Transcript Gaining from international trade

International Trade
The Trade Sector of the US
Growth:
- In 1975, exports and imports were each
approximately 8% of the U.S. economy.
- In 2000, exports accounted for 11.2% of GDP and
imports made up 14.9%.
Major Trading Partners:
- Canada, Mexico, and Japan
-China, Europe
International Trade Is of Increasing Importance to the US
U.S. International Trade in a World Context
International Trade as a Percentage of GDP
International trade is still less important to the United States than to most
other countries.
Leading Trading Partners of the U.S.
–––––––– Percent of Total U.S. Trade, 2002 ––––––––
–––––––– Percent of Total U.S. Trade, 2006 –––––
–––
Canada
19.8% 18.5%
Mexico
China
Japan
Germany
United Kingdom
South Korea
Taiwan
France
Malaysia
All other countries
11.5%
11.9%
11.9%
9.1%
7.2%
8.6%
4.9% 4.5%
3.9% 3.4%
3.1% 2.7%
2.5% 2.1%
2.3% 2.1%
1.8% 1.7%
34.4%
32.2%
• Today, Canada, Mexico, China, and Japan are the leading
trading partners with the United States.
• The impact of international trade varies across industries. -some compete effectively, some do not.
Gains from
Specialization and Trade
Law of Comparative Advantage
• A group of individuals, regions, or nations can
produce a larger joint output if each specializes in
the production of goods in which it is a lowopportunity cost producer and trades for goods for
which it is a high opportunity cost producer.
Gains from Specialization and Trade
• International trade allows each country to
specialize according to the law of comparative
advantage.
• Each country can produce those goods that it
can produce at a low opportunity cost.
• Trading partners can consume a wider variety of
goods than they could produce domestically.
Absolute advantage:
The ability to produce more of a good or service
than competitors when using the same amount of
resources.
Absolute advantage
Japan can produce more of both
Output per Hour of Work
Japan
United States
Cell Phones
Tablet Computers
12
2
6
4
Comparative advantage
Japan is more efficient in producing cell phones
US is more efficient in producing tablets
Japan
Opportunity Costs
Cell Phones
Tablet Computers
0.5 tablet computer
2 cell phones
United States
2 tablet computers
0.5 cell phone
Increasing Consumption through Trade
Terms of trade The ratio at which a country can trade its exports
for imports from other countries.
Countries gain from specializing in producing goods in which they have a
comparative advantage and trading for goods in which other countries
have a comparative advantage.
Autarky A situation in which a country does not trade with
other countries.
Why Don’t We See Complete Specialization?
1. Not all goods and services are traded internationally. Some services
are difficult to export, such as medical care.
2. Production of most goods involves increasing opportunity costs. If a
country devotes more workers to producing a good, the opportunity
cost of producing more of that good will increase, causing the country
to stop short of complete specialization.
3. Tastes for products differ. Countries may each have a comparative
advantage in producing different varieties of a particular product.
Does Anyone Lose as a Result of International Trade?
Some firms win, and some lose. The losers are likely to try to convince
their governments to interfere by barring imports of the competing
products from the other country or by imposing high tariffs on them.
Where Does Comparative Advantage Come From?
1. Climate and natural resources. Geology can create comparative
advantage.
2. Relative abundance of labor and capital. Some countries have a
comparative advantage in producing goods requiring highly skilled workers
and sophisticated machinery, while others have a comparative advantage
requiring unskilled workers and relatively simple machinery.
3. Technology. Broadly defined, technology is the process firms use to
turn inputs into goods and services.
Some countries are strong in product technologies, which involve the
ability to develop new products.
Other countries are strong in process technologies, which involve the
ability to improve the processes used to make existing products.
4. External economies. Once an industry becomes established in an area,
firms that locate in that area gain advantages over firms located
elsewhere.
Gains from Specialization and Trade
• International trade leads to gains from:
• Economies of Scale:
reductions in per-unit costs that often
accompany large-scale production, marketing,
and distribution.
• More Competitive Markets:
Promotes competition in domestic markets and
allows consumers to purchase a wide variety of
goods at economical prices.
External economies:
reductions in a firm’s costs that result from an
increase in the size of an industry.
A Hard Lesson to Learn
Exports and Imports are Linked
• Exports provide the foreign exchange needed
for the purchase of imports.
• Imports provide trading partners with the
currency needed to purchase exported goods
and services.
• Therefore, restrictions that limit one will also
limit the other.
U.S. Has a Comparative Advantage
• The price of soybeans and other internationally traded
commodities is determined by the forces of supply and demand
in the world market.
