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Chapter 35


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Chapter 35

  1. 1. International Trade Chapter 35 McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved
  2. 2. U.S. Trade Patterns The U.S. is the largest player in global product and resource markets. 2
  3. 3. Imports The U.S. imported more than $2.2 trillion of goods and services in 2006. Imports are goods and services purchased from foreign sources. 3
  4. 4. Exports We exported $1 trillion of goods and $431billion in services in 2006. Exports are goods and services sold to foreign buyers. 4
  5. 5. Export Ratios 5
  6. 6. Trade Balances The trade balance is the difference between the value of exports and imports. Any imbalance in America’s trade must be offset by reverse imbalances elsewhere. Trade balance = exports – imports 6
  7. 7. Trade Balances Trade deficit is the amount by which the value of imports exceeds the value of exports in a given time period. Trade surplus is the amount by which the value of exports exceeds the value of imports in a given time period. 7
  8. 8. Trade Balances: 2006 8
  9. 9. Bilateral Trade Balances: Top Deficit Countries Country China Japan Canada Mexico Germany Trade Balance (in billions of dollars) –233 –88 –73 –64 –48 9
  10. 10. Bilateral Trade Balances: Top Surplus Countries Country Netherlands U.A.E. Australia Hong Kong Belgium Trade Balance (in billions of dollars) +14 +11 +10 +10 +7 10
  11. 11. Motivation to Trade Why trade when . . . . . . we import many of the things we also export. . . . we could produce many of the other things we import. . . . we seem to seem to worry so much about trade imbalances. LO2 11
  12. 12. Specialization Trade allows nations to specialize and specialization increases total output. Trade increases world output and the standards of living in all trading countries. LO2 12
  13. 13. Production and Consumption Without Trade The gains from trade can be illustrated using production possibilities curves. Production possibilities – The alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology. LO2 13
  14. 14. Production and Consumption Without Trade In the absence of trade, a country’s consumption possibilities are identical to its production possibilities. possibilities - The Consumption alternative combinations of goods and services that a country could consume in a given time period. LO2 14
  15. 15. Consumption Possibilities Without Trade U.S. Production Possibilities Bread Wine 100 0 80 10 60 20 40 30 20 40 0 50 LO2 French Production Possibilities Bread Wine 15 0 12 12 9 24 6 36 3 48 0 60 15
  16. 16. Consumption Possibilities Without Trade U.S. production possibilities OUTPUT OF BREAD (zillions of loaves per year) 100 A B 80 C 60 D 40 E 20 0 10 20 30 40 F 50 60 OUTPUT OF WINE (zillions of barrels per year) LO2 16
  17. 17. Consumption Possibilities Without Trade French production possibilities OUTPUT OF BREAD (zillions of loaves per year) 25 20 15 G H 10 I J 5 0 K 10 20 30 40 50 L 60 OUTPUT OF WINE (zillions of barrels per year) LO2 17
  18. 18. Production and Consumption With Trade To assess the potential gain from trade, we need to consider the combined output of trading nations. By increasing the mix of output in each trading country, we can increase total world output. LO2 18
  19. 19. Mutual Gains Each country produces those goods it makes best, then trades with other countries to acquire the goods it desires to consume. When a country engages in international trade, its consumption possibilities always exceed its production possibilities. LO2 19
  20. 20. Consumption Possibilities Without Trade U.S. (at point D) France (at point I) World total LO2 Bread 40 9 49 Wine 30 24 54 20
  21. 21. Consumption Possibilities With Trade U.S. (at point C) France (at point K) World total LO2 Bread 60 3 63 Wine 20 48 68 21
  22. 22. QUANTITY OF BREAD (zillions of loaves per year) Consumption Possibilities With Trade 120 100 80 60 40 20 0 (a) U.S. production and consumption A Production with trade C Consumption with trade N D Production and consumption without trade 10 20 30 40 50 60 QUANTITY OF WINE (zillions of barrels per year) LO2 22
  23. 23. Consumption Possibilities With Trade (b) French production and consumption QUANTITY OF BREAD (zillions of loaves per year) 20 LO2 15 I 10 M Consumption with trade Production with trade K Production and 5 consumption without trade 0 10 20 30 40 50 QUANTITY OF WINE (zillions of barrels per year) 60 23
  24. 24. Gains from Specialization United States France World total LO2 Old Mix of Output Bread Wine 40 30 (point D) 9 24 (point I) 49 54 New Mix of Output Bread Wine 60 20 (point C) 3 48 (point K) 63 68 24
