1. International Trade
Economics Chapter 17

2. Benefits and Issues of International Trade
Resource Distribution and Specialization
A nation’s economic patterns are based on factors of production it has
Geography, climate, natural resources, etc.
patterns change over time; for example, U.S. originally agricultural
This leads to Specialization
only a small range of products are made
Specialization leads to increased productivity and a need to trade for the products not produced

3. Resource Distribution and Specialization
Example: Specialization
Costa Rica exports bananas; has warm, wet climate bananas need
relatively low agricultural wages are beneficial—production is labor intensive
New Zealand exports wool, lamb, and mutton
has temperate climate, water, open grasslands needed for grazing
has low population density, scientific breeding, mechanized processing

4. Absolute and Comparative Advantage
Absolute advantage—nation’s ability to make product more efficiently
Comparative advantage—ability to produce at lower opportunity cost
What you give up to produce a product, produce the things that force you to give up the least.

5. Absolute and Comparative Advantage
Example: Absolute Advantage
Australia produces more iron ore and steel than China with same labor
Australia has absolute advantage

6. Absolute and Comparative Advantage
Example: Comparative Advantage
Australia’s production ratio of steel: ore is 1:5
China’s production ration of steel: ore is 1:3
China has the comparative advantage because they give up 3 ore to make 1 steel, Australia gives up 5 ore to make 1 steel
China should produce more steel and trade it to Australia

7. International Trade
Specialization, absolute & comparative advantage lead nations to trade with each other. This makes us more interdependent.

8. Impacts of International Trade
The United States in the World Economy
U.S. is world’s largest exporter; exports more services than imports
tourism, transportation, architecture, construction, information systems
Also world’s largest importer; imports more goods than it exports
oil and refined oil products, machinery, raw materials
Main trading partners: Canada, China, Mexico, Japan

9. Two Philosophies of Trade
Free Trade – Trade without barriers
Protectionism – use of trade barriers

10. Protectionism
Protectionism—use of trade barriers to protect domestic industries
Purpose to protect jobs, national security, infant industries
new industries unable to compete with larger, established competitors

11. Section 2 Barriers to Trade
Trade barrier—law limiting free trade among nations; most mandatory
Examples of trade barriers:
Quota—limits on the amount of a product that can be imported
Dumping—sale of product in other country at lower price than at home
hurts domestic producers; gives consumers lower price

12. Barriers to Trade Examples of trade barriers:
Tariff—fee charged for goods brought from another country
Revenue tariff—tax on imports, specifically to raise money
rarely used today
Protective tariff—tax on imported goods to protect domestic products
raise price of goods more cheaply elsewhere

13. Barriers to Trade Examples of trade barriers:
Embargo—law that cuts most or all trade with a specific country
Informal trade barriers—licenses, environmental, health, safety laws

14. The Impact of Trade Barriers
Impact 1: Higher Prices
Trade barriers raise prices or keep them high
In 2000, U.S., Japan set tariffs on South Korean semiconductor chips
Korean and domestic chip prices went up in U.S. and Japan

15. The Impact of Trade Barriers
Impact 2: Trade Wars
Trade wars often result from disagreements over quotas or tariffs
Can result over other issues
EU banned U.S hormone-treated beef, U.S. set 100% tax on many EU foods

16. Arguments for Protectionism
Argument 1: Protects Domestic Jobs?
U.S. workers upset over jobs lost to countries with cheaper labor
Trade barriers generally protect inefficient production, higher prices
Laid-off voters influenced government to fund job training programs

17. Arguments for Protectionism
Argument 2: Protects Infant Industries?
Protection expected to allow new industries to grow until competitive
used by developing nations to keep out goods from developed nations
Critics say freedom from competition maintains perpetual infancy
and need for perpetual support

18. Arguments for Protectionism
Argument 3: Protects National Security?
National security affects industries considered vital for safety
energy industry considered vital by most nations

19. Arguments for Free Trade
Free trade lowers prices by eliminating trade barriers
Free trade allows a greater variety of goods to be sold

20. Regional and World Trade Organizations
Group 1: The European Union
Economic and political union; no barriers for members
Euro—currency of the EU, used by 12 of 27 member nations
EU has 20% of global exports and imports, world’s biggest trader
sets low tariffs; wants to remove all barriers to international trade

21. Regional and World Trade Organizations
Group 2: NAFTA
NAFTA—North American Free Trade Agreement of 1994
phases out trade barriers between Canada, Mexico, U.S. in 15 years
Has led to specialization, efficiency, expanded markets, new jobs
All countries have had economic gain; trade has more than doubled

22. Regional and World Trade Organizations
Group 3: Other Regional Trade Groups
Various groups formed to specialize, promote free trade, stay competitive
include Mercosur, ASEAN, APEC, SADC
OPEC—Organization of Petroleum Exporting Countries is a cartel
group of producers controls production, pricing, marketing of a product

23. Regional and World Trade Organizations
Group 4: World Trade Organization
In 1944, Allied nations formed General Agreement on Tariffs and Trade
World Trade Organization—formed in 1995 by nations that follow GATT
negotiates, administers trade agreements; resolves disputes
monitors policies of 149 members; gives support to developing countries
WTO successful to varying degrees

24. Analyzing Tariffs—Who Wins and Who Loses?
Background
The United States has had tariffs on sugar since the days of the early republic.
In recent WTO talks, less-developed countries have objected to the lack of market access for their goods and their price disadvantage.
What’s the Issue
How do the trade barriers set up by the U.S. government affect producers (both foreign and domestic) and consumers?
Thinking Economically
Which argument for protection does document C seem to make? Is this argument economically valid? Explain.
Is the difference in price shown in document B an unavoidable outcome of the program outlined in document A? Explain.
How does U.S. government intervention in the sugar industry limit the functioning of the economy as a free market? Use examples from the documents in your answer.

25. International Trade Debate
Team A:
International trade does not destroy job opportunities in America, as some people fear. The voluntary exchange between countries is a good policy because it creates more productive jobs that pay higher wages by motivating workers to specialize in producing the goods in which they have a comparative advantage. Therefore, the U.S. must continue to be actively involved in international trade. 
Team B:
The U.S. government has a responsibility to protect the American economy and American jobs. International trade threatens to increase the economic prosperity of other poorer nations and simultaneous hurt the American economy by sending American jobs overseas. Therefore, the U.S. must withdraw from all international programs and establish protection of domestic goods and services.