International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 37 – Comparative Advantage recap, Trade Barriers, Protectionism, Trade Organizations

Key Facts Worth Noting The United States has a trade deficit in goods and a trade surplus in services, and overall has a trade deficit in goods and services. The United States has a sizable trade deficit in goods and services with China. Canada is the most important trading partner for the United States in terms of the volume of trade.

Some Key Trade Facts LO1 Principal U.S. exports include: Principal U.S. imports include: Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.5% of world’s exports Petroleum Automobiles Metals Household appliances Computers 37-3

Economic Basis for Trade Nations have different resource endowments Labor-intensive goods are such as Textiles and toys Land-intensive goods are such as vegetables and beef Capital-intensive goods are such as airplanes and chemicals LO2 37-4

The nation can produce a product at a lower opportunity cost Assumptions Two nations with the same size labor force Straight line opportunity costs represent constant costs in each country Curves represent different costs between countries Opportunity cost ratio is the slope of the curve LO2 Comparative Advantage 37-5

Vegetables (Tons) Beef (Tons) Vegetables (Tons) Beef (Tons) (a) United States (b) Mexico A Z Comparative Advantage LO2 37-6

Comparative Advantage Referring to the previous slide: Terms of trade U.S. 1V = 1B U.S. will sell 1B for more than 1V Mexico 2V = 1B Mexico will pay less than 2V for 1B Terms of trade will settle between the two opportunity costs Terms of Trade are1B = 1.5V LO2 37-7

Why not specialize? If the opportunity cost ratios in the two nations are not constant and there are increasing opportunity costs associated with more production of a product, then specialization may not be complete.

Trade Barriers Tariffs – excise (extra) taxes on imported goods Revenue tariff – on products not domestically produced – these raise $ for the government Protective tariff – shields domestic producers from foreign competition – raises the price of the import LO4 37-9

More Barriers and Export Subsidies Import quota – restriction on quantity or total value of a product imported Nontariff barrier (NTB) – rules, regulations, licensing – make it difficult to import a product Voluntary export restriction (VER) – agreement among exporters to limit the amount or a product exported Export subsidy – govt payment to the producer that allows a lower price on the sale of the product exported

Economic Impact of Tariffs Direct effects – raises domestic price Decline in consumption Increase in domestic production Decline in imports Tariff revenue to the government Indirect effects lead to a reduction in trade and worldwide output LO

Economic Impact of Quotas Decline in consumption Increase in domestic production Decline in imports Quotas do not provide for any government revenue but instead transfer it to foreign producers ** the cost of quotas and tariffs exceed any benefits to the consumer or nation LO

The Case for Protection – Pros and cons Military self-sufficiency – however, it is difficult to determine “vital” industries Diversification for stability – not necessary in advanced economies Infant industry - it is difficult to select industries that will prosper and there is a persistence to keep the protection in effect long after it is necessary LO

Protection arguments continued… Protection against dumping – the sale of foreign goods on the US markets at prices below cost of production or commonly charged in the home nation Increased domestic employment – not necessarily, imports eliminate jobs but create others Cheap foreign labor - there are mutual gains from trade between rich and poor nations and they lower the cost of production for products.

GATT Three principles: Equal, nondiscriminatory trade between member nations Uruguay in Reduction in tariffs Elimination of import quotas for textiles and apparel and decreased subsidies for agriculture LO

WTO Successor to GATT in 2010 Oversees trade agreements and rules on disputes Critics argue that it may allow nations to circumvent environmental and worker-protection laws LO

European Union 27 member nations Abolished tariffs and import quotas between member nations Established common tariff with nations outside the EU Created Euro Zone with one currency LO

NAFTA Agreement between U.S., Canada, and Mexico Established a free trade zone between the countries Trade has increased in all countries Enhanced standard of living LO

Trade Adjustment Assistance Act Provides support to qualified workers displaced by imports or plant relocations from international trade. **Criticism – dislocations are part of the market economy and worker in the international sector should not get special subsidies for job loss

OFFSHORING Jobs done by U.S. workers are shifted to foreign workers and locations. Has long been used in manufacturing, improvements in communication and technology make it possible to do it in services.