International Trade Outline How open is the U.S. economy? Patterns and Trends in International Trade Gains from International International Trade Restrictions

An index of openness This is a simple measure of the relative importance of the foreign sector Let O denote the index of openness X is exports M is imports GDP is gross domestic product Thus, we have:

Imports + Exports as a Percent of U.S. GDP, percent

What do we trade with other nations? Source: Bureau of Economic Analysis

Who are our major trading partners?

Exports and Imports of the United States, Billions of 1998 dollars

Exports and Imports of the United States, Billions of 1998 dollars

Comparative Advantage Recall that a county has a comparative advantage in the production of a good of service if it can produce a unit at lower opportunity cost than its trading partners

Why does the U.S. export aircraft?

Why does the U.S. import T-shirts

The gains from trade

Notice that by specializing and trading according to comparative advantage, both China and the U.S. reach a point outside their respective domestic PPFs.

Trade Restrictions The term “protectionism” refers to any measure that has the effect of reducing the quantity of imported goods or services. Commercial policy: Government policy that influences international trade flows.

Types of Trade Restrictions Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba. Tariffs: Taxes imposed on imported goods. Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber. Subsidies: payments by government to exporters. These stimulate trade by allowing the exporter to charge a lower price.

Protectionism, part 2 Government procurement: Most nations require their governments to buy from domestic producers. Example: the 1933 “Buy American” Act applicable to federal agencies. Non-tariff trade barriers: Other policies that have the effect of reducing the flow of imports or exports. Example: Health and safety standards, import licensing, product design standards, bureaucratic red tape. The Japanese trade ministry (MITI) decided that snow skis made in the U.S. were not safe enough for Japanese ski enthusiasts Other examples: European ban on hormone treated beef and genetically-modified soybeans

Arguments for protectionism Save domestic jobs Dumping Government revenue creation. National security Infant industries President Bush’s trade representative Robert Zoeller says “I want fair trade.”

Industry Cost to Consumers Per Job Saved Autos$105,000 Color TVs420,000 Motorcycles150,000 Athletic Footwear30,000 Apparel 37,000 Specialty Steel1,000,000 Glassware200,000 Sugar60,000 Ball Bearings90,000 Costs of protecting U.S. jobs from foreign competition Source: Coughlin, et al. (1988) and Hufbauer, et al

Country Tariffs as a % of Government Revenue U.K. 0.1% Japan 1.2 U.S. 1.5 Costa Rica 16.1 Ghana 31.2 Dominican Republic 44.2 Lesotho 55.1 Tariffs as a percentage of total government revenue Source: World Bank