1. SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE
International Trade
SLIDES PREPARED BY JUDITH SKUCE, GEORGIAN COLLEGE

2. In this chapter you will learn
16.1 Some key facts about Canada’s international trade
16.2 About specialization and comparative advantage
16.3 About supply and demand analysis of exports and imports
16.4 About trade barriers and their negative effects on nations’ economic well-being
16.5 The usual arguments against trade
16.6 The role played by the World Trade Organization (WTO) in promoting international trade

3. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones

4. International Linkages
Figure 16-1
Canadian
Economy
Other National Economies
Goods & Services
Capital & Labour
Info & Technology
Money

5. Canadian International Trade: Volume & Pattern
Exports are 40% of Canadian GDP

6. Exports of Goods & Services as % of GDP
GLOBAL PERSPECTIVE 16.1
Exports of Goods & Services as % of GDP

7. Canadian exports & imports have doubled as % of GDP since 1971
Figure 16-2

8. Canadian International Trade: Volume & Pattern
Dependence
Canada almost entirely dependent on other countries for bananas, cocoa, spices, tea, raw silk, tin, natural rubber
Many Canadian industries rely on sales abroad: wheat, corn, tobacco, computers, automobiles, etc.

9. Canadian International Trade: Volume & Pattern
Trade Patterns
Main exports:
automotive products
machinery & equipment
industrial goods & materials
Main imports:
industrial goods & material
Canada imports some of the same categories of goods it exports

10. Rapid Trade Growth Transportation Technology Communications Technology
General Decline in Tariffs

11. Participants in International Trade
North America, Japan, & Western Europe
headquarters for multinational corporations
New Participants
Hong Kong, Singapore, South Korea, Taiwan
China
Eastern Europe
Russia

12. Exports of Goods & Services as % of GDP
Comparative Exports
Exports of Goods & Services as % of GDP

13. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones

14. The Economic Basis for Trade
Why do nations trade?
The distribution of resources is uneven
Efficient production requires different technologies or resource combinations
Products are differentiated as to quality & other non-price attributes

15. The Economic Basis for Trade
labour-intensive goods

16. The Economic Basis for Trade
labour-intensive goods
land-intensive goods

17. The Economic Basis for Trade
labour-intensive goods
land-intensive goods
capital-intensive goods

18. The Economic Basis for Trade
Distribution of resources may change over time

19. Specialization & Comparative Advantage
The Basic Principle
specialization according to comparative advantage reduces costs

20. Specialization & Comparative Advantage
Two isolated nations
constant costs
straight-line production possibilities curves
different costs
different technology & resources

21. Production Possibilities45 40 35 30 25 20 15 12 10 5
Figure 16-3
Canada
Brazil 30 25 20 15 10 4
Soybeans (tonnes)
Soybeans (tonnes)
Steel (tonnes)
Steel (tonnes) 21
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

22. Specialization & Comparative Advantage
the choice under self-sufficiency

23. Production Possibilities: Self Sufficiency45 40 35 30 25 20 15 12 10 5
Figure 16-3
Canada
Brazil 30 25 20 15 10 4
18 steel
12 soybeans
Soybeans (tonnes)
Soybeans (tonnes)
8 steel
4 soybeans A B
Steel (tonnes)
Steel (tonnes) 23
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

24. Specialization Based on Comparative Advantage
Opportunity Cost Table
Country 1 Steel Cost 1 Soybean Cost
Canada 1 soybean 1 steel
Brazil 2 soybeans .5 steel
Who has the comparative advantage in steel?

25. Specialization Based on Comparative Advantage
Opportunity Cost Table
Country 1 Steel Cost 1 Soybean Cost
Canada 1 soybean 1 steel
Brazil 2 soybeans .5 steel
Who has the comparative advantage in soy?

26. Specialization Based on Comparative Advantage
Canada - comparative advantage in steel
Brazil - comparative advantage in soybeans

27. Production Possibilities: Before Trade45 40 35 30 25 20 15 12 10 5
Figure 16-3
Canada
Brazil 30 25 20 15 10 4
18 steel
12 soybeans
Soybeans (tonnes)
Soybeans (tonnes)
8 steel
4 soybeans A B
Steel (tonnes)
Steel (tonnes) 27
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

28. Production Possibilities: After Specialization45 40 35 30 25 20 15 12 10 5
Figure 16-3
Canada
Brazil 30 25 20 15 10 4
Soybeans (tonnes)
30 steel
0 soybeans
Soybeans (tonnes)
0 steel
20 soybeans A B
Steel (tonnes)
Steel (tonnes) 28
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

29. Terms of Trade what will the terms of trade be? many possibilities
for trade to be mutually beneficial the terms of trade must be between each nation’s opportunity costs

30. Terms of Trade Opportunity Cost Table for example:
Country 1 Steel Cost 1 Soybean Cost
Canada 1 soybean 1 steel
Brazil 2 soybeans .5 steel
for example:
1 steel for 1.5 soybeans
gains from trade can be illustrated with trading possibilities line

