The Global Rules of Trade
What do countries do to ensure global trade is fair?
Governments have applied rules and regulations to systems of trade to make sure companies are using the same guidelines when it comes to global trade.
The world of trade has come a long way since early people exchanged beads for textiles. Products and services are traded around the world between big businesses, small businesses, individuals, nonprofit groups, and a number of other entities. How do governments make sure that everything is fair? How do they ensure that no one business or country gains a monopoly?
When countries import goods, the demand for locally made goods might decline. If this happens, local economies make less money, and workers could lose their jobs. A town that is home to a factory where 1,000 people work will suffer if the company goes out of business or moves.
If it can’t compete with products made in China, a company might decide to move its operations to another country where labor is cheaper. What would happen to the stores, restaurants, doctors’ practices, and other places of business if 1,000 people lost their jobs and no longer had money to spend?
To protect companies and workers, governments often try to manage trade in two basic ways: by restricting imports and encouraging exports. They put policies and regulations in place that make it easier and cheaper for people to buy local products. These regulations are known as trade barriers because they slow or limit the flow of goods between two countries.
One of the most common barriers to trade is a tariff. A tariff is a fee charged on every imported good, usually calculated as a percentage of the import’s value. For example, if the United States imposes a 10-percent tariff on imported French wine, then a retailer bringing a $100 shipment of French wine into the United States will have to pay a $10 tariff to the U.S. government.
To recover the tariff’s cost, the importing company will usually increase the price of the wine to American buyers. Tariffs can therefore make imported goods more expensive than locally made goods, which makes people more likely to buy domestic products.
The United States and its allies have trade restrictions on the export of weapons, military technology, and other technologies with possible military use to countries suspected of developing weapons of mass destruction.
This chart shows a history of the United States’ trade imbalance with China.
credit: Wikideas1
Tariffs are usually collected for a government by a customs agency, such as the U.S. Customs and Border Protection agency. For some countries, tariffs are a significant source of revenue.
A government can also influence trade through subsidies. A subsidy is an amount of money the government pays to a local company. This money helps the company produce its goods and charge customers lower prices. When the local company can charge a lower price, it can better compete with foreign imports.
A quota limits the quantity of a particular good that can be imported. By limiting access to imports, quotas make a product scarce. The government is trying to ensure that any demand for a good for more than the quota amount is filled by domestic producers instead of foreign producers. In the 1980s, the United States imposed a quota on sugar imports. The quota was put in place to protect American sugar producers that faced competition from lower-priced, foreign suppliers.
An embargo is a complete ban on the trade of a certain good or with a specific country. In 1962, President John F. Kennedy declared a trade embargo between the United States and Cuba because of the Cuban government’s ties to the communist Soviet Union. A version of the trade embargo still exists today, making it one of the longest trade embargos in U.S. history. Have you heard stories about trade embargoes in the news?
OTHER CONSEQUENCES
While tariffs, subsidies, and quotas give an advantage to domestic companies and workers, they can also have some negative effects. Import tariffs and quotas raise the prices of imported goods for consumers. In addition, when local producers do not have to compete with foreign producers, they can charge higher prices to local customers.
Subsidies make it easier for local companies to sell their products at cheaper prices and still make a good profit. They can also export their goods to other countries at these low prices. Producers in these countries can suffer, which means workers could lose their jobs.
What can some of these negative effects look like in real life? In 2011, the Argentinian government imposed a 35-percent tariff on imported cell phones, computers, and tablets. The tariff was designed to protect manufacturing workers in Argentina.
Companies that manufactured products in Argentina would not be subject to the tariff. The government hoped that this would encourage foreign companies to set up manufacturing plants in Argentina, which would bring many benefits, including employing more workers.
The high prices caused many stores to stop selling Apple products. Because Argentinian consumers still wanted these products, they turned to the black market or went online to buy them. Some even traveled to nearby Chile to buy Apple products at lower prices.
In 2017, the Argentinian government announced that it would remove the tariff on imported computers and tablets. It is expected to remove tariffs on cell phones in the coming months.
Governments sometimes use sanctions to restrict imports and exports for political reasons. A sanction is a trade restriction that is meant to punish or influence another country for human rights violations or acts of aggression.
REDUCING TRADE BARRIERS
Many people feel that the global market would be better off if trade barriers were removed. Without trade barriers, it would be easier and cheaper for people around the world to get the goods they want and need.
