SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE International Trade SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

In this chapter you will learn 16.1 Some key facts about Canada’s international trade 16.2 About specialization and comparative advantage 16.3 About supply and demand analysis of exports and imports 16.4 About trade barriers and their negative effects on nations’ economic well-being 16.5 The usual arguments against trade 16.6 The role played by the World Trade Organization (WTO) in promoting international trade

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones

International Linkages Figure 16-1 Canadian Economy Other National Economies Goods & Services Capital & Labour Info & Technology Money

Canadian International Trade: Volume & Pattern Exports are 40% of Canadian GDP

Exports of Goods & Services as % of GDP GLOBAL PERSPECTIVE 16.1 Exports of Goods & Services as % of GDP

Canadian exports & imports have doubled as % of GDP since 1971 Figure 16-2

Canadian International Trade: Volume & Pattern Dependence Canada almost entirely dependent on other countries for bananas, cocoa, spices, tea, raw silk, tin, natural rubber Many Canadian industries rely on sales abroad: wheat, corn, tobacco, computers, automobiles, etc.

Canadian International Trade: Volume & Pattern Trade Patterns Main exports: automotive products machinery & equipment industrial goods & materials Main imports: industrial goods & material Canada imports some of the same categories of goods it exports

Rapid Trade Growth Transportation Technology Communications Technology General Decline in Tariffs

Participants in International Trade North America, Japan, & Western Europe headquarters for multinational corporations New Participants Hong Kong, Singapore, South Korea, Taiwan China Eastern Europe Russia

Exports of Goods & Services as % of GDP Comparative Exports Exports of Goods & Services as % of GDP

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones

The Economic Basis for Trade Why do nations trade? The distribution of resources is uneven Efficient production requires different technologies or resource combinations Products are differentiated as to quality & other non-price attributes

The Economic Basis for Trade labour-intensive goods

The Economic Basis for Trade labour-intensive goods land-intensive goods

The Economic Basis for Trade labour-intensive goods land-intensive goods capital-intensive goods

The Economic Basis for Trade Distribution of resources may change over time

Specialization & Comparative Advantage The Basic Principle specialization according to comparative advantage reduces costs

Specialization & Comparative Advantage Two isolated nations constant costs straight-line production possibilities curves different costs different technology & resources

Production Possibilities 45 40 35 30 25 20 15 12 10 5 Figure 16-3 Canada Brazil 30 25 20 15 10 4 Soybeans (tonnes) Soybeans (tonnes) 5 10 15 18 20 25 30 5 8 10 15 20 Steel (tonnes) Steel (tonnes) 21 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Specialization & Comparative Advantage the choice under self-sufficiency

Production Possibilities: Self Sufficiency 45 40 35 30 25 20 15 12 10 5 Figure 16-3 Canada Brazil 30 25 20 15 10 4 18 steel 12 soybeans Soybeans (tonnes) Soybeans (tonnes) 8 steel 4 soybeans A B 5 10 15 18 20 25 30 5 8 10 15 20 Steel (tonnes) Steel (tonnes) 23 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Specialization Based on Comparative Advantage Opportunity Cost Table Country 1 Steel Cost 1 Soybean Cost Canada 1 soybean 1 steel Brazil 2 soybeans .5 steel Who has the comparative advantage in steel?

Specialization Based on Comparative Advantage Opportunity Cost Table Country 1 Steel Cost 1 Soybean Cost Canada 1 soybean 1 steel Brazil 2 soybeans .5 steel Who has the comparative advantage in soy?

Specialization Based on Comparative Advantage Canada - comparative advantage in steel Brazil - comparative advantage in soybeans

Production Possibilities: Before Trade 45 40 35 30 25 20 15 12 10 5 Figure 16-3 Canada Brazil 30 25 20 15 10 4 18 steel 12 soybeans Soybeans (tonnes) Soybeans (tonnes) 8 steel 4 soybeans A B 5 10 15 18 20 25 30 5 8 10 15 20 Steel (tonnes) Steel (tonnes) 27 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Production Possibilities: After Specialization 45 40 35 30 25 20 15 12 10 5 Figure 16-3 Canada Brazil 30 25 20 15 10 4 Soybeans (tonnes) 30 steel 0 soybeans Soybeans (tonnes) 0 steel 20 soybeans A B 5 10 15 18 20 25 30 5 8 10 15 20 Steel (tonnes) Steel (tonnes) 28 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Terms of Trade what will the terms of trade be? many possibilities for trade to be mutually beneficial the terms of trade must be between each nation’s opportunity costs

Terms of Trade Opportunity Cost Table for example: Country 1 Steel Cost 1 Soybean Cost Canada 1 soybean 1 steel Brazil 2 soybeans .5 steel for example: 1 steel for 1.5 soybeans gains from trade can be illustrated with trading possibilities line

Trading Possibilities Lines: After Trade 45 40 35 30 25 20 15 12 10 5 1.5 soy for 1 steel Figure 16-4 Canada Brazil .67 steel for 1 soy 30 25 20 15 10 4 Soybeans (tonnes) Soybeans (tonnes) Trading possibilities line Trading possibilities line A B 5 10 15 18 20 25 30 5 8 10 15 20 Steel (tonnes) Steel (tonnes) 31 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Table 16-3 Canada Brazil steel soybeans Outputs before specialization 18 12 8 4 Outputs after specialization Amounts exported (-) & imported (+) Outputs available after trade Gains from specialization & trade 30 20 -10 +15 +10 -15 20 15 10 5 2 3 2 1

Gains from Trade Improved Options Added Output

Trade with Increasing Costs A more realistic model: increasing opportunity costs less than complete specialization

The Case for Free Trade Restated Through free trade based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources & a higher level of material well-being than without free trade Side benefits: promotion of competition, deterrence of monopoly linking of national interests, reduction of national animosities

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones

Supply & Demand Analysis of Exports & Imports When world prices increase relative to domestic prices, domestic exports will increase, resulting in an upward sloping export supply curve When world prices decrease relative to domestic prices, domestic imports will increase, resulting in a downward sloping import demand curve

Canadian Export Supply and Import Demand Figure 16-5 Cdn. domestic aluminum market Cdn. export supply and import demand Sd If the world price exceeds the Cdn. price by 25 cents.... $1.75 1.50 1.25 1.00 .75 $1.75 1.50 1.25 1.00 .75 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Dd 50 75 100 125 150 50 100 38 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Canadian Export Supply and Import Demand Figure 16-5 Cdn. domestic aluminum market Cdn. export supply and import demand Sd $1.75 1.50 1.25 1.00 .75 $1.75 1.50 1.25 1.00 .75 SURPLUS = 50 EXPORTS = 50 If the world price goes further up.... Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Dd 50 75 100 125 150 50 100 39 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Canadian Export Supply and Import Demand Figure 16-5 Cdn. domestic aluminum market Cdn. export supply and import demand Sd SURPLUS = 100 EXPORTS = 100 $1.75 1.50 1.25 1.00 .75 $1.75 1.50 1.25 1.00 .75 Cdn. export supply Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) If world prices fall below $1.25.... Dd 50 75 100 125 150 50 100 40 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Canadian Export Supply and Import Demand Figure 16-5 Cdn. domestic aluminum market Cdn. export supply and import demand Sd $1.75 1.50 1.25 1.00 .75 $1.75 1.50 1.25 1.00 .75 Cdn. export supply Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) IMPORTS = 50 SHORTAGE = 50 Dd 50 75 100 125 150 50 100 41 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Canadian Export Supply and Import Demand Figure 16-5 Cdn. domestic aluminum market Cdn. export supply and import demand Sd $1.75 1.50 1.25 1.00 .75 $1.75 1.50 1.25 1.00 .75 Cdn. export supply Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) Cdn. import demand SHORTAGE = 100 IMPORTS = 100 Dd 50 75 100 125 150 50 100 42 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

U.S. Export Supply and Import Demand Figure 16-6 U.S. domestic aluminum market U.S. export supply and import demand Sd SURPLUS = 100 EXPORTS = 100 $1.50 1.25 1.00 .75 .50 $1.50 1.25 1.00 .75 .50 U.S. export supply SURPLUS = 50 EXPORTS = 50 Price (per kg. Cdn. dollars) Price (per kg. Cdn. dollars) U.S. import demand SHORTAGE = 50 IMPORTS = 50 SHORTAGE = 100 IMPORTS = 100 Dd 50 75 100 125 150 50 100 43 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

World Equilibrium World price is where: U.S. export supply Cdn. export supply import demand Figure 16-7 World price is where: U.S. export supply =Cdn. import demand 1.25 1.12 1.00 U.S. export supply import demand e Price (per kg. Cdn. dollars) 25 44 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Note the world price is HIGHER than the US domestic price before trade World Equilibrium Cdn. export supply import demand Figure 16-7 Note the world price is HIGHER than the US domestic price before trade 1.25 1.12 1.00 U.S. export supply import demand e Price (per kg. Cdn. dollars) 25 45 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

World Equilibrium Cdn. export supply import demand Figure 16-7 Why would the US be willing to pay $1.12 when they can produce it themselves at $1.00? 1.25 1.12 1.00 U.S. export supply import demand e Price (per kg. Cdn. dollars) 25 46 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

World Equilibrium Cdn. export supply import demand Figure 16-7 Earnings from US exports allow Americans to import other goods which have greater value than the exported aluminum 1.25 1.12 1.00 U.S. export supply import demand e Price (per kg. Cdn. dollars) 25 47 © 2005 McGraw-Hill Ryerson Ltd. Macroeconomics, Chapter 16

Supply & Demand Analysis of Exports & Imports world price set by interaction of world demand and supply only one price can persist for a standardized commodity (ignoring transportation costs and trade barriers)

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones

Trade Barriers Tariffs Import Quotas Non-tariff Barriers (NTB) Revenue tariffs Protective tariffs Import Quotas Non-tariff Barriers (NTB) Voluntary Export Restrictions (VER)

Effects of a Tariff open to world markets: quantity demanded increases to d quantity supplied decreases to a imports are d-a Figure 16-8 price supply pD q pW a d imports demand quantity Domestic Market

Effects of a Tariff tariff Domestic Market effects of a tariff: Figure 16-8 effects of a tariff: price rises to pT quantity supplied increases to b quantity demanded decreases to c imports are c-b price supply pD q pT tariff b c pW a d demand imports quantity Domestic Market

Effects of a Tariff Domestic Market supply tariff revenue Figure 16-8 price supply tariff revenue = (c-b)X(pT-pW) =imports X tariff pD q pT b c pW a d demand imports quantity Domestic Market

Economic Impact of Tariffs Decline in consumption Increased domestic production Decline in imports Tariff revenue Indirect Effects: expansion of inefficient industries at the expense of relatively efficient ones

Economic Impact of Quotas the same, without the tariff revenue for the government foreign firms reap the benefit of higher prices

Effects of a Quota Domestic Market supply Figure 16-8 price supply price with quota is pQ, which again reduces imports pD q pQ b c pW a d imports demand quantity Domestic Market

Net Costs of Tariffs & Quotas Consumer costs price of imported product goes up some consumers shift purchases from imports to higher-priced domestic goods prices of domestic goods rise gains to protected industries & workers come at the expense of much greater losses for the entire economy

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones

The Case For Protection: A Critical Review Self-Sufficiency Argument Increase Domestic Employment Argument job creation from imports fallacy of composition possibility of retaliation long-run feedbacks Diversification for Stability Argument

The Case For Protection: A Critical Review Infant Industry Argument Counter-arguments: which industries? how long? other better methods Strategic Trade Policy

The Case For Protection: A Critical Review Protection Against Dumping Argument Driving Out Competitors Price Discrimination Cheap Foreign Labour Argument

The Case For Protection: A Critical Review A Summing Up the arguments for protection are not convincing there is compelling historical evidence that free trade has led to prosperity & protectionism has led to the opposite

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones

Multilateral Trade Agreements & Free-Trade Zones high tariffs a contributing cause of the Great Depression Reciprocal Trade Agreements most-favoured-nation clauses

Canadian Tariff Rates, 1930-2002

General Agreement on Tariffs & Trade (GATT) first signed in 1947 equal, non-discriminatory trade treatment for all member nations reduction of tariffs by multilateral negotiation elimination of import quotas eight rounds of negotiations Uruguay Round took effect in 1995

World Trade Organization (WTO) successor to the GATT oversees trade agreements rules on trade disputes forum for further rounds of negotiations Doha Round launched in 2001

World Trade Organization (WTO) Trade liberalizations to be implemented by 2005: tariff reductions new rules for trade in services reductions in agricultural subsidies new protections for intellectual property phasing out quotas on textiles & apparel, & replacing them with declining tariffs

World Trade Organization (WTO) GATT & WTO have been positive forces for liberalized trade WTO is highly controversial concerns about environment, labour

The European Union (EU) free-trade zones, trade blocs EU initiated in 1958 as the Common Market expanded from 15 to 25 countries in 2004 nearly all internal tariffs & import quotas abolished common system of tariffs on non-EU goods liberalized movements of capital & labour within the EU common internal economic policies

The European Union (EU) effects mixed: Canada benefits from increasing prosperity in EU market but trade barriers make it difficult to compete with EU companies the Euro Zone established in early 2000s ends the inconvenience & expense of exchanging currencies

North American Free Trade Agreement Canada, Mexico, United States formed a trade bloc in 1993 greatly reduced tariffs tariffs will be eliminated by 2008 concerns about job losses not realized standard of living has been enhanced in all three countries

Chapter 16 Topics 16.1 Canada & International Linkages 16.2 The Economic Basis for Trade 16.3 Supply & Demand Analysis of Exports & Imports 16.4 Trade Barriers 16.5 The Case for Protection: A Critical Review 16.6 Multilateral Trade Agreements & Free-Trade Zones