Chapter Objectives Comparative advantage and the gains from trade Exports and imports Economic effects of tariffs and quotas Arguments for protectionism 37-1 Chapter 38 - International Trade

Some Key Facts What is the import/export situation with goods? Services? U.S. trade deficit in goods $735 billion in 2014 U.S. trade surplus in services $231 billion in 2007 Who is the largest U.S. trade partner? Trade deficit with China $257 billion in 2007 – 2014? $342 billion in

World Exports Germany United States China Japan France Netherlands United Kingdom Italy Source: World Trade Organization Percentage Share of World Exports, Selected Nations, , 13%

Why should/do nations trade? Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods 37-5

Comparative Advantage Assumptions Two nations Same size labor force Constant costs in each country Different costs across countries U.S. absolute advantage in both Opportunity cost ratio Slope of the curve Vegetables sacrificed per ton of Beef 37-6

Vegetables (Tons) Beef (Tons) Vegetables (Tons) Beef (Tons) (a) United States (b) Mexico A B Comparative Advantage 37-7

Self-sufficiency output mix US – 12V, 18B Mexico – 4V, 8B Specialization and trade Produce good with lowest domestic opportunity cost Opportunity cost of 1 ton beef 1 pound of vegetables in U.S. 2 pounds of vegetables in Mexico Comparative Advantage 37-8

Terms of trade U.S. 1B = 1V U.S. will sell 1B for more than 1V Mexico 1B = 2V Mexico will pay less than 2V for 1B Settle between the two Depends on supply/demand factors Assume 1B = 1.5V Comparative Advantage 37-9

Gains from trade Self-sufficiency output mix US – 12V, 18B Mexico – 4V, 8B Total – 16V, 26B Complete Specialization US – 30B Mexico – 20V Complete specialization More of both goods More efficient resource allocation Homework!!!!!!!! Comparative Advantage 37-10

Benefits of Free Trade The case for free trade? Promote efficiency If China can produce steel cheaper than the U.S., shouldn’t they? If the U.S. can create useful technology more efficiently than China, shouldn’t they? Promote competition More and better stuff! Adapt or Die, right? Ties nations together economically with diplomatic spillover 37-11

Costs of Free Trade What if you’re a steelworker in Pittsburgh? What if you’re a software developer in China? Americans benefit from cheaper steel, but the nightly news has no problem profiling the loss of steel jobs The benefits are spread out and hard to see, the harmed are easily identified Special interests will mobilize, seeking protection…examples?

Supply and Demand Analysis World price Domestic price with no trade World price > domestic price Export surplus Export supply curve World price < domestic price Import shortage Import supply curve 37-13

Price (Per Pound; U.S. Dollars Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars (a) U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand DdDd SdSd U.S. Export Supply U.S. Import Demand a b c x y Surplus = 50 Surplus = 100 Shortage = 50 Shortage = 100 Supply and Demand Analysis 37-14

Supply and Demand Analysis Price (Per Pound; U.S. Dollars Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars (a) Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand DdDd SdSd Canadian Export Supply Canadian Import Demand q r s t Surplus = 50 Surplus = 100 Shortage =

International Equilibrium Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars Import demand = Export supply Canadian Export Supply Canadian Import Demand e U.S. Export Supply U.S. Import Demand Equilibrium 37-16

Trade Barriers Tariffs Revenue tariff Protective tariff What’s the difference? Import quota Nontariff barrier (NTB) Licensing, standards, etc. Voluntary export restriction (VER) Why would a producer voluntarily restrict their exports? Domestic Export Subsidy 37-17

Trade Barriers Economic impact of tariffs Direct effects Decline in domestic consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects Promote inefficiency Hurt growth 37-18

Trade Barriers Quantity Price 0 DdDd SdSd PdPd q S d + Q PtPt PwPw abcd Economic Effects of a Tariff or Quota Who/What benefits from the tariff? 2.Who/What suffers? Free trade provides consumers with a higher quantity at a lower price! What about a quota?

The Case for Protection Different arguments – examples? Military self-sufficiency Diversification for stability Infant industry Protection against dumping Increased domestic employment Cheap foreign labor 37-20

Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) (1947) World Trade Organization (WTO) (1995) European Union (EU) (1958/1993) North American Free Trade Agreement (NAFTA) (1994) LO6

The WTO World Trade Organization has 151 member nations Liberalize trade through negotiation Protest groups Labor unions, environmentalists, socialists, anarchists Key issues for the protestors Labor protection and environmental standards 37-22