Lecture 12 The Balance of Trade and International Transactions Econ 340News: Feb 17-23 • Leaders of US, Canada, and Mexico met in Mexico, marking the 20th anniversary of NAFTA -- WSJ: 2/20 | Proquest | NYT: 2/19 | Proquest | FT: 2/19 | CTools – Barak Obama, Stephen Harper, and Enrique Peña Nieto, the met in Toluca, Mexico, for their "Tres Amigos Summit" marking the 20th anniversary of the North American Free Trade Agreement, NAFTA. They announced several agreements, to ease travel among the countries for people and for goods. But the meeting was a disappointment, in that Obama faces opposition at home on both trade and immigration. – In the 20 years of NAFTA, jobs have not moved from the US and Canada to Mexico, as some feared, but neither has Mexico's income risen relative to the others, as many hoped. Intra-regional trade has grown, but not faster than trade with the rest of the world. – Obama's trade representative, Michael Froman, argues that the negotiation of the Trans-Pacific Partnership, TPP, which includes Canada and Mexico, represents Obama delivering on his campaign promise to "renegotiate NAFTA." Critics scoff. • France making changes to attract FDI -- NYT: 2/17 | Proquest | FT: 2/17 | CTools – President François Hollande met with foreign investors and promised to limit taxes and simplify regulations, in order to make France more friendly for inflows of foreign direct investment. He also promised grants for foreign startups. – As a socialist president, not previously very friendly to business, his time in office has been marked by a slump of inward FDI. He responded recently to rising unemployment with a "responsibility pact" that would cut labor costs and simplify labor regulations. – Corporate taxes in France are currently higher than in Germany, and he promises to "harmonize" with Germany by 2020. • The US Fed issued its final rules on US operations of foreign banks -- NYT: 2/19 | Proquest | FT: 2/19 | CTools – In the works for several years, these rules have now been weakened somewhat for foreign banks, but they are still viewed as harsh. Mainly, the Fed pushed back by one year the deadline for compliance. – The aim is to lessen the likelihood that the US government will be asked to bail out banks when they get in trouble, including the US operations of foreign banks. To accomplish this, the Fed is requiring larger foreign banks to hold greater "capital" in their US operations, not just have access to capital held abroad. – Though the rules on foreign banks are the same as have applied for some time to US banks, the foreign banks still complain that the rules create an "uneven playing field." Officials in Europe have said they might retaliate against US banks in Europe. Econ 340, Deardorff, Lecture 12: Trade Balance 2News: Feb 17-23 • Leaders of US, Canada, and Mexico met in Mexico, marking the 20th anniversary of NAFTA – Barak Obama, Stephen Harper, and Enrique Peña Nieto, the met in Toluca, Mexico, for their "Tres Amigos Summit" marking the 20th anniversary of the North American Free Trade Agreement, NAFTA. They announced several agreements, to ease travel among the countries for people and for goods. But the meeting was a disappointment, in that Obama faces opposition at home on both trade and immigration. – In the 20 years of NAFTA, jobs have not moved from the US and Canada to Mexico, as some feared, but neither has Mexico's income risen relative to the others, as many hoped. Intra-regional trade has grown, but not faster than trade with the rest of the world. – Obama's trade representative, Michael Froman, argues that the negotiation of the Trans-Pacific Partnership, TPP, which includes Canada and Mexico, represents Obama delivering on his campaign promise to "renegotiate NAFTA." Critics scoff. Econ 340, Deardorff, Lecture 12: Trade Balance 3Econ 340, Deardorff, Lecture 12: Trade Balance 4News: Feb 17-23 • France making changes to attract FDI – President François Hollande met with foreign investors and promised to limit taxes and simplify regulations, in order to make France more friendly for inflows of foreign direct investment. He also promised grants for foreign startups. – As a socialist president, not previously very friendly to business, his time in office has been marked by a slump of inward FDI. He responded recently to rising unemployment with a "responsibility pact" that would cut labor costs and simplify labor regulations. – Corporate taxes in France are currently higher than in Germany, and he promises to "harmonize" with Germany by 2020. Econ 340, Deardorff, Lecture 12: Trade Balance 5Econ 340, Deardorff, Lecture 12: Trade Balance 6News: Feb 17-23 • The US Fed issued its final rules on US operations of foreign banks – In the works for several years, these rules have now been weakened somewhat for foreign banks, but they are still viewed as harsh. Mainly, the Fed pushed back by one year the deadline for compliance. – The aim is to lessen the likelihood that the US government will be asked to bail out banks when they get in trouble, including the US operations of foreign banks. To accomplish this, the Fed is requiring larger foreign banks to hold greater "capital" in their US operations, not just have access to capital held abroad. – Though the rules on foreign banks are the same as have applied for some time to US banks, the foreign banks still complain that the rules create an "uneven playing field." Officials in Europe have said they might retaliate against US banks in Europe. Econ 340, Deardorff, Lecture 12: Trade Balance 7Econ 340, Deardorff, Lecture 11: FDI 8Econ 340, Deardorff, Lecture 11: FDI 9Econ 340, Deardorff, Lecture 11: FDI 10Econ 340, Deardorff, Lecture 11: FDI 11Econ 340, Deardorff, Lecture 12: Trade Balance 12 Outline: The Balance of Trade and International Transactions • What Is the Balance of Trade? • What the Balance of Trade Does Not Mean • International Transactions – Current Account – Financial Account • What the Balance of Trade Does Mean – From Balance of Payments Accounting – From National Income AccountingEcon 340, Deardorff, Lecture 12: Trade Balance 13 What Is It? • Definition: Balance of Trade = Exports minus Imports – Defined for • Merchandise (i.e., goods) = “Balance on Merchandise
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