• If U.S. soybean producers were prohibited from selling to
foreigners, the domestic price would be Pn.
• Free trade permits U.S. soybean producers to sell Qp units at
the higher world price of Pw.
U.S. Market
Sd
Price
Pw
a
b
Sw
World Market
Price
Sw
Pw
c
Pn
Dw
Dd
Qc
Qn
Qp
Soybeans
(bushels)
Qw
Soybeans
(bushels)
U.S. Has a Comparative Advantage
• At the world price of Pw, the quantity (Qp – Qc) is exported.
• Compared to the no-trade situation, the producers’ gain from the
higher price (Pw b c Pn) exceeds the cost imposed on domestic
consumers (Pw a c Pn) by the triangle (area) a b c.
U.S. Market
Sd
Price
Pw
a
b
Sw
World Market
Price
Sw
Pw
c
Pn
Dw
Dd
U.S. exports
Qc
Qn
Qp
Soybeans
(bushels)
Qw
Soybeans
(bushels)
Foreigners Have a Comparative
Advantage
• Consider the international market for manufacturing shoes.
• In the absence of trade, the domestic price would be Pn.
• Since many foreign producers have a comparative advantage in
the production of shoes, international trade leads to lower prices
Pw.
U.S. Market
World Market
Price
Sd
Price
Sw
Pn
a
Pw
Dd
Dw
Qn
Shoes
Qw
Shoes
Foreigners Have a Comparative
Advantage
• At the price Pw, U.S. consumers demand Qc units of which
(Qc – Qp) are imported.
• Compared to no trade, consumers gain Pn a b Pw,
while domestic producers lose Pn a c Pw.
• A net gain of a b c results.
U.S. Market
World Market
Price
Sd
Price
Sw
a
Pn
Pw
b
c
Sw
Pw
Dd
Dw
U.S. imports
Qp Qn Qc
Shoes
Qw
Shoes
The Economics of
Trade Restrictions
Tariffs, Quotas and
Voluntary Export Restraints
Tariff A tax imposed by a government on imports.
Quota A numerical limit a government imposes on the
quantity of a good that can be imported into the
country.
Voluntary export restraint (VER) An agreement
negotiated between two countries that places a
numerical limit on the quantity of a good that can be
imported by one country from the other country.
U.S. Tariff Rates: 1890 to the Present
–––––––– U.S. Average Tariff Rate ––––––––
(Duties collected as a share of dutiable imports)
60%
50%
40%
30%
20%
4.5%
10%
1890
1910
1930
1950
1970
1990
2006
Trade Restrictions: Impact of a Tariff.
• Consider a tariff on autos imports.
• Without a tariff, the world price
of autos is Pw. At Pw consumers
in the U.S. purchase Q1 units …
Price
SDomestic
Qd1 from U.S. producers and …
Q1 – Qd1 from foreign producers.
• A tariff t makes it more costly for
Americans to purchase autos from
abroad. U.S. prices rise to Pw+ t
and purchases fall from Q1 to Q2. Pw+ t
• U.S. purchases from domestic
producers rise from Qd1 to Qd2 …
imports fall to Q2 – Qd2.
Pw
Imports after tariff
S
U
T
V
Initial imports
DDomestic
• Producers gain area S … the
tariff generates T tax revenues for
the government…
areas
U & V are deadweight losses from
reduction in allocative efficiency.
Tariff = t
Qd1 Qd2 Q2 Q1
Quantity
(automobiles)
Trade Restrictions: Impact of a Quota
• Consider a quota on peanuts.
• Without trade restraints, Pw (the
world price of peanuts) would be
the domestic price. At Pw U.S.
consumers would purchase Q1 …
Price
SDomestic
Qd1 from U.S. producers and …
Q1 – Qd1 imported from abroad.
• A quota of Q2 – Qd2 imports
pushes the U.S. price up to P2.
• While total U.S. purchases fall
(from Q1 to Q2), those from U.S.
producers rise (from Qd1 to Qd2)
and … imports fall to Q2 – Qd2.
Import quota:
Q2 – Qd2
P2
Pw
S
U
T
V
Initial imports
• U.S. producers gain area S. Area
T goes to foreign producers with
permits to import into the U.S.
•U & V are deadweight losses.
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(peanuts)
Note: The government derives no
additional revenue from quotas.
