Copyright 2008 The McGraw-Hill Companies 23-1 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show 23 International Trade

Copyright 2008 The McGraw-Hill Companies 23-2 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Chapter Objectives The Graphical Model of Comparative Advantage, Specialization, and the Gains From Trade How Differences Between World Prices and Domestic Prices Prompt Exports and Imports How Economists Analyze the Economic Effects of Tariffs and Quotas The Rebuttals to the Most Frequently Presented Arguments for Protectionism About the Assistance Provided Workers Under the Trade Adjustment Act of 2002 How the Offshoring of U.S. Jobs Relates to the Growing International Trade in Services

Some Key Trade Facts U.S. trade deficit in goods $517 billion in 2009 U.S. trade surplus in services $138 billion in 2009 Canada largest U.S. trade partner Trade deficit with China $220 billion in 2009 Exports are 13% U.S. output Dependence on oil LO1 23-3

Copyright 2008 The McGraw-Hill Companies 23-4 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Some Key Facts U.S. Sizable Trade Deficit with China U.S. Dependence on Oil is Reflected U.S. has World’s Highest Trading Volume (Exports and Imports) China a Major Trade Force International Trade Links World Economies International Trade is the Center of Policy Debates

Some Key Trade Facts Principal U.S. exports include: Chemicals Agricultural products Consumer durables Semiconductors Aircraft U.S. provides about 8.5% of world’s exports LO1 23-5

Some Key Trade Facts LO1 23-6

Copyright 2008 The McGraw-Hill Companies 23-7 Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Some Key Facts GLOBAL PERSPECTIVE Germany United States China Japan France Netherlands Italy United Kingdom Source: World Trade Organization Shares of World Exports, Selected Nations Percentage Share of World Exports, 2004

Some Key Trade Facts LO1 23-8

Economic Basis for Trade Nations have different resource endowments Labor-intensive goods Land-intensive goods Capital-intensive goods LO2 23-9

Assumptions Two nations Same size labor force Constant costs in each country Different costs between countries U.S. absolute advantage in both Opportunity cost ratio Slope of the curve Wheat sacrificed per ton of Coffee LO2 Comparative Advantage 23-10

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Coffee (Tons) Wheat (Tons) Coffee (Tons) Wheat (Tons) (a) United States(b) Brazil A B

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Self-Sufficiency Output Mix Specializing Based on Comparative Advantage –Principle of Comparative Advantage Terms of Trade –1W ≡ 1C in the U.S. –1W ≡ 2C in Brazil Gains from Trade Trading Possibility Line –Improved Options –Added Output W23.1

Comparative Advantage Gains from trade Trading possibilities line Slope equals terms of trade Improved options Complete specialization More of both goods More efficient resource allocation LO

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Coffee (Tons) Wheat (Tons) Coffee (Tons) Wheat (Tons) (a) United States(b) Brazil A B A’ B’ C C’ W c w w’ Trading Possibilities Line Trading Possibilities Line

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show The Economic Basis for Trade Trade with Increasing Costs ( curve would be concave, not linear) The Case for Free Trade

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Supply and Demand Analysis of Exports and Imports World Price Domestic Price Supply and Demand in the United States –U.S. Export Supply Export Supply Curve –U.S. Import Demand Import Demand Curve

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Supply and Demand Analysis of Exports and Imports Price (Per Pound; U.S. Dollars Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars (a) U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand DdDd SdSd U.S. Export Supply U.S. Import Demand a b c x y Surplus = 50 Surplus = 100 Shortage = 50 Shortage = 100 U.S. Aluminum Market

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Supply and Demand Analysis of Exports and Imports Price (Per Pound; U.S. Dollars Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars (a) Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand DdDd SdSd Canadian Export Supply Canadian Import Demand a r s t Surplus = 50 Surplus = 100 Shortage = 50 Canadian Aluminum Market

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Supply and Demand Analysis of Exports and Imports Quantity of Aluminum (Millions of Pounds) Price (Per Pound; U.S. Dollars Equilibrium World Price and Quantity of Exports and Imports Canadian Export Supply Canadian Import Demand e World Market for Aluminum U.S. Export Supply U.S. Import Demand Equilibrium W23.2

Trade Barriers and Export Subsidies Tariffs Revenue tariff Protective tariff Import quota Nontariff barrier (NTB) Voluntary export restriction (VER) Export subsidy LO

Economic Impact of Tariffs Direct effects Decline in consumption Increase in domestic production Decline in imports Tariff revenue Indirect effects 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 LO

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Trade Barriers Quantity Price 0 DdDd SdSd PdPd Q S d + Q PtPt PwPw abcd Economic Effects of a Protective Tariff or an Import Quota

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Consider Tariff Impact Example of tariff gone awry: Water Intensive California Rice (shortage of water and uncertain future of meeting water needs). “The U.S. government supports domestic rice production through tariffs on imported rice and direct taxpayer subsidies based on production, prices, and historical acreage”..

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Trade Barriers The Case for Protection: A Critical Review –Military Self-Sufficiency Argument –Diversification-for-Stability Argument –Infant Industry Argument Counterarguments Strategic Trade Policy –Protection-Against-Dumping Argument Dumping –Increased Domestic Employment Argument Smoot-Hawley Tariff Act –Cheap Foreign Labor Argument

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 LO

Multilateral Trade Agreements General Agreement on Tariffs and Trade (GATT) World Trade Organization (WTO) European Union (EU) North American Free Trade Agreement (NAFTA) LO

GATT Three principles: Equal, nondiscriminatory trade between member nations Reduction in tariffs Elimination of import quotas LO

WTO Established by Uruguay Round of GATT 153 member nations 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 Initiated in 1958 as Common Market 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 and Offshoring Trade Adjustment Assistance Act Designed to help individuals hurt by international trade Offshoring of jobs Shifting of work previously done by American workers to workers abroad LO

Petition of the Candlemakers Petition of candlemakers asking for protection from natural light producers such as the sun Tongue-in-cheek argument supporting the idea of free trade LO

Copyright 2008 The McGraw-Hill Companies Some Key Facts The Economic Basis for Trade Supply and Demand Analysis of Exports and Imports Trade Barrier Trade Adjustment Assistance Last Word Key Terms End Show Key Terms labor-intensive goods land-intensive goods capital-intensive goods opportunity-cost ratio principle of comparative advantageprinciple of comparative advantage terms of trade trading possibilities line gains from trade world price domestic price export supply curve import demand curve equilibrium world price tariffs revenue tariff protective tariff import quota nontariff barrier (NTB) voluntary export restriction (VER)voluntary export restriction (VER) strategic trade policy dumping Smoot-Hawley Tariff Act Trade Adjustment Assistance ActTrade Adjustment Assistance Act offshoring World Trade Organization (WTOWorld Trade Organization (WTO Doha Round