Chapter 35 International Trade ECON 201 Macroeconomics Chapter 35 International Trade

Ch 35 Objectives The graphical model of comparative advantage, specialization, and the gains from trade. How differences between world prices and domestic prices prompt exports and imports. How economists analyze the economic effects of tariffs and quotas. The rebuttals to the most-common arguments for protectionism. About the assistance provided workers under the Trade Adjustment Act of 2002. How the offshoring of U.S. jobs relates to the growing international trade in services.

What is international trade? exchange of goods and services across national borders. Free Trade

Some Facts The United States exports many of the “same” goods it imports. (Intra-industry trade) Canada is the United States’ quantitatively most important trading partner. The U.S. has a Trade Deficit with China ($202 billion in 2005.) Current Numbers – U.S. Census Bureau

Import/Export Business Principal U.S. exports Computers Chemicals Semiconductors Consumer durables Agricultural products. Petroleum Automobiles Computers metals. U.S. main imports:

More Facts U.S. dependence on foreign oil is reflected in its $94 billion trade deficit (imports exceed exports)with OPEC nations in 2005. 2008 – trade deficit was 175,613 million dollars. As of January, 09’ - over 4 million. U.S. leads the world in the volume of exports and imports. Germany is the world’s top exporter; U.S. exports of goods make up about 9% of the world’s exports.

Shares of World Exports, Selected Nations Percentage Share of World Exports, 2004 0 2 4 6 8 10 12 Germany United States China Japan France Netherlands Italy United Kingdom 10.0 8.9 6.5 6.2 4.9 3.9 3.8 3.8 Source: World Trade Organization

International Trade & Finance link economies together. Is often at the center of U.S. economic policy. Economic change in one part of the world has repercussions for countries around the globe.

Economic Basis for Trade International Trade allows Nations to specialize their productions. nations can specialize, increase the productivity of their resources, and realize a larger total output.

Why do nations trade? Uneven economic resources among nations. Efficient production of various goods requires different technologies & resources. Quality & non-price attributes. Some people like imported goods.

Japan large, well‑educated labor force and can specialize in labor‑intensive commodities. Australia abundance of land can cheaply produce land‑intensive agricultural products. Industrially advanced nations (including Japan) are in a position to produce capital‑intensive goods.

In Their Element Japan – digital cameras, video games players, DVD players Australia – wheat, wool, meat Brazil – coffee Countries with Lg. amts. of capital – cars, ag equipment, chemicals

Principle of Comparative Advantage Review refers to the ability of a person or a country to produce a particular good at a lower opportunity cost than another country. explains how trade can create value for both parties even when one can produce all goods with less resources than the other. The net benefits of such an outcome are called gains from trade.

Principle of Comparative Advantage Lower Opportunity cost – total output will be greatest when each good is produced by the nation that has the lower opportunity cost.

Example U.S. & Brazil Figure 35.1a & 35.1b U.S. has a comparative advantage in wheat production and should specialize in wheat. Brazil should specialize in coffee.

Specialization (Fig. 35.1) After specialization, there will be more coffee and more wheat in total than the totals before specialization. Wheat production rose from 26 units of wheat to 30 units of wheat. Coffee production rose from 16 to 20.

Limits to Terms of Trade At what exchange ratio will they trade? Must get a better price than domestically or why trade? U.S. will not give up more than 1 wheat for each coffee. Brazil will not trade more than 2 coffee for 1 wheat. Actual Terms of trade – determined by negotiation.

Depends on world supply and demand for the product. Actual Exchange Ratio Depends on world supply and demand for the product.

Benefits of free trade Promotes competition Deters monopoly Forces firms to use low-cost production techniques. Be more innovative More consumer choices Links Natl. interest & breaks down Ntl. Animosities.

Government Barriers Eliminate gains from specialization. Must shift resources if they can’t trade freely. Tariffs Revenue Tariff Protective Tariff Import Quota Non-tariff barrier (NTB) Voluntary Export Restriction(VER)

Tariffs Excise taxes on imports, used for revenue purposes, or protect domestic producers from foreign competition by raising import prices. Revenue Tariff Protective Tariff Import Quota - specify the maximum amounts of imports allowed in a certain period of time. Low import quotas may be a more effective protective device than tariffs, which do not limit the amount of goods entering a country.

Voluntary Export Restriction(VER) - agreements by foreign firms to “voluntarily” limit their exports to a particular country. Japan has voluntary limits on its auto exports to the United States. Non-tariff barrier (NTB) - licensing requirements, unreasonable standards, or bureaucratic red tape in customs procedures.

Fallacy of composition Dumping act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. Fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole.

Smoot Hawley Tariff Act of 1930 Raised U.S. tariffs on over 20,000 imported goods. 1,028 economists signed a petition against it. Help to create great depression? Representative W.C. Hawley (left) and Senator Reed Smoot (right) shake hands in agreement on new tariff bill.

Acts and Adjustments Trade Adjustment Assistance Act- 2002- WTO – 1993 Successor to the General Agreement on Tariffs & Trade (GATT) 1947. Designed to supervise and liberalize international trade. Oversees trade agreements. Headquartered in Geneva, Switzerland.

Cheap Labor Offshoring Cheap imports will flood U.S. markets Relocation by a company from one country to another. Loss of U.S. jobs Increases demand for complementary jobs Cheap imports will flood U.S. markets Domestic living standards go down Economic logic – reduce costs

Free Trade World economy can achieve a more efficient allocation of resources and a higher level of material well‑being.

End chapter 35