What if one country removes its trade barriers but another does not? Countries without the barriers could be hurt when foreign competitors sell goods at cheaper prices. In addition, because their goods would still be subject to tariffs and quotas, they would have a harder time exporting goods. To protect themselves, countries typically enter into trade agreements that require all parties to reduce trade barriers. With these agreements, importing and exporting goods can be easier for all participating countries.
WTO
After World War II, many countries wanted to encourage international trade. They believed that trade among nations would help each nation rebuild its infrastructure and economy after the long, hard war.
Members of the WTO
In 1947, 23 countries signed the General Agreement on Trade and Tariffs (GATT). The agreement reduced industrial tariffs, quotas, and other trade restrictions. More countries gradually joined GATT. Changes to the original agreement reduced trade barriers even more. By 1994, 123 nations had signed the agreement.
The countries that had signed GATT agreed that a formal organization was needed to deal with global trade issues. The result was the World Trade Organization (WTO). Like GATT, the WTO works to reduce trade barriers. While GATT was a set of rules for global trade, the WTO is an organization that regulates international trade. It works to ensure that trade between countries flows smoothly. The WTO is run by its member governments. As of July 2016, there were 164 member countries.
While the WTO was created to promote free trade, critics claim the organization has favored certain countries over others—in particular, developed countries at the expense of poorer, less-developed nations.
Protesting WTO policies in Jakarta, Indonesia
credit: Jonathan McIntosh
Formed in 1995, the WTO acts as a forum for multilateral trade negotiation, administers multilateral trade agreements, rules on trade disputes, and reviews national trade policies.
The practice of helping a country’s industries by placing tariffs on competitive foreign imports is called protectionism.
Capitalism is an economic system where a country’s trade is controlled by private companies and individuals who make a profit instead of being controlled by the government. In a capitalist system, companies want to grow to earn more profits. Globalization is often the best way to grow. You can watch a video that explains capitalism at this website.
Crash Course 33
Without some trade protections, developing countries are often unable to start new industries or diversify into other industries. Workers in poor nations are often exploited to produce cheap goods that benefit rich corporations and countries.
In addition, some people claim that the WTO and its free-trade policies do not consider the environment. Free trade allows countries with minimal environmental protections in place to export goods around the world. Others believe the WTO’s free-trade policies reduce cultural diversity and encourage the growth of large, multinational corporations.
TRADE TREATIES
Smaller groups of nations have also joined together in regional trading blocs to increase trade. Trade agreements have been made among countries in North America, Europe, Southeast Asia, South America, Central America, and Africa. While each agreement is different, all the agreements have a common goal: to increase trade and prosperity in the participating countries by reducing trade barriers.
In 1993, the creation of the European Union (EU) reduced trade barriers among its member countries. The EU also made trade between countries easier by introducing a single currency called the euro that most member nations use.
The United States participates in several regional trade agreements, including the North American Free Trade Agreement (NAFTA). NAFTA was signed in 1994 and involves the United States, Mexico, and Canada. Under the agreement, the three countries cut import tariffs to zero for almost all manufactured products traded between them.
As with most trade agreements, NAFTA brought advantages and disadvantages. It significantly increased trade among all three countries. Consumers paid lower prices for many goods. Some American industries also experienced gains. For example, American farmers had a new, large market for sales. Even though NAFTA caused some domestically produced goods to be replaced by imported goods, the new markets for each country made up for the loss of domestic production.
Some American industries, such as the auto industry, shifted manufacturing work to Mexico, where labor was less expensive. This caused the loss of many manufacturing jobs in the United States. And although manufacturing jobs increased in Mexico, they were often low-paying.
In May 2017, the White House notified the U.S. Congress that it intended to renegotiate NAFTA. President Donald Trump (1946–) has indicated that the United States may withdraw entirely from the deal if a satisfactory renegotiation does not occur.
WORLD’S BIGGEST STORE
What do all of these trade regulations and agreements mean for the real world? Have you ever been to a Walmart? In 1962, Walmart opened its first store in Arkansas. By the 1970s, Walmart started to expand across the country and, by the 1990s, Walmart had stores in every area of the United States. It was the country’s top retailer.
