International Trade Economics Chapter 17

Benefits and Issues of International Trade Resource Distribution and Specialization A nation’s economic patterns are based on factors of production it has Geography, climate, natural resources, etc. patterns change over time; for example, U.S. originally agricultural This leads to Specialization only a small range of products are made Specialization leads to increased productivity and a need to trade for the products not produced

Resource Distribution and Specialization Example: Specialization Costa Rica exports bananas; has warm, wet climate bananas need relatively low agricultural wages are beneficial—production is labor intensive New Zealand exports wool, lamb, and mutton has temperate climate, water, open grasslands needed for grazing has low population density, scientific breeding, mechanized processing

Absolute and Comparative Advantage Absolute advantage—nation’s ability to make product more efficiently Comparative advantage—ability to produce at lower opportunity cost What you give up to produce a product, produce the things that force you to give up the least.

Absolute and Comparative Advantage Example: Absolute Advantage Australia produces more iron ore and steel than China with same labor Australia has absolute advantage

Absolute and Comparative Advantage Example: Comparative Advantage Australia’s production ratio of steel: ore is 1:5 China’s production ration of steel: ore is 1:3 China has the comparative advantage because they give up 3 ore to make 1 steel, Australia gives up 5 ore to make 1 steel China should produce more steel and trade it to Australia

International Trade Specialization, absolute & comparative advantage lead nations to trade with each other. This makes us more interdependent.

Impacts of International Trade The United States in the World Economy U.S. is world’s largest exporter; exports more services than imports tourism, transportation, architecture, construction, information systems Also world’s largest importer; imports more goods than it exports oil and refined oil products, machinery, raw materials Main trading partners: Canada, China, Mexico, Japan

Two Philosophies of Trade Free Trade – Trade without barriers Protectionism – use of trade barriers

Protectionism Protectionism—use of trade barriers to protect domestic industries Purpose to protect jobs, national security, infant industries new industries unable to compete with larger, established competitors

Section 2 Barriers to Trade Trade barrier—law limiting free trade among nations; most mandatory Examples of trade barriers: Quota—limits on the amount of a product that can be imported Dumping—sale of product in other country at lower price than at home hurts domestic producers; gives consumers lower price

Barriers to Trade Examples of trade barriers: Tariff—fee charged for goods brought from another country Revenue tariff—tax on imports, specifically to raise money rarely used today Protective tariff—tax on imported goods to protect domestic products raise price of goods more cheaply elsewhere

Barriers to Trade Examples of trade barriers: Embargo—law that cuts most or all trade with a specific country Informal trade barriers—licenses, environmental, health, safety laws

The Impact of Trade Barriers Impact 1: Higher Prices Trade barriers raise prices or keep them high In 2000, U.S., Japan set tariffs on South Korean semiconductor chips Korean and domestic chip prices went up in U.S. and Japan

The Impact of Trade Barriers Impact 2: Trade Wars Trade wars often result from disagreements over quotas or tariffs Can result over other issues EU banned U.S hormone-treated beef, U.S. set 100% tax on many EU foods

Arguments for Protectionism Argument 1: Protects Domestic Jobs? U.S. workers upset over jobs lost to countries with cheaper labor Trade barriers generally protect inefficient production, higher prices Laid-off voters influenced government to fund job training programs

Arguments for Protectionism Argument 2: Protects Infant Industries? Protection expected to allow new industries to grow until competitive used by developing nations to keep out goods from developed nations Critics say freedom from competition maintains perpetual infancy and need for perpetual support

Arguments for Protectionism Argument 3: Protects National Security? National security affects industries considered vital for safety energy industry considered vital by most nations

Arguments for Free Trade Free trade lowers prices by eliminating trade barriers Free trade allows a greater variety of goods to be sold

Regional and World Trade Organizations Group 1: The European Union Economic and political union; no barriers for members Euro—currency of the EU, used by 12 of 27 member nations EU has 20% of global exports and imports, world’s biggest trader sets low tariffs; wants to remove all barriers to international trade

Regional and World Trade Organizations Group 2: NAFTA NAFTA—North American Free Trade Agreement of 1994 phases out trade barriers between Canada, Mexico, U.S. in 15 years Has led to specialization, efficiency, expanded markets, new jobs All countries have had economic gain; trade has more than doubled

Regional and World Trade Organizations Group 3: Other Regional Trade Groups Various groups formed to specialize, promote free trade, stay competitive include Mercosur, ASEAN, APEC, SADC OPEC—Organization of Petroleum Exporting Countries is a cartel group of producers controls production, pricing, marketing of a product

Regional and World Trade Organizations Group 4: World Trade Organization In 1944, Allied nations formed General Agreement on Tariffs and Trade World Trade Organization—formed in 1995 by nations that follow GATT negotiates, administers trade agreements; resolves disputes monitors policies of 149 members; gives support to developing countries WTO successful to varying degrees

Analyzing Tariffs—Who Wins and Who Loses? Background The United States has had tariffs on sugar since the days of the early republic. In recent WTO talks, less-developed countries have objected to the lack of market access for their goods and their price disadvantage. What’s the Issue How do the trade barriers set up by the U.S. government affect producers (both foreign and domestic) and consumers? Thinking Economically Which argument for protection does document C seem to make? Is this argument economically valid? Explain. Is the difference in price shown in document B an unavoidable outcome of the program outlined in document A? Explain. How does U.S. government intervention in the sugar industry limit the functioning of the economy as a free market? Use examples from the documents in your answer.

International Trade Debate Team A: International trade does not destroy job opportunities in America, as some people fear. The voluntary exchange between countries is a good policy because it creates more productive jobs that pay higher wages by motivating workers to specialize in producing the goods in which they have a comparative advantage. Therefore, the U.S. must continue to be actively involved in international trade.  Team B: The U.S. government has a responsibility to protect the American economy and American jobs. International trade threatens to increase the economic prosperity of other poorer nations and simultaneous hurt the American economy by sending American jobs overseas. Therefore, the U.S. must withdraw from all international programs and establish protection of domestic goods and services.