Trade Restriction Impacts
Price
SDomestic
Price
SDomestic
Import quota:
Imports after tariff
Pw
Q2 – Qd2
P2
Pw+ t
S
U
T
V
Tariff = t
Pw
S
U
T
V
Initial imports
Initial imports
DDomestic
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(automobiles)
Qd1 Qd2 Q2 Q1
Quantity
(peanuts)
The Economic Effect of the U.S. Sugar Quota
Without quota, U.S. producers would
sell 4.7 billion pounds of sugar,
U.S. consumers would buy 27.5 billion
pounds,
imports would have been 22.8 billion
pounds
The U.S. price would be $0.28 per
pound.
equilibrium would be at point E;
With sugar import quota of 5.3 billion
pounds
the price of sugar is $0.53 per pound,
U.S. producers supply 15.9 billion
pounds.
U.S. consumers purchase 21.2 billion
pounds
The Economic Effect of the U.S. Sugar Quota
The sugar quota causes a
loss of consumer surplus
equal to the area
A + B + C + D.
The area A is the gain to
U.S. sugar producers.
The area B is the gain to
foreign sugar producers.
The areas C and D
represent deadweight loss.
The total loss to U.S.
consumers in 2010 was
$6.08 billion.
The High Cost of Preserving US Jobs with Tariffs and Quotas
Product
Benzenoid chemicals
Luggage
Softwood lumber
Dairy products
Frozen orange juice
Ball bearings
Machine tools
Women's handbags
Canned tuna
Number of Jobs
Saved
216
226
605
2,378
609
146
1,556
773
390
Cost to Consumers per Year
for Each Job Saved
$1,376,435
1,285,078
1,044,271
685,323
635,103
603,368
479,452
263,535
257,640
Practical Application:
In 2002, the Bush administration imposed
tariffs of up to 25% on imported steel
products. This action
a. reduced the supply of steel in the domestic
market and led to higher steel prices.
b.increased U.S. employment because it saved
jobs in the steel industry.
c. reduced employment in the U.S. steel container
industry because the higher steel prices made it
more difficult for them to compete with foreign
rivals.
Preserving Japanese Jobs with Tariffs and
Quotas Is Also Expensive
Product
Rice
Natural gas
Gasoline
Paper
Beef, pork, and poultry
Cosmetics
Radio and television sets
Cost to Consumers per
Year for Each Job Saved
$51,233,000
27,987,000
6,329,000
3,813,000
1,933,000
1,778,000
915,000
1.
2.
3.
4.
Why do Nations Adopt
Trade Restrictions?
National Defense argument
Protect higher wages argument
Saves domestic employment
Prevents Dumping:
a. The sale of goods abroad at a price below cost
b. Allows foreign firms to achieve economies of
scale.
c. Foreign firms may want to gain entry to
another market. Sell below cost to gain sales.
5. Infant Industry argument
a. Protect developing industries while growing
b. Difficult to tell when they are adult.
Efforts to Reduce Trade Restrictions
GATT / WTO
In 1948 the United States and Europe set up the General Agreement
on Tariffs and Trade (GATT) to reduce tariffs and revive
international trade after World War II
A series of multilateral negotiations, called trade rounds, took place,
in which countries agreed to reduce tariffs from the very high levels
of the 1930s.
In the following decades, trade in services and in products
incorporating intellectual property, such as software programs and
movies, grew in importance.
Efforts to Reduce Trade Restrictions
GATT / WTO
In January 1995, GATT was replaced by the World Trade
Organization (WTO).
World Trade Organization (WTO) An international organization that
oversees international trade agreements.
Why Do Some People Oppose the World Trade Organization?
1. Some opponents are specifically against the globalization process
that began in the 1980s and became widespread in the 1990s.
2. Other opponents have the same motivation as the supporters of
tariffs in the 1930s—to erect trade barriers to protect domestic
firms from foreign competition.
3. Some critics of the WTO support globalization in principle but
believe that the WTO favors the interests of the high-income
countries at the expense of the low-income countries.
Globalization The process of countries becoming more open to foreign
trade and investment.
Anti-Globalization Many of those who protest at WTO meetings
distrust globalization.
Some believe that free trade and foreign investment destroy the
distinctive cultures of those countries.
Globalization has also allowed multinational corporations to relocate
factories from high-income countries to low-income countries.
Some people have argued that firms with factories in developing
countries should pay workers wages as high as those paid in highincome countries, abiding by the same health, safety, and
environmental regulations.
The governments of most developing countries have arguments against
these proposals.
IMF - loans and financial assistance
EU - European free trade area
NAFTA - North American free
trade area
U.S. Trade with Canada and Mexico
6%
–––––––– U.S. Trade with Canada and Mexico ––––––
––
5%
(Exports and Imports together as a share of GDP)
Canada
4%
3%
Mexico
2%
1%