  25. 25. Pursuit of Comparative Advantage Although international trade can make everyone better off, it’s not obvious which goods should be traded, or on what terms. LO1 25
  26. 26. Opportunity Costs The decision to export is based on comparative advantage. Comparative advantage - The ability of a country to produce a specific good at a lower opportunity cost than its trading partners. Opportunity cost - The most desired goods or services that are forgone in order to obtain something else. LO1 26
  27. 27. Comparative Advantage Comparative advantage refers to the relative (opportunity costs) of producing particular goods. World output, and thus potential gains from trade, will be maximized when each country pursues its comparative advantage. LO1 27
  28. 28. Absolute Costs Don’t Count The absolute advantages in production do not matter. Absolute advantage – The ability of a country to produce a specific good with fewer resources (per unit of output) than other countries. LO1 28
  29. 29. Terms of Trade The terms of trade establish the trading rate. Terms of trade is the rate at which goods are exchanged – the amount of good A given up for good B in trade. 29
  30. 30. Limits to the Terms of Trade A country will not trade unless the terms of trade are superior to domestic opportunities. The terms of trade between two countries will lie somewhere between their respective opportunity costs in production. 30
  31. 31. Searching for the Terms of Trade Bread United States Bread France A 100 80 X 60 C D 40 Production 20 possibilities 0 120 90 60 30 10 0 10 20 30 Y Consumption possibilities N 40 50 60 70 80 90 100 110 Consumption possibilities L M 20 30 Production possibilities K 40 50 60 Wine 70 80 90 100 110 31
  32. 32. The Role of Markets and Prices The decision to import or export a particular good is often left up to the market decisions of individual consumers and producers. 32
  33. 33. The Role of Markets and Prices The terms of trade, like the price of any good, will depend on the willingness of market participants to buy or sell at various prices. 33
  34. 34. Protectionist Pressures Although the potential gains from trade are impressive, not everyone favors free trade. Imports typically compete with a domestic industry. LO3 34
  35. 35. Microeconomic Pressures The affected industries will try to restrict imports in order to preserve their own jobs and incomes. LO3 35
  36. 36. Import-Competing Industries Workers and producers who compete with imported products – who work in import-competing industries – have an economic interest in restricting trade. LO3 36
  37. 37. Export Industries Trade not only alters the mix of output but also redistributes income from import-competing industries to export industries. LO3 37
  38. 38. Net Gain Trade restrictions designed to protect specific microeconomic interests reduce the total gains from trade. LO3 38
  39. 39. Additional Pressures Selfish micro interests are not the only source of trade restrictions. Other arguments are used to restrict trade. LO3 39
  40. 40. National Security Concerns Essential defense-related goods are vital during times of war. A war could disrupt this flow leaving us vulnerable. Exporting vital technology to a potential enemy is not wise. LO3 40
  41. 41. Dumping Import competing industries are placed at risk when goods are consistently dumped in a nation. Dumping is the sale of goods in export markets at prices below domestic prices. LO3 41
  42. 42. Infant Industries Even normal export prices might make it difficult or impossible for a new domestic industry to develop. These industries may need temporary protection from imports. LO3 42
  43. 43. Infant Industries Trade restrictions are justified only if there is tangible evidence that the industry can develop a comparative advantage reasonably quickly. LO3 43
  44. 44. Improving the Terms of Trade The distribution of the gains from trade depends on the terms of trade. Putting restrictions on imports can move the terms of trade in our favor We would end up with a larger share of the gains from trade. LO3 44
  45. 45. Barriers to Trade The microeconomic losses associated with trade give rise to a constant clamor for trade restrictions. LO3 45
  46. 46. Embargoes The sure-fire way to restrict trade is simply to eliminate it. An embargo is a prohibition against trading particular goods. LO3 46
  47. 47. Tariffs A more frequent trade restriction is a tariff. A tariff is a tax (duty) imposed on imported goods. A tariff makes imported goods more expensive to domestic consumers, and less competitive with domestically priced goods. LO3 47