31. Trading Possibilities Lines: After Trade45 40 35 30 25 20 15 12 10 5
1.5 soy for 1 steel
Figure 16-4
Canada
Brazil
.67 steel for 1 soy 30 25 20 15 10 4
Soybeans (tonnes)
Soybeans (tonnes)
Trading
possibilities
line
Trading
possibilities
line A B
Steel (tonnes)
Steel (tonnes) 31
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

32. Table 16-3 Canada Brazil steel soybeans Outputs before specialization18 12 8 4
Outputs after specialization
Amounts exported (-) & imported (+)
Outputs available after trade
Gains from specialization & trade 30 20
-10
+15
+10
-15 20 15 10 5 2 3 2 1

33. Gains from Trade
Improved Options
Added Output

34. Trade with Increasing Costs
A more realistic model:
increasing opportunity costs
less than complete specialization

35. The Case for Free Trade Restated
Through free trade based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources & a higher level of material well-being than without free trade
Side benefits:
promotion of competition, deterrence of monopoly
linking of national interests, reduction of national animosities

36. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones

37. Supply & Demand Analysis of Exports & Imports
When world prices increase relative to domestic prices, domestic exports will increase, resulting in an upward sloping export supply curve
When world prices decrease relative to domestic prices, domestic imports will increase, resulting in a downward sloping import demand curve

38. Canadian Export Supply and Import Demand
Figure 16-5
Cdn. domestic aluminum market
Cdn. export supply and
import demand Sd
If the world price
exceeds the Cdn.
price by 25 cents....
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
Price (per kg. Cdn. dollars)
Price (per kg. Cdn. dollars) Dd 50 75
100
125
150 50
100 38
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

39. Canadian Export Supply and Import Demand
Figure 16-5
Cdn. domestic aluminum market
Cdn. export supply and
import demand Sd
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
SURPLUS = 50
EXPORTS = 50
If the world price
goes further up....
Price (per kg. Cdn. dollars)
Price (per kg. Cdn. dollars) Dd 50 75
100
125
150 50
100 39
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

40. Canadian Export Supply and Import Demand
Figure 16-5
Cdn. domestic aluminum market
Cdn. export supply and
import demand Sd
SURPLUS = 100
EXPORTS = 100
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
Cdn.
export
supply
Price (per kg. Cdn. dollars)
Price (per kg. Cdn. dollars)
If world prices
fall below $ Dd 50 75
100
125
150 50
100 40
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

41. Canadian Export Supply and Import Demand
Figure 16-5
Cdn. domestic aluminum market
Cdn. export supply and
import demand Sd
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
Cdn.
export
supply
Price (per kg. Cdn. dollars)
Price (per kg. Cdn. dollars)
IMPORTS = 50
SHORTAGE = 50 Dd 50 75
100
125
150 50
100 41
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

42. Canadian Export Supply and Import Demand
Figure 16-5
Cdn. domestic aluminum market
Cdn. export supply and
import demand Sd
$1.75
1.50
1.25
1.00
.75
$1.75
1.50
1.25
1.00
.75
Cdn.
export
supply
Price (per kg. Cdn. dollars)
Price (per kg. Cdn. dollars)
Cdn.
import
demand
SHORTAGE = 100
IMPORTS = 100 Dd 50 75
100
125
150 50
100 42
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

43. U.S. Export Supply and Import Demand
Figure 16-6
U.S. domestic aluminum market
U.S. export supply and
import demand Sd
SURPLUS = 100
EXPORTS = 100
$1.50
1.25
1.00
.75
.50
$1.50
1.25
1.00
.75
.50
U.S.
export
supply
SURPLUS = 50
EXPORTS = 50
Price (per kg. Cdn. dollars)
Price (per kg. Cdn. dollars)
U.S.
import
demand
SHORTAGE = 50
IMPORTS = 50
SHORTAGE = 100
IMPORTS = 100 Dd 50 75
100
125
150 50
100 43
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

44. World Equilibrium World price is where: U.S. export supply
Cdn.
export
supply
import
demand
Figure 16-7
World price is where:
U.S. export supply
=Cdn. import demand
1.25
1.12
1.00
U.S.
export
supply
import
demand e
Price (per kg. Cdn. dollars) 25 44
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

45. Note the world price is HIGHER than the US domestic price before trade
World Equilibrium
Cdn.
export
supply
import
demand
Figure 16-7
Note the world price is HIGHER than the US domestic price before trade
1.25
1.12
1.00
U.S.
export
supply
import
demand e
Price (per kg. Cdn. dollars) 25 45
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

46. World Equilibrium
Cdn.
export
supply
import
demand
Figure 16-7
Why would the US be willing to pay $1.12 when they can produce it themselves at $1.00?
1.25
1.12
1.00
U.S.
export
supply
import
demand e
Price (per kg. Cdn. dollars) 25 46
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

