INTERNATIONAL TRADE: DOES IT JEOPARDIZE AMERICAN JOBS? Chapter 14 INTERNATIONAL TRADE: DOES IT JEOPARDIZE AMERICAN JOBS?

Chapter Outline WHAT WE TRADE AND WITH WHOM THE BENEFITS FROM TRADE BARRIERS TO TRADE TRADE AS A DIPLOMATIC WEAPON

Exports and Imports As a percentage of GDP

What We Trade:Exports (2002) Good Billions of Dollars of Exports Chemicals 80.5 Food and Agricultural Products 55.6 Computers 145.9 Airplanes and Parts 56.4 Motor Vehicles 70.6 Services 292.2 Total 974.1

What We Trade: Imports (2002) Good Billions of Dollars of Imports Computers and Semiconductors 120.9 Petroleum 21.9 Chemicals 83.8 Audio and Video Equipment. 311 Motor Vehicles 186.8 Services 227.4 Total 1392.1

With Whom We Trade 2002 Country Exports in billions Imports in billions Balance Canada 160.8 210.6 -49.8 Mexico 97.5 134.7 -37.2 Japan 51.4 121.5 -70.1 China 22.1 125.2 -103.1 Mid East 18.9 34.4 -15.5 Other Asia 101.1 175.2 -74.1 W. Europe 157.1 246.3 -89.2 Africa 10.7 22.2 -11.5 World 693.5 1163.6 -470.1

Comparative and Absolute Advantage Absolute Advantage: the ability to produce a good better, faster, or more quickly than a competitor Comparative Advantage: the ability to produce a good at a lower opportunity cost of the resources used

The Benefits of Trade: When Comparative and Absolute Advantage are the same Suppose there are two countries, Germany and Italy, and two goods, beer and sausage, and the production per unit of labor is shown in the table below. Beer Sausage Germany 2 1 Italy Clearly, there are benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.

The Benefits of Trade: When Comparative and Absolute Advantage are Not the same Now suppose the Germans are better at producing both goods. The Germans have an absolute advantage in both but a comparative advantage in only beer. Beer Sausage Germany 2 3 Italy 1 There are still benefits from trade. If the Germans focus on beer production and the Italians focus on sausage production and they trade with one another more beer and more sausage is available to both countries.

Terms-of-trade The amount of a good one country must give up in order to obtain another good from the other country, usually expressed as a ratio.

Using Production Possibilities Frontiers Beer Italy Germany Beer Production Possibilities Frontier Production Possibilities Frontier Sausage Sausage

Consumption Possibilities Frontier with Trade Beer Consumption Possibilities Frontier Sausage

Reasons For Limiting Trade That Many Economists Support National Security National Identity Both of the above can be overstated easily. Environmental Concerns Child-Labor Concerns

Reasons for Limiting Trade that Most Economists Do Not Support To protect industries from competition To temporarily aid an industry that is just emerging. To protect an industry from competition that is dumping (the exporting of goods below cost so as to drive competitors out-of-business) its products in the US.

Methods of Limiting Trade Tariffs: a tax on imports Quotas: a legal restriction on the amount of a good coming into the country Non-tariff barriers: barriers to trade that result from regulatory actions

} Tariffs vs. Quotas P Limiting trade with a quota Q/t D S P* Q* S’ } Tariff F Plimit C A B Limiting trade with a quota Qlimit Limiting trade with a tariff A tariff raises tax revenue and a quota does not.

Costs of Protection Whether there is a quota or a tariff there is deadweight loss. This means that the gainers (the people who keep their jobs) gain less than the losers (the people who have to pay higher prices) lose. The average cost per job saved via trade barriers is estimated to be $169,000 per year.

Trade as a Diplomatic Weapon Trade sanctions have failed To get Castro out of Cuba To get Iran to release our hostages in 1979-1980. To get the Soviet Union out of Afghanistan. To get Iraq out of Kuwait in 1990.