International Trade

Chapter 38

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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

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20Beef (Tons)

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30Beef (Tons)

12

18 8

4

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

Veg

etab

les

(To

ns

) 30

25

20

15

10

5

0

35

40

45

5 10 15 20Beef (Tons)

Veg

etab

les

(To

ns

) 30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30Beef (Tons)

12

18 8

4

A

Z

A’

Z’

V

V’

W

v

b b’

TradingPossibilities Line

TradingPossibilities 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

38-17

1.50

1.25

1.00

.75

.50

050 100

Quantity of Aluminum(Millions of Pounds)

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

1.50

1.25

1.00

.75

.50

050 75 100 125 150

Quantity of Aluminum(Millions of Pounds)

Supply and Demand Analysis

(a) U.S. Domestic Aluminum Market

(b) U.S. Export Supplyand Import Demand

Dd

Sd

U.S.ExportSupply

U.S.Import

Demand

a

b

c

x

y

Surplus = 50

Surplus = 100

Shortage = 50

Shortage = 100

LO3

38-18

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

1.50

1.25

1.00

.75

.50

050 75 100 125 150

Quantity of Aluminum(Millions of Pounds)

1.50

1.25

1.00

.75

.50

050 100

Quantity of Aluminum(Millions of Pounds)

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

(a) Canada’s Domestic Aluminum Market

(b) Canada’s Export Supplyand Import Demand

Dd

Sd

CanadianExportSupply

CanadianImport

Demand

q

r

s

t

Surplus = 50

Surplus = 100

Shortage = 50

Supply and Demand Analysis

LO3

38-19

International Equilibrium

1.00

.75

.88

050 100

Quantity of Aluminum(Millions of Pounds)

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

Import demand = Export supply

CanadianExportSupply

e

U.S.ExportSupply

U.S.Import

Demand

Equilibrium

CanadianImport 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

Pri

ce

0

Dd

Sd

Pd

q

Sd + Q

Pt

Pw

a b c d

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