McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. INTERNATIONAL TRADE POLICY INTERNATIONAL TRADE POLICY Chapter 19

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. Patterns of Trade Differences in the importance of trade Total Output ($)Export Ratio (%)Import Ratio (%) Netherlands Germany 3, Canada 1, Italy 2, France 2, United Kingdom 3, Japan 4, United States14,

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. U.S. Exports by Region,

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. U.S. Imports by Region,

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Balance of Trade Balance of trade  Trade deficit – imports > exports  Trade surplus – exports > imports  U.S. trade deficit--5% of GDP. Financing the trade deficit  Sell financial assets  Government bonds  Stocks and bonds  Real assets  Corporations  Real estate

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved. 16-6OUTSOURCING What is it? Outsourcing--THEN Oursourcing--NOW

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Comparative Advantage: Saudi Arabia and the U.S. U.S Oil Food A B C D E F Saudi Arabia Saudi Arabia has a comparative advantage in oil. Saudi Arabia should produce 1000 barrels of oil Food Oil A F E D C B The U.S. has comparative advantage in food. The U.S. should produce 1000 tons of food.

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved The Gains from Trade Saudi Arabia trades 500 barrels of oil to the U.S. for 120 tons of food. U.S. trades 500 tons of food to Saudi Arabia for 120 barrels of oil. Trader keeps 380 barrels of oil and 380 tons of food. Production Consumption S.A. U.S. S.A. U.S. I.T. Oil (barrels) Food (tons)

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved The Gains from Trade Oil Food A B C D E F Saudi Arabia G Saudi Arabia is consuming 500 barrels of oil and 120 tons of food, point G Food Oil A F E D C B U.S. H U.S. is consuming 120 barrels of oil and 500 tons of food, point H.

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Inherent and Transferable Comparative Advantage Inherent comparative advantages  Factors that are relatively unchangeable, such as resources and climate. Transferable comparative advantages  Factors that can change relatively easily, such as capital, technology, and types of labor. Long run advantage depends on having inherent comparative advantages

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved The Law of One Price In competitive markets there is pressure for equal factors to be priced equally. Firms will produce where costs are lower Convergence hypothesis – the tendency of economic forces to eliminate transferable comparative advantage.

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved U.S. Comparative Advantages Facilitating trade—managing, advertising, distributing Research and high-level labor skills Physical and technological infrastructure Wealth from past production makes the U.S. the world’s largest consumer. U.S. companies hold a large number of patents Relatively open immigration policy. Learning by doing

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Arguments Against Free Trade Protection of “ infant industries” Lost jobs are more visible than gains from trade--lower prices & greater variety. Low wages in other countries. National security Political Considerations

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Varieties of Trade Restrictions Tariffs – taxes on imports Quotas – quantity limits placed on imports Voluntary restraint agreements Embargoes Regulatory trade restrictions Nationalistic appeals

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Why Economists Generally Oppose Trade Restrictions Free trade increases total output globally. Trade increases competition Restrictions based on national security are often abused or can be evaded. Trade restrictions are addictive.

McGraw-Hill/Irwin Copyright  2008 by The McGraw-Hill Companies, Inc. All rights reserved Institutions Supporting Free Trade Free trade associations  European Union (EU)  North American Free Trade Association (NAFTA) Most- favored nation status—lower tariffs