1 Announcements: Tuesday Chiquita case this week Value of 1/100 chance of death from last week’s notecards: $1000 or less: K: 5 (typical range) K: K-1Million: 19 1M-10M: 25 More: 49

2 Announcements: Thursday Baron, “Political Analysis for Business,” drug articles, Value of life from last week’s notecards

3 G302 Week 9 International Trade

4 Why does U.S. Steel care about the government? Formed in 1901 by merging most of the steel companies in the U.S. In 2000 paid $495 million for a Slovak steel company, and agreed to invest $700 million more Steel prices fell in Half of the 30 American steel companies are bankrupt Pension problem—600,000 retired workers What can be done?

5 What you will learn today The benefits of international trade The effect of tariffs and quotas How international trade organizations work

6 Is there market failure in international trade, so we need the government to protect our industries?

7 What’s Good About Imports? Voluntary exchange makes both parties better off---within nations or between them Each country can specialize in what it does best

8 Krugman’s parody I We need a new economic paradigm because today America is part of a truly global economy (1) To maintain its standard of living, America now has to learn to compete in an ever tougher global marketplace. (2) That’s why high productivity and product quality have become essential. (3)

9 Krugman’s parody II We need to move the American economy into the high-value sectors (4) that will generate jobs (5) for the future. And the only way we can be competitive in the new global economy is if we forge a new partnership between government and business. (6)

10 What Countries Export to the United States? Canada $198 billion Japan $131 billion Mexico $110 billion China $82 billion Germany $55 billion

11 What Countries Import from the United States? Canada $166 billion Mexico $87 billion Japan $57 billion UK $38 billion Germany $27 billion

12 Domestic and Foreign Supply P QQ Q P PP S US S foreign S Total Demand P=12, Q=10

13 What happens if US producers reduce their costs slightly? P QQ Q P PP S US S foreign S Total Demand (a) P falls, Q US rises (b) P falls, Q US falls (c) P stays the same, Q US rises (d) P stays the same, Q US falls (e) P rises, Q US rises 6

14 A Tariff of $2/unit P QQ Q P PP S US S foreign S Total Demand The red curves are the new supply curves

15 A Tariff of $2: Winners and Losers Q P S Total Demand A B E D C The price rises from $12 to _____ Sales drop from 10 to__ US businesses sell ___ instead of 4. Imports fall from 6 to __ US PS rises by ___ Foreign PS is unchanged. Tax revenue rises by ___ CS falls by __________ DWL is _____ $ B D B+C+D+E C+E

16 A Quota of 3 for Imports P S S S P P P QQ Q US FOREIGN TOTAL Demand An import quota of 3 makes the foreign supply curve turn vertical at Q=3. Thus, imports do not add more than 3 to the total supply curve

17 A Quota of 3: Winners and Losers 4 12 S P Q 5 0 Demand A B C D E The price rises from 12 to ___ Sales fall from 10 to __ Imports fall from 6 to __ U.S. PS rises from A to _______ Foreign PS rises from 0 to ____ U.S. CS falls by __________ ____ is deadweight loss A+B+D C B+C+D+E E

18 Which is a better way to reduce imports, quotas or tariffs? Tariffs have the advantage that they transfer surplus from consumers to the government instead of to foreign businesses 1. Did the sign-in sheet get around? 2. If you answered a question, bring up a notecard for me.

19 The Smoot-Hawley Tariff of 1930 Tariffs on 20,000 goods Average tariff > 50% 26+ nations retaliated US exports fell from $5.2 billion to $1.7 billion Helped create the Great Depression

20 The General Agreement on Trade and Tariffs (GATT) Began in 1944 with 23 members , avg. tariff fell from 40% to 5% Principles: Reciprocity (If I cut my tariff, so do you) Non-discrimination (all countries pay the same tariff if they export to us) Transparency (Non-tariff barriers  tariffs) Lacked “teeth”; could not enforce decisions

21 The World Trade Organization Created in 1995 Can make binding decisions Countries that win a case at the WTO can retaliate against offender

22 U.S. Steel Tariffs The International Trade Commission recommended putting tariffs on imported steel President Bush did impose tariffs in 2002 The EU has filed a complaint at the WTO American steel consumers and shippers are upset