Some U.S. companies moved their manufacturing to Mexico to take advantage of less strict environmental regulations. This created an environmental problem there. In Mexico, maquiladoras, or export assembly plants, mainly produce clothing, cars, and electronic equipment. While providing jobs to the local people, the plants have also caused significant damage to the environment. They generate hazardous waste products such as alcohols, benzene, acetone, acids, and plastic and metal debris that leak into the land and water. They also emit polluting gases into the atmosphere. According to estimates by the Sierra Club, the damage cause by toxic pollution is more than $36 billion annually.
Sierra Club NAFTA Mexico PDF
Every year, the Economist magazine publishes the Big Mac Index. This index measures the price of a Big Mac hamburger sold at McDonald’s restaurants worldwide. It compares the burger prices to the exchange rate of other currencies. Many experts have found that the Big Mac Index is often a relatively accurate predictor of changes in exchange rates. Check out the Big Mac Index at this website. Which countries offer Big Macs for less money? Which charge more? What do these countries have in common?
Economist Big Mac
Walmart Supercenter in Shenzhen, China
credit: WhisperToMe
In 1991, Walmart opened its first store in Mexico, then expanded into Canada. In 1996, the company opened its first stores in China.
As it grew into different countries, Walmart used different strategies. In some places, Walmart took over an existing local store or created an alliance with a local business. For example, in Mexico, Walmart formed a 50-50 joint venture with Cifra, Mexico’s largest retailer. Cifra provided operational expertise for the Mexican market.
Walmart understood that it needed to adapt to local markets and cultures. In China, Walmart experimented with different store formats and products to see which appealed the most to Chinese customers. Stores were stocked with merchandise mainly manufactured in China by global suppliers or by local producers. This balanced the Chinese government’s pressure to sell locally made goods with customers’ demands for high-status U.S. goods.
As of 2017, Walmart had more than 11,000 stores operating under multiple banners in 28 countries. It also operated e-commerce websites in 11 countries. Revenue in fiscal year 2017 was $485.9 billion.1
As more countries have agreed to reduce trade barriers, global trade flows have multiplied more than 20 times worldwide. Many experts believe this massive explosion in global trade has increased productivity, improved living standards, and increased prosperity around the world.
For already industrialized nations such as the United States, the emergence of new manufacturing countries has been both positive and negative. As the economies of developing nations grow, they have become large markets for U.S. and European exports. These opportunities have benefited many American companies and workers.
Many developing countries have lower labor costs than those in industrialized nations, which gives them an advantage when producing manufactured goods. This has led to an increase in imports of manufactured goods that are cheaper than locally produced goods. As a result, some U.S. companies have gone out of business or moved their manufacturing facilities to developing countries. The loss of jobs for American workers, particularly good-paying manufacturing jobs, has been difficult for many communities.
As with most things, globalization is a mix of positive and negative outcomes. In the next chapter, we’ll take a look at how this works in terms of global politics!
VOCAB LAB 
Write down what you think each word means. What root words can you find to help you? What does the context of the word tell you?
adapt, capitalism, embargo, monopoly, protectionism, quota, subsidy, tariff, and trade agreement.
Compare your definitions with those of your friends or classmates. Did you all come up with the same meanings? Turn to the text and glossary if you need help.
•What might the world be like if there were no regulations on international trade?
•Do rules and regulations make it easier for organizations to protect the environment?
WINNERS OR LOSERS?
Global trade has many benefits. It lowers the price of goods, increases wages, and fuels economic growth. Yet the global economy has both winners and losers.
•To further understand this issue, you can explore the following articles or research some additional information on your own.
•“More Wealth, More Jobs, but Not for Everyone: What Fuels the Backlash on Trade”
Trade backlash
•“The Toughest Questions About Global Trade”
CBS global trade 2016
•Based on what you learn, consider the effects of global trade on individuals, companies, and governments. For example, think about the effect of global trade on a multinational toy corporation, an American factory worker, a Chinese factory worker, an Indian software engineer, an American chief executive officer, a local toy retailer, the United States government, and the Chinese government. Who are the winners and losers? Create a chart that shows the effects of global trade on the different groups.
•Do you think that increasing global trade will have a positive, negative, or neutral effect on the world overall? What about for the United States? Do you believe that the United States should enter into more free-trade agreements? Or do you believe that trade protectionism is a better strategy? Explain your position.
To investigate more, consider that as globalization changes the economy, local workers and businesses can be hurt by disappearing sales and jobs. What policies can the government put in place to support workers and businesses hurt by globalization?
