INTERNATIONAL TRADE 37 C H A P T E R Export Partners Canada 13%, Mexico 8%, China 4%, Japan 3% Import Partners China 15.4%, Canada 11.6%, Mexico, 9.1%,

INTERNATIONALTRADE

37C H A P T E R

Export Partners

Canada 13%, Mexico 8%, China 4%, Japan 3%

Import PartnersChina 15.4%, Canada 11.6%, Mexico, 9.1%, Japan, 4.9%, Germany 3.7%

$695.9 billion Trade Deficit in 2009

Export Goods & Services 16% of American GDP

KEY FACTS ON TRADE

United States

GermanyJapan

FranceUnited

KingdomCanada

Italy

0 2 4 6 8 10 12

GLOBAL PERSPECTIVEShares of World Exports, Selected Nations, 1999

Source: World Trade Organization

Source: WTO.Share of World Goods Exports, Leading Exporters, 1950-2008

The first decade of the 21st century have seen a significant shift in the share of global trade of the leading exporters (United States, Japan, Germany and China more recently). The enduring trend

involving the relative decline of American exports has accelerated to the point that Germany became the world's leading exporter in 2003 with China climbing to the second rank in 2007.

Japan's share has been declining for about 15 years and was overtaken in 2004 by China. However, it must be considered that many Japanese (and Korean) corporations have relocated in China parts

of their production facilities, so some Chinese exports are embedded within Japanese supply chains. There is thus a convergence and an enduring stability of the share of the world's four

leading exporters, hovering in the 30% of total exports range.

ECOMOMIC BASIS FOR TRADEECOMOMIC BASIS FOR TRADE

Distribution of Economic ResourcesDistribution of Economic ResourcesDifferent Technologies and/or Different Technologies and/or

ResourcesResourcesGoods are Differentiated as to Goods are Differentiated as to

Quality and other Nonprice Quality and other Nonprice AttributesAttributes

Labor-Intensive GoodsLabor-Intensive GoodsLand-Intensive GoodsLand-Intensive GoodsCapital-Intensive GoodsCapital-Intensive Goods

COMPARATIVE ADVANTAGE

Two Isolated NationsConstant Costs

Straight Line PPF’sDifferent Costs

Different Technology and Resources in Each Nation

Cost Ratio

Self-Sufficiency Output Mix

Trading According to Comparative Advantage

Graphically...

PRODUCTION POSSIBILITIES

A

B

Co

ffee

(to

ns)

Co

ffee

(to

ns)

45

40

35

30

25

20

15

10

5

0

30

25

20

15 10 5

05 10 15 20 25 30 5 10 15 20

Wheat (tons) Wheat (tons)

Curve For Each CountryUnited States Brazil

Total output will be greatest whenEach good is produced by the nationthat has the lowest domesticopportunity cost for that good.

U.S has comparative advantage in wheat

Brazil has comparative advantage in coffee

Principle of Comparative Advantage


Terms of Trade

Gains From TradeImproved Options

Principle of Comparative Advantage


Trading Possibilities Line

Graphically…

TRADING POSSIBILITIES LINES

Co

ffee

(to

ns)

Co

ffee

(to

ns)

45

40

35

30

25

20

15

10

5

0

30

25

20

15 10 5

05 10 15 20 25 30 5 10 15 20

A

B

Tradingpossibilities line



The Gains from TradeUnited States Brazil


Co

ffee

(to

ns)

Co

ffee

(to

ns)

45

40

35

30

25

20

15

10

5

0

30

25

20

15 10 5

05 10 15 20 25 30 5 10 15 20

A

B



A’

B’




Co

ffee

(to

ns)

Co

ffee

(to

ns)

45

40

35

30

25

20

15

10

5

0

30

25

20

15 10 5

05 10 15 20 25 30 5 10 15 20

A

B



A’

B’



The Case ForFree Trade

U.S. EXPORT SUPPLYAND IMPORT DEMAND

U.S. DomesticU.S. DomesticAluminum MarketAluminum Market

U.S. Export SupplyU.S. Export SupplyAnd Import DemandAnd Import Demand

Dd

Sd

If the world priceIf the world priceexceeds the U.S.exceeds the U.S.

price by 25 cents...price by 25 cents...

$1.50

1.25

1.001.00

.75

.50

.25Pri

ce (

per

po

un

d;

U.S

. do

llars

)

10050 75 125150Quantity of Aluminum

10050P

rice

(p

er p

ou

nd

; U

.S. d

olla

rs)

$1.50

1.25

1.001.00

.75

.50

.25

Quantity of Aluminum

EXPORTS = 50EXPORTS = 50


U.S. DomesticAluminum Market


$1.50

1.25

1.001.00

.75

.50

.25

10050

DdPri

ce (

per

po

un

d;

U.S

. do

llars

)

Pri

ce (

per

po

un

d;

U.S

. do

llars

)

10050 75 125150

SURPLUS = 50

$1.50

1.25

1.001.00

.75

.50

.25

If the world priceIf the world pricegoes further up...goes further up...

Sd

Quantity of Aluminum Quantity of Aluminum




U.S. DomesticU.S. DomesticAluminum MarketAluminum Market


$1.50

1.25

1.001.00

.75

.50

.25

10050

DdPri

ce (

per

po

un

d;

U.S

. do

llars

)

Pri

ce (

per

po

un

d;

U.S

. do

llars

)

10050 75 125150

SURPLUS = 50

SURPLUS = 100 $1.50

1.25

1.001.00

.75

.50

.25

If world pricesIf world pricesfall below $1.00...fall below $1.00...

Sd

U.S.exportsupply


SHORTAGE = 50

U.S. EXPORT SUPPLYU.S. EXPORT SUPPLYAND IMPORT DEMANDAND IMPORT DEMAND

U.S. DomesticAluminum Market

U.S. Export SupplyAnd Import Demand

$1.50

1.25

1.001.00

.75

.50

.25

10050

DdPri

ce (

per

po

un

d;

U.S

. do

llars

)

Pri

ce (

per

po

un

d;

U.S

. do

llars

)

10050 75 125150

SURPLUS = 50

SURPLUS = 100 $1.50

1.25

1.001.00

.75

.50

.25

Sd



IMPORTS = 50IMPORTS = 50

U.S.U.S.exportexportsupplysupply


SHORTAGE = 50

SHORTAGE = 100

U.S.U.S. EXPORTEXPORT SUPPLYAND IMPORT DEMANDU.S.U.S. EXPORTEXPORT SUPPLY

AND IMPORT DEMANDU.S. Domestic

Aluminum MarketU.S. Export Supply

And Import Demand

$1.50

1.25

1.00

.75

.50

.25

10050

DdPri

ce (

per

po

un

d;

U.S

. do

llars

)

Pri

ce (

per

po

un

d;

U.S

. do

llars

)

10050 75 125150

SURPLUS = 50

SURPLUS = 100

U.S.exportsupply





U.S.import

demand

$1.50

1.25

1.00

.75

.50

.25

Sd


CANADIAN EXPORT SUPPLYCANADIAN EXPORT SUPPLYAND IMPORT DEMANDAND IMPORT DEMAND

CANADIAN EXPORT SUPPLYCANADIAN EXPORT SUPPLYAND IMPORT DEMANDAND IMPORT DEMAND

Canada’s DomesticAluminum Market

Canada’s Export SupplyAnd Import Demand

DdSHORTAGE = 50

$1.50

1.25

1.00

.75

.50

.25

10050

Pri

ce (

per

po

un

d;

U.S

. do

llars

)

Pri

ce (

per

po

un

d;

U.S

. do

llars

)

10050 75 125150

SURPLUS = 100

Canadianexportsupply

Canadianimport

demand

$1.50

1.25

1.00

.75

.50

.25

Sd

SURPLUS = 50


EQUILIBRIUM WORLD PRICE ANDEQUILIBRIUM WORLD PRICE ANDQUANTITY OF EXPORTS & IMPORTSQUANTITY OF EXPORTS & IMPORTS

Pri

ce (

per

po

un

d;

U.S

. d

oll

ars)

U.S. exportU.S. exportsupplysupply

U.S. importU.S. importdemanddemand

Quantity of Aluminum

CanadianCanadianexportexportsupplysupply

Canadian importCanadian importdemanddemand

10050

$1.50

1.25

1.00

.75

.50

.25

25

.88 Equilibrium

TRADE BARRIERS

TariffsTariffs--excise taxes on imported goodsexcise taxes on imported goods

RevenueRevenue TariffTariff--provide Federal Government with revenue provide Federal Government with revenue (usually on products not produced domestically)(usually on products not produced domestically)

ProtectiveProtective TariffTariff--designed to shield domestic producersdesigned to shield domestic producers

ImportImport QuotaQuota--sets a maximum amount that may be sets a maximum amount that may be importedimported

NontariffNontariff BarrierBarrier (NTB)- (NTB)-licensing, safety, government licensing, safety, government ““red tapered tape””

Voluntary Export RestrictionVoluntary Export Restriction (VER) (VER)

http://www.mhhe.com/cgi-bin/mcbrue15.pl?url=origin37-1

ECONOMIC IMPACT OF TARIFFSDirect EffectsDirect Effects

• Decline in ConsumptionDecline in Consumption• Increased Domestic Increased Domestic

ProductionProduction• Decline in ImportsDecline in Imports• Tariff RevenueTariff Revenue

Direct EffectsDirect Effects• Decline in ConsumptionDecline in Consumption• Increased Domestic Increased Domestic

ProductionProduction• Decline in ImportsDecline in Imports• Tariff RevenueTariff Revenue

Indirect EffectsIndirect Effects•Promote inefficienciesPromote inefficiencies•Decrease Aggregate demandDecrease Aggregate demand

ECONOMIC IMPACT OF TARIFFS

Economic Impact of Quotas Revenue transferred to foreign producers

Net Costs of Tariffs and Quotas Price goes up to consumers

Impact On Income Distribution Burden disproportionately hits low

incomes

THE CASE FOR PROTECTIONMilitary Self-SufficiencyIncrease Domestic Employment

•Job Creation From Imports•Fallacy of Composition•Retaliation

•Smoot-Hawley Act of 1930•Long-run feedbacks

Diversification-For-StabilityInfant-Industry ArgumentStrategic Trade PolicyProtection-Against-DumpingCheap Foreign Labor

World Trade Organization (WTO)•Reductions in Tariffs Worldwide

• New Rules to Promote Trade in Services•Reduction in Agricultural Subsidies•Intellectual Property Protections•Phasing Out Textile Quotas and Tariffs

THE WORLD TRADE ORGANIZATIONTHE WORLD TRADE ORGANIZATION

World Trade Organization (WTO)•Reductions in Tariffs Worldwide

•New Rules to Promote Trade in Services

•Reduction in Agricultural Subsidies

•Intellectual Property Protections

•Phasing Out Textile Quotas and Tariffs

THE WORLD TRADE ORGANIZATION

ChapterConclusions

export supply curveimport demand curveequilibrium world pricetariffsrevenue tariffprotective tariffimport quotanontariff barrier (NTB)voluntary export

restriction (VER)strategic trade policydumpingWorld Trade

Organization (WTO)

labor-intensive goodsland-intensive goodscapital-intensive goodscost ratioprinciple of

comparative advantage

terms of tradetrading possibilities

linegains from tradeworld pricedomestic price

ENDBACKCopyright McGraw-Hill/Irwin 2002

EXCHANGE RATESTHE BALANCE OF PAYMENTS,AND TRADE DEFICITS

Chapter 38

Coming soon...

Documents

INTERNATIONAL TRADE 37 C H A P T E R Export Partners Canada 13%, Mexico 8%, China 4%, Japan 3% Import Partners China 15.4%, Canada 11.6%, Mexico, 9.1%,