McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Goals Summarize some important data of trade Explain policies countries use to restrict trade Summarize the reasons for trade restrictions and why economists generally oppose trade restrictions Explain how free trade associations both help and hinder international trade 2

The Nature and Patterns of Trade Differences in the importance of trade Total Output ($) Export Ratio (%) Import Ratio (%) Netherlands 844 78 71 Germany 3,695 47 41 Canada 1,706 29 31 Italy 2,180 27 France 2,825 26 28 United Kingdom 2,462 30 33 Japan 6,078 15 14 United States 15,094 13 16 3

U.S. Exports by Region, 2012 OPEC 4% Central and South America 11% Canada 19% Other 10% Mexico 13% Pacific Rim 25% European Union 18%

Central and South America U.S. Imports by Region, 2012 OPEC 9% Canada 15% Central and South America 8% Mexico 11% Other 9% European Union 17% Pacific Rim 31%

The Changing Nature of Trade As technological changes in telecommunications reduce costs, foreign countries will be able to provide more services The nature of trade is continually changing, both in terms of the countries with which the U.S. trades and the goods and services traded Customer service calls for U.S. companies are now more frequently answered in India This trade in services is often called outsourcing 6

The Changing Nature of Trade Is Chinese and Indian outsourcing different from previous outsourcing? Using overseas suppliers is not a new development in trade The difference is the potential size of outsourcing to India and China with combined populations of 2.5 billion people Because technology is growing in these countries, the U.S. economy must develop new technologies to remain competitive 7

Balance of Trade Trade deficit = exports < imports Trade surplus = exports > imports The U.S. has a significant trade deficit of approximately $820 billion which is 5.5% of GDP The U.S. is financing its trade deficit by selling off financial assets, stocks and bonds, and real assets, corporations and real estate 8

The United States has been running trade deficits since the 1970s Balance of Trade Percent of GDP The United States has been running trade deficits since the 1970s 1970 1980 1990 2000 2010 2020 9

Debtor and Creditor Nations Running a deficit isn’t necessarily bad The U.S. is currently financing its trade deficit by selling off assets The U.S. has not always had a trade deficit; following WWII, it had trade surpluses The U.S. has gone from being a large creditor nation to being the world’s biggest debtor; international considerations have been forced on the nation 10

Varieties of Trade Restrictions Tariffs are taxes governments place on internationally traded goods (generally imports) Quotas are quantity limits placed on imports Voluntary restraint agreements are when countries voluntarily restrict their exports An embargo is a total restriction on the import or export of a good Regulatory trade restrictions are government-imposed procedural rules that limit imports Nationalistic appeals, such as “Buy American” can help to restrict international trade 11

Application: Tariffs when the domestic country is small Tariffs decrease imports, increase domestic production, and generate tariff revenue P Tariff revenue SDomestic $3.00 $2.50 PWorld + $0.50Tariff = S’World $2.00 PWorld = SWorld Imports’ DDomestic Q Imports 12

Application: Quotas when the domestic country is small Quotas decrease imports and increase domestic production SDomestic $3.00 $2.50 World supply with quota $2.00 PWorld = SWorld Quota = 50 DDomestic Q Imports w/o quota 13

Reasons for Trade Restrictions Unequal internal distribution of the gains from trade Haggling by companies over the gains from trade Haggling by countries over trade restrictions Specialized production Learning by doing and economies of scale Macroeconomic costs of trade National security International politics Increased revenue brought in by tariffs 14

Why Economists Generally Oppose Trade Restrictions From a global perspective, free trade increases total output International trade provides competition for domestic companies Restrictions based on national security are often abused or evaded Trade restrictions are addictive 15

Institutions Supporting Free Trade The World Trade Organization (WTO) has over 150 members Free trade associations are groups of countries that allow free trade among its members and put up common barriers against all other countries’ goods e.g. the European Union (EU) and the North American Free Trade Association (NAFTA) Countries strengthen trading relationships with most-favored nation status – those countries will be charged as low a tariff on exports as any other country 16

Chapter Summary The nature of trade is continually changing The U.S. is importing more and more high-tech goods and services from India and China and other East Asian countries Outsourcing is a type of trade. Outsourcing is a larger phenomenon today compared to 30 years ago because China and India are so large Trade restrictions include tariffs and quotas, embargoes, voluntary restraint agreements, regulatory trade restrictions, and nationalistic appeals 17

Chapter Summary Reasons that countries impose trade restrictions include unequal internal distribution of the gains from trade and haggling by countries over trade restrictions Economists generally oppose trade restrictions because of their understanding of the advantages of free trade The World Trade Organization is an international organization committed to reducing trade barriers Free trade associations, such as the European Union, help trade by reducing barriers to trade among member nations 18