1 Introduction to International Trade and Trade Policy

2 Comparative Advantage Comparative advantage: when a country (or firm) has a lower opportunity cost of producing a good or service Lower opportunity cost implies that a country (or firm) can sell a good or service at a lower price Specialization in areas where there is a comparative advantage enables mutually beneficial gains from trade

3 Gains From Free Trade In markets with a comparative disadvantage –Goods are imported –CS increases –PS decreases –TS increases In markets with a comparative advantage –Goods are exported –CS decreases –PS increases –TS increases

4 An Example of Trade Policy Analysis: Tariffs on Imports Comparison to free trade CS decreases PS increases TS decreases Imports decrease The government raises revenue

5 General Observations TS is greater with free trade than with no free trade TS is greater with free trade than with tariffs (or quotas) There are “winners” and “losers” with free trade and trade policies

6 Common Arguments Against Free Trade 1.Loss of jobs 2.National security 3.Protection of infant industries 4.Unfair competition 5.Protection as a bargaining chip 6.Sweatshops 7.Environmental consequences