Chapter 17 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 Kick it Up and Notch: Costs of Protectionism

Exports and Imports As a percentage of GDP

What We Trade: Exports (2009) Good Billions of Dollars of Exports Elec. Mach. Aud & Video 105.0 Motor Vehicles 95.0 Transportation Equipment 84.0 Petroleum 62.7 Industrial Mach. 56.5 Services 503.0 1,780.5

What We Trade: Imports (2009) Good Billions of Dollars of Imports Petroleum 329.6 Motor Vehicles 179.1 Telecommunication Eq 137.3 Elec. Mach. Aud & Video 119.7 Office Machines 113.5 Services 370.0 Total 2,282.1

With Whom We Trade

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, the United States and Brazil, and two goods, Apples and Coffee, and the production per unit of labor is shown in the table below. Coffee Apples United States 1 2 Brazil Clearly, there are benefits from trade. If the Americans focus on apples and the Brazilians focus on coffee and they trade with one another, more apples and more coffee is available to both countries.

The Benefits of Trade: When Comparative and Absolute Advantage are Not the Same Now suppose the Americans are better at producing both goods. The Americans have an absolute advantage in both but a comparative advantage in only Apples. Coffee Apples United States 3 2 Brazil 1 There are still benefits from trade. If the Americans focus on apple production and the Brazilians focus on coffee production and they trade with one another more apples and coffee 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 Brazil United States Apples Apples Production Possibilities Frontier Production Possibilities Frontier Coffee Coffee

Consumption Possibilities Frontier with Trade Apples Consumption Possibilities Frontier Coffee

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

Cost of Limiting Trade Pworld S D P World Market Domestic Market P S A Pdomestic C Q’s Q’d E F B D Q/t Q/t Qd

} 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.