47. World Equilibrium
Cdn.
export
supply
import
demand
Figure 16-7
Earnings from US exports allow Americans to import other goods which have greater value than the exported aluminum
1.25
1.12
1.00
U.S.
export
supply
import
demand e
Price (per kg. Cdn. dollars) 25 47
© 2005 McGraw-Hill Ryerson Ltd.
Macroeconomics, Chapter 16

48. Supply & Demand Analysis of Exports & Imports
world price set by interaction of world demand and supply
only one price can persist for a standardized commodity (ignoring transportation costs and trade barriers)

49. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones

50. Trade Barriers Tariffs Import Quotas Non-tariff Barriers (NTB)
Revenue tariffs
Protective tariffs
Import Quotas
Non-tariff Barriers (NTB)
Voluntary Export Restrictions (VER)

51. Effects of a Tariff open to world markets:
quantity demanded increases to d
quantity supplied decreases to a
imports are d-a
Figure 16-8
price
supply pD q pW a d
imports
demand
quantity
Domestic Market

52. Effects of a Tariff tariff Domestic Market effects of a tariff:
Figure 16-8
effects of a tariff:
price rises to pT
quantity supplied increases to b
quantity demanded decreases to c
imports are c-b
price
supply pD q pT
tariff b c pW a d
demand
imports
quantity
Domestic Market

53. Effects of a Tariff Domestic Market supply tariff revenue
Figure 16-8
price
supply
tariff revenue
= (c-b)X(pT-pW)
=imports X tariff pD q pT b c pW a d
demand
imports
quantity
Domestic Market

54. Economic Impact of Tariffs
Decline in consumption
Increased domestic production
Decline in imports
Tariff revenue
Indirect Effects:
expansion of inefficient industries at the expense of relatively efficient ones

55. Economic Impact of Quotas
the same, without the tariff revenue for the government
foreign firms reap the benefit of higher prices

56. Effects of a Quota Domestic Market supply
Figure 16-8
price
supply
price with quota is pQ, which again reduces imports pD q pQ b c pW a d
imports
demand
quantity
Domestic Market

57. Net Costs of Tariffs & Quotas
Consumer costs
price of imported product goes up
some consumers shift purchases from imports to higher-priced domestic goods
prices of domestic goods rise
gains to protected industries & workers come at the expense of much greater losses for the entire economy

58. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones

59. The Case For Protection: A Critical Review
Self-Sufficiency Argument
Increase Domestic Employment Argument
job creation from imports
fallacy of composition
possibility of retaliation
long-run feedbacks
Diversification for Stability Argument

60. The Case For Protection: A Critical Review
Infant Industry Argument
Counter-arguments:
which industries?
how long?
other better methods
Strategic Trade Policy

61. The Case For Protection: A Critical Review
Protection Against Dumping Argument
Driving Out Competitors
Price Discrimination
Cheap Foreign Labour Argument

62. The Case For Protection: A Critical Review
A Summing Up
the arguments for protection are not convincing
there is compelling historical evidence that free trade has led to prosperity & protectionism has led to the opposite

63. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones

64. Multilateral Trade Agreements & Free-Trade Zones
high tariffs a contributing cause of the Great Depression
Reciprocal Trade Agreements
most-favoured-nation clauses

65. Canadian Tariff Rates, 1930-2002

66. General Agreement on Tariffs & Trade (GATT)
first signed in 1947
equal, non-discriminatory trade treatment for all member nations
reduction of tariffs by multilateral negotiation
elimination of import quotas
eight rounds of negotiations
Uruguay Round took effect in 1995

67. World Trade Organization (WTO)
successor to the GATT
oversees trade agreements
rules on trade disputes
forum for further rounds of negotiations
Doha Round launched in 2001

68. World Trade Organization (WTO)
Trade liberalizations to be implemented by 2005:
tariff reductions
new rules for trade in services
reductions in agricultural subsidies
new protections for intellectual property
phasing out quotas on textiles & apparel, & replacing them with declining tariffs

69. World Trade Organization (WTO)
GATT & WTO have been positive forces for liberalized trade
WTO is highly controversial
concerns about environment, labour

70. The European Union (EU)
free-trade zones, trade blocs
EU initiated in 1958 as the Common Market
expanded from 15 to 25 countries in 2004
nearly all internal tariffs & import quotas abolished
common system of tariffs on non-EU goods
liberalized movements of capital & labour within the EU
common internal economic policies

71. The European Union (EU)
effects mixed:
Canada benefits from increasing prosperity in EU market
but trade barriers make it difficult to compete with EU companies
the Euro Zone established in early 2000s
ends the inconvenience & expense of exchanging currencies

72. North American Free Trade Agreement
Canada, Mexico, United States formed a trade bloc in 1993
greatly reduced tariffs
tariffs will be eliminated by 2008
concerns about job losses not realized
standard of living has been enhanced in all three countries

73. Chapter 16 Topics 16.1 Canada & International Linkages
16.2 The Economic Basis for Trade
16.3 Supply & Demand Analysis of Exports & Imports
16.4 Trade Barriers
16.5 The Case for Protection: A Critical Review
16.6 Multilateral Trade Agreements & Free-Trade Zones