International Trade Patterns and Trends in International Trade Gains from trade Absolute and comparative advantage revisited Tariffs Quotas Welfare loss from trade restrictions Arguments for trade restrictions

Source:

Composition of U.S. Imports and Exports Composition of US merchandise exports and imports in

8 U.S. production as a percentage of U.S. consumption for various commodities If U.S. production is <100% of consumption, imports make up the difference. If U.S. production exceeds U.S. consumption, then the difference is exported. Percent

Ricardo’s principle of comparative advantage shows how trade between nations can be mutually beneficial

11 Production possibilities for United States and Izodia (a) United States Production possibilities with 100 million workers (millions of units per day) U1U1 U2U2 U3U3 U4U4 U5U5 U6U6 Food Clothing (b) Izodia Production possibilities with 200 million workers (millions of units per day) I1I1 I2I2 I3I3 I4I4 I5I5 I6I6 Food Clothing

12 Production possibilities frontiers for the United States and Izodia without trade (millions of units per day) Food (a) United States U1U1 U2U2 U3U3 U5U Clothing Food (b) Izodia I1I1 I2I2 I4I4 I5I Clothing0 Slope: opportunity cost of an additional unit of food is ½ unit of clothing An additional unit of food costs 2 units of clothing. Food is produced at a lower opportunity cost in the United States. U4U4 U6U6 I3I3 I6I6

Measuring opportunity cost: For the United States Food: 60 clothing/120 food = ½ clothing per food. Clothing: 120 food/60 clothing = 2 food per clothing For Izodia Food: 80 clothing/40food = 2 clothing per food Clothing: 40 food/80 clothing = ½ food per clothing Thus the Unites States has the comparative advantage in food and Izodia has the comparative advantage in clothing.

How much of one good exchanges for a unit of another good. As long as the Americans can get more than ½ unit of clothing for each unit of food, and as long as the Izodians can get more than ½ unit of food for a unit of clothing, both sides benefit from specialization and trade

These terms work for both sides

16 Production (and consumption) possibility frontiers with trade (millions of units per day) Food (a) United States Clothing Food (b) Izodia Clothing0 U I Trade: 1 unit of clothing for 1 unit of food. Both countries are better off as a result of international trade. I3I3 U4U4

United StatesIzodia Clothing (units) Food (units) Clothing (units) Food (units) No Trade Trade Gain

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.

The Japanese trade ministry (MITI) decided that snow skis made in the U.S. were not safe enough for Japanese ski enthusiasts Health and safety standards—such as European ban on genetically-modified soybeans and hormone- treated beef. Product design standards Licensing requirements Bureaucratic red tape

20 Consumer and producer surplus from market exchange $ Price per pound 060 Chicken (pounds per day) S = marginal cost D = marginal benefit Consumer surplus Producer surplus

21 Effect of a tariff $ Price per pound S D 030 Sugar millions of pounds per month) a b c d f At a world P=$0.10 per pound, US consumers demand 70 mill. pounds of sugar per month, and US producers supply 20 mill. pounds per month; the difference is imported. Tariff= $0.05 per pound; P=$0.15 per pound. US producers increase production to 30 mill. pounds; US consumers cut back to 60 mill. pounds. Imports fall to 30 mill. pounds. Consumers are worse off. Loss of consumer surplus: areas a, b, c, and d. a = increase in producer surplus b = higher marginal cost of domestically producing sugar that could have been produced more cheaply abroad. c = government revenue from the tariff d = loss of consumer surplus from the drop in consumption b+d = Net welfare loss to the US economy

S’ 22 Effect of a quota $ Price per pound S D 0 Sugar (millions of pounds per month) $ Price per pound S D 030 Sugar (millions of pounds per month) a b c d S’ e Quota=30 mill., world price=$0.10. S’=supply curve (imports and US production; new price $0.15: intersection of D and S’. Loss of consumer surplus: a+b+c+d; a = transfer from US consumers to US producers; b+d = net loss; c = gain for sellers of foreign-grown sugar

Given the preceding analysis, why are trade restrictions so pervasive?

National security Save domestic jobs Anti-dumping Infant industry