  48. 48. “Beggar-Thy-Neighbor” The curtailment of imports looks like an easy solution to the problem of domestic unemployment. Tariffs inflict harm on foreign producers. When foreign countries retaliate with tariffs of their own, world trade shrinks and unemployment increases in all countries. LO3 48
  49. 49. Quotas The same outcome of a tariff can be attained more directly by imposing an import quota. A quota is a limit on the quantity of a good that may be imported in a given time period. LO3 49
  50. 50. Comparative Effects The effect of quotas on trade is different than the effect of tariffs. LO3 50
  51. 51. No-Trade Equilibrium The equilibrium price is completely determined by domestic demand and supply curves. Equilibrium price – The price at which the quantity of a good demanded in a given time period equals the quantity supplied. LO3 51
  52. 52. Free-Trade Equilibrium Free trade allows the import of unlimited quantity of foreign supplies at the world price. Free trade results in reduced prices and increased consumption. LO3 52
  53. 53. Tariff-Restricted Trade Tariffs raise the price of imports and shifts the import supply curve upward. Domestic prices rise, domestic production rises, and domestic consumption falls. LO3 53
  54. 54. Quota-Restricted Trade Quotas are a greater threat to competition than tariffs because quotas preclude additional imports at any price. LO3 54
  55. 55. Impact of Trade Restrictions PRICE (dollars per unit) (a) No-trade equilibrium D1 p1 0 LO3 S1 q1 QUANTITY (units per year) 55
  56. 56. Impact of Trade Restrictions PRICE (dollars per unit) (b) Free-trade equilibrium D1 p1 B p2 0 LO3 S1 qd S2 q1 q2 QUANTITY (units per year) 56
  57. 57. Impact of Trade Restrictions PRICE (dollars per unit) (c) Tariff-restricted trade D1 p1 p3 p2 0 LO3 S1 C S3 S2 qd qt q1 q3 q2 QUANTITY (units per year) 57
  58. 58. Impact of Trade Restrictions PRICE (dollars per unit) (d) Quota-restricted trade D1 S4 Q p1 p4 p2 0 LO3 S1 q1 q4 q2 QUANTITY (units per year) 58
  59. 59. Voluntary Restraint Agreements A slight variant of quotas has been used in recent years. A voluntary restraint agreement (VRA) is an agreement to reduce the volume of trade in a specific good – a “voluntary” quota. LO3 59
  60. 60. Nontariff Barriers Embargoes, export controls, tariffs, and quotas are the most visible barriers to trade, but they are only the tip of the iceberg. LO3 60
  61. 61. Nontariff Barriers The U.S. uses product standards, licensing restrictions, restrictive procurement practices, and other nontariff barriers to restrict roughly 15 percent of imports. LO3 61
  62. 62. An Increasingly Global Market Trade policy is a continuing conflict between the proponents of free trade and the special interests that profit from trade protection. 62
  63. 63. Multilateral Trade Pacts The long-term trend is towards lowering trade barriers, thereby increasing global competition. Protectionist forces are being countered by the worldwide recognition of the gains from trade. Exporters and firms that use imported inputs push for free trade. 63
  64. 64. Global Pacts: GATT and WTO The granddaddy of the multilateral, multiyear free-trade pacts was the General Agreement on Tariffs and Trade (GATT). 64
  65. 65. WTO The 1994 GATT pact created the World Trade Organization (WTO) to enforce free-trade rules. The WTO has become the world’s trade police force. 65
  66. 66. WTO Protests Some people see free trade as a mixed blessing. Environmentalists worry about depletion of resources, congestion and pollution. Labor organizations worry about depressed wages and working conditions. Third World countries worry about an unfair trade playing field. 66
  67. 67. Regional Pacts Groups of nations have moved even faster toward open markets by developing regional trade pacts. 67
  68. 68. NAFTA In December 1992, the United States, Canada, and Mexico signed the North American Free Trade Agreement (NAFTA). The ultimate goal of NAFTA is to eliminate all trade barriers between these three countries. 68
  69. 69. CAFTA The success of NAFTA prompted a similar 2005 agreement between the U.S. and central American nations. The Central American Free Trade Agreement (CAFTA) aims to eliminate tariffs and standardize trade and investment policies in CAFTA nations. 69
  70. 70. European Union The European Union (EU) is a regional pact that virtually eliminates national boundaries between 25 countries. The EU eliminated trade barriers and permits full inter-country mobility of workers and capital. In effect, Europe has become one large unified market. 70
  71. 71. International Trade End of Chapter 35 McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved