International Trade Chapter 38 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

38-2 Some Key Trade Facts U.S. trade deficit in goods $735 billion in 2012 U.S. trade surplus in services $196 billion in 2012 Canada largest U.S. trade partner Trade deficit with China $315 billion in 2012 Exports are 14% U.S. output Dependence on oil LO1

38-3 Some Key Trade Facts Principal U.S. exports include: Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.1% of world’s exports LO1

38-4 Some Key Trade Facts Principal U.S. imports include: Petroleum Automobiles Metals Household appliances Computers LO1

38-5 Some Key Trade Facts LO1

38-6 Some Key Trade Facts LO1

38-7 Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods LO2

38-8 Assumptions Two nations Same size labor force Constant costs in each country Different costs between countries U.S. absolute advantage in both Opportunity cost ratio Slope of the curve Vegetables sacrificed per ton of beef Comparative Advantage LO2

38-9 Comparative Advantage (a) United States (b) Mexico Vegetables (Tons) Beef (Tons) Vegetables (Tons) Beef (Tons) A Z LO2

38-10 Comparative Advantage Self-sufficiency output mix Specialization and trade Produce the good with the lowest domestic opportunity cost Opportunity cost of 1 ton of beef: 1 pound of vegetables in U.S. 2 pounds of vegetables in Mexico

38-11 Comparative Advantage LO2

38-12 Comparative Advantage Terms of trade U.S. 1V = 1B U.S. will sell 1B for more than 1V Mexico 2V = 1B Mexico will pay less than 2V for 1B Settle between the two Depends on supply/demand factors Assume 1B = 1.5V LO2

38-13 Comparative Advantage Gains from trade Trading possibilities line Slope equals terms of trade Improved options Complete specialization More of both goods More efficient resource allocation LO2

38-14 Gains from Trade (a) United States (b) Mexico Vegetables (Tons) Beef (Tons) Vegetables (Tons) Beef (Tons) A Z A’ Z’ V V’ W v b b’ Trading Possibilities Line Trading Possibilities Line B LO2

38-15 Comparative Advantage Trade with increasing costs Concave production curve Resources not perfectly substitutable Incomplete specialization Case for free trade Promote efficiency Promote competition LO2

38-16 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 LO3

Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars Quantity of Aluminum (Millions of Pounds) Supply and Demand Analysis (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 LO3

38-18 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 = 50 Supply and Demand Analysis LO3

38-19 International Equilibrium Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars Import demand = Export supply Canadian Export Supply e U.S. Export Supply U.S. Import Demand Equilibrium Canadian Import Demand LO3

38-20 Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO4

38-21 Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects LO4

38-22 Economic Impact of Quotas Decline in consumption Increase in domestic production Decline in imports Quotas do not provide for any government revenue but instead transfer it to foreign producers LO4

38-23 Economic Effects of Tariff/Quota Quantity Price 0 DdDd SdSd PdPd q S d + Q PtPt PwPw a bcd LO4

38-24 The Case for Protection Military self-sufficiency Diversification for stability Infant industry Protection against dumping Increased domestic employment Cheap foreign labor LO5

38-25 Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) LO6

38-26 GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO6

38-27 WTO Established by Uruguay Round of GATT 153 member nations in 2010 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker- protection laws LO6

38-28 European Union Initiated in 1958 as Common Market Abolished tariffs and import quotas between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency LO6

38-29 NAFTA Agreement between U.S., Canada, and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living LO6

38-30 Trade Adjustment and Offshoring Trade Adjustment Assistance Act Designed to help individuals hurt by international trade Offshoring of jobs Shifting of work previously done by American workers to workers abroad LO6

38-31 Petition of the Candlemakers Petition of candlemakers asking for protection from natural light producers such as the sun Tongue-in-cheek argument supporting the idea of free trade