1. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 14 INTERNATIONAL TRADE: DOES IT JEOPARDIZE AMERICAN JOBS?

2. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline WHAT WE TRADE AND WITH WHOM THE BENEFITS FROM TRADE BARRIERS TO TRADE TRADE AS A DIPLOMATIC WEAPON

3. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved.

4. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. What We Trade: Exports (2000) GoodBillions of Dollars of Exports Chemicals80.3 Food and Agricultural Products 54.2 Computers196.2 Airplanes and Parts53.5 Motor Vehicles79.7 Services293.5 Total1,065.7

5. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. What We Trade: Imports (2000) GoodBillions of Dollars of Imports Computers and Semiconductors 164.9 Petroleum25.5 Chemicals71.9 Audio and Video Equipment. 29.0 Motor Vehicles179.7 Services217.0 Total1,441.4

6. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. With Whom We Trade CountryExports in billions Imports in billions Balance Canada178.8229.2-50.4 Mexico111.7135.9-24.2 Japan65.2146.7-81.5 China16.3100.1-83.8 Mid East19.038.9-19.9 Other Asia119.0199.0-80.0 W. Europe181.3277.3-96.0 Africa11.027.6-17.6 World782.41216.7-434.3

7. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Comparative and Absolute Advantage Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used

8. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Benefits of Trade: When Comparative and Absolute Advantage are the same BeerSausage Germany21 Italy12 Suppose there are two countries, Germany and Italy, and two goods, beer and sausage, and the production per unit of labor is shown in the table below. Clearly, there are benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.

9. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Benefits of Trade: When Comparative and Absolute Advantage are Not the same BeerSausage Germany23 Italy12 Now suppose the Germans are better at producing both goods. The Germans have an absolute advantage in both but a comparative advantage in only beer. There are still benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.

10. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Terms-of-trade The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio.

11. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Using Production Possibilities Frontiers Beer Sausage Beer Sausage ItalyGermany Production Possibilities Frontier

12. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Consumption Possibilities Frontier with Trade Beer Sausage Consumption Possibilities Frontier

13. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons For Limiting Trade That Many Economists Support National Security National Identity –Both of the above can be overstated easily. Environmental Concerns Child-Labor Concerns

14. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Limiting Trade that Most Economists Do Not Support To protect industries from competition –To temporarily aid an industry that is just emerging. –To protect an industry from competition that is dumping (the exporting of goods below cost so as to drive competitors out- of-business) its products in the US.

15. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Methods of Limiting Trade Tariffs: a tax on imports Quotas: a legal restriction on the amount of a good coming into the country Non-tariff barriers: barriers to trade that result from regulatory actions

16. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Tariffs vs. Quotas P limit C A B E P Q/t D S P* Q* Q limit Limiting trade with a quota S’ } Tariff F Limiting trade with a tariff A tariff raises tax revenue and a quota does not.

17. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Costs of Protection Whether there is a quota or a tariff there is deadweight loss. This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose. The average cost per job saved via trade barriers is estimated to be $169,000 per year.

18. McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Trade as a Diplomatic Weapon Trade sanctions have failed –To get Castro out of Cuba –To get Iran to release our hostages in 1979-1980. –To get the Soviet Union out of Afghanistan. –To get Iraq out of Kuwait in 1990.