain is in ‘services’, in which financial services and investment play a major part. When countries commit services to international trade agreements, the liberalization of those services is then locked in i.e. a commitment to keep the service open to transnational investors.

Trade-in-services trade commitments involve states giving transnational corporations rights to come in and operate and to keep operating, without limits on their activities or on the number of transnational corporations that enter the sector, with rights to the same or better treatment than that which national companies receive (including any subsidies), and rights to sue the government in an international jurisdiction if there is any attempt, by any level of government, to limit  those rights or to introduce any regulation which might, even  incidentally, limit corporations’ expected future profits.

As corporate rights are thus increased via trade commitments, the rights of governments to control them are correspondingly diminished and democratic control over the activities of corporations is forfeited. Trade agreements are led by the financial and business centers with almost no input from labor, human rights, or environmental groups.  A framework is pushed on the public that what is good for banks and large multinational corporations will be good for workers.  Government trade representatives work with regulators to pre-emptively set up a legal framework where any new regulations a level of government might pass would have to be in legal compliance with the new trade agreement.

One goal of free trade agreements is to ensure present and future profits for corporations by putting in place rules against governments having the ability to adopt strategies to limit profits.  This limiting of corporate profits, including expected future profits, is called ‘expropriation’. The provision for corporations to sue governments in trade disputes is called ‘investor protection’. The experience where it has been included in other trade deals such as in the North American Free Trade Agreement (NAFTA), between the US, Canada, and Mexico is that it results in either very big payouts by governments to corporations or to have a chilling effect on proposed legislation e.g. social or environmental legislation. 1

1.  May 2014 Report on Trade Between the US and South Korea since New Trade Agreement


Understanding Exchange Rates

If you have done any traveling around the world, you have probably noticed that there are different currencies.  When traveling to another country, a person will most likely need to purchase items with the local currency.  Currencies from different  countries can be exchanged in foreign exchange markets.  The amount of one country’s currency that can be traded for a unit of another country’s currency is called the exchange rate.  For example, let’s say a traveler goes fro the United States to Canada.  If the exchange rate is one dollar for 1.5 Canadian dollars,  that would mean that an American traveler exchanging $10, would receive back $15 in Canadian dollars.

The exchange rates for currencies are determined by the forces of supply and demand   Changes in supply or demand will affect the equilibrium exchange rates.   For example, let’s say that in the United States interest rates went up.   A raise in interest rates will mean an increase in the demand for U.S. dollars,  since investors around the world will want to buy dollars to invest in U.S. assets because of higher returns.   Or if prices in the United States fell,  there would also be an increase for dollars.  For example, foreign tourists might want to visit a popular vacation spot, such as Hollywood,  because it would be cheaper.

When the value of a currency increases, it is called appreciation.    When a country’s currency appreciates, two things generally occur.  First,  the increased value of the exchange rate makes imports less expensive for the residents of the country where the exchange rate appreciated.  For example,  if the U.S. dollar appreciates against the Japanese yen, then Japanese televisions will become less expensive for U.S. consumers.  U.S. consumers like an appreciated dollar, because it lowers the cost of  living and keeps inflation in check.   Secondly, an increased value of the exchange rate makes U.S. goods more expensive on world markets.  This is bad news for the firms that export goods such as car manufacturers or wine growers.

When the value of a currency decreases, it is called depreciation.  When a country’s currency depreciates, two things generally occur.  First,  if the U.S. dollar depreciates against the Japanese Yen,  then Japanese imports such as automobiles, would become more expensive, thereby, raising the cost of living.   Secondly,  U.S. goods would become cheaper on world markets.   Firms that export goods would be happy, whereas consumers of foreign products would not.   With exports increasing and imports decreasing,  the United States could reduce its current trade deficit.  This is a position some politicians and economists advocate.  The argument made against devaluing U.S. currency is that if the dollar falls,  returns measured in foreign currencies will decrease.  These investors will find dollar investments less attractive.  To keep investors from withdrawing their funds from the United States, interest rates would have to increase.

To sum up, a strong dollar leads to a decrease in exports and an increase in imports.  A weak dollar leads to an increase in exports and a decrease in imports. With this is mind, an important question to ask is can a country intentionally manipulate its currency to encourage exports?

1.  The Demise of the Dollar?

2.  Economist Michael Hudson Speaks on the US Currency War


The Economics of Development 

economicdevlopmentIf one looks at the economic conditions around the world, it is not difficult to notice that some countries are more economically advanced than others.  The United States has an advanced economy and a high standard of living, while a country such as Bangladesh, does not.  How does a developing nation become an advanced one?

Obstacles to Economic Development

Although developing countries are aware of the conditions and criteria needed to develop,  many nations face economic, institutional, and cultural conditions that impede economic growth. Below is a short list of obstacles faced by developing nations.

1)  Lack of natural resources.  Some nations lack mineral deposits, arable land, or energy sources.

2)  Population Concerns.  Some nations are overpopulated and/or have high population growth rates.  This means it is difficult to save, invest, and increase productivity since there are high levels of unemployment present.

3)  Shortage of capital goods such as public utilities, machinery, and factories.   A lack of capital goods contributes to a low labor productivity.

4)  Lack of economic diversity.  Many developing countries are heavily reliant on the production of one product for export.

5)  Institutional and cultural factors.  Factors such as political corruption and bribery can hinder economic development.

6)  Limited access to foreign markets.  Advanced nations often have trade barriers that prevent goods from developing nations to be sold.

Economic Growth Strategies

Since the end of World War II, poor countries have pursued different paths for economic growth. One strategy has been import substitution.  Import substitution is when countries use trade barriers to protect domestic production for foreign imports.  The belief of this strategy is that local businesses need protection so that they have time to mature and can then compete internationally.  Countries such as Mexico, Brazil, and Argentina have used this strategy.  Another strategy for development is called export-led growth.  This strategy promotes growth through the export of manufactured goods.  Products for export are often targeted subsidized by the government.  Countries such as South Korea, Malaysia, and China have adopted export-led growth as a development strategy.


Aid to Developing Countries

Dissatisfied with the international trading system, developed nations have demanded that advanced nations improve the climate for international development.  In response, institutions such as the World Bank and International Monetary Fund have been developed to support developing economies.

World Bank.  Because of the devastating effects of the Great Depression, after World War II, the advanced nations decided to create international agencies to promote economic stability.  The World Bank is an international agency designed to provide loans to developing nations with the aim of reducing poverty and promoting economic development.  Loans are awarded to member nations for specific development projects such as hospitals, schools, highways or dams.  The World Bank is also involved in debt-refinancing activities.


1.  The World Bank

International Monetary Fund.  The International Monetary Fund (IMF) was created as a  bank for the central banks of member nations. The IMF borrows money to nations running temporary deficits. The loans, which must be paid back, have conditions attached to them.  The country must agree to enact economics and fiscal policies recommended by the IMF.  The IMF has sometimes demanded that deficit nations undergo severe austerity programs including reductions in public spending,  to privatize public holdings, and to open their markets to more foreign competition and exports.  These conditions have met strong resistance from deficit nations who believe they contribute to their economic problems.

1.  The International Monetary Fund

Competing Visions and Directions for Economic Development

As we enter the twenty-first century, there are competing ideas for how countries should develop economically.  Along with the competing ideas, is the tension that exists between advanced and developing countries.  In order to make progress, developing countries must displace workers in the advanced countries. The United States, with the most advanced economy in the world, is competing with other countries to win over adherents to their vision of economic development.

washingtonconsensusThe Washington Consensus Model.  This model was born out of the collapse of the communist economies of the Soviet Union and Eastern Europe in the late 1980’s.  Developing countries outside the Soviet Bloc began looking for an alternative to the socialist model of development.  In John Williamson’s origination of the term Washington Consensus, he outlined ten policies developing countries should pursue.  They are:

1.  Fiscal Discipline.  An emphasis on government’s not running deficits.

2.  Tax Reform

3.  Trade Liberalization.  This means opening domestic markets to foreign competition.

4.  Privatization.  The selling of public assets to private businesses.

5.  Deregulation.  Reduction in business and environmental regulations.

The Washington Consensus is a macroeconomic policy designed to promote growth in developing countries through an emphasis on opening a country’s market to international trade and investment.  Supporters say it has worked, while opponents suggest otherwise. Opponents suggest that the Washington Consensus has shifted wealth from poor developing countries (most frequent examples being South American countries) to multinational corporations in advanced countries such as the United States.

The Mixed Economy/Socialist Model.   As was mentioned above, many people believe the Washington Consensus has not worked and are looking for alternative models.  One such model is reincorporating elements of socialism to the economy so that wealth can be redistributed to the poor.   Socialistpolitical leaders in Latin America such as Venezuelan President Hugo Chavez and Bolivian President Evo Morales are vocal and well-known critics of the Washington Consensus.

1.  Beyond the Washington Consensus?






Bigelow, Bill

2002  Rethinking Gobalization: Teaching for Justice in an Unjust World  Milwaukee:   Rethinking Schools Press

Carbaugh, Robert J.

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Parkin, Michael      2000  Economics (5th Edition)  New York:   Addison- Wesley

Slavin, Stephen L.      1999   Economics  (5th Edition)   New York:   Irwin McGraw-Hill

Taylor, John B.

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Tregarthen, Timothy.

2000 Economics (2nd Edition) New York:  Worth Publishers

Tucker, Irvin B.         1995  Survey of Economics   New York:  West Publishing Company

1  The Real Force Behind the EU/US Trade Agreement by Linda Kaucher



   actionMovies Relevant to This Unit

Below are a list of movies that exhibit economic concepts learned in this unit.



books03  Books Relevant to This Unit

Below are a list of books that exhibit sociological concepts learned in this unit.

1.  Globalization and Its Discontents   by Joseph E. Stiglitz



Copyright ©2007, 2014 Glenn Hoffarth All Rights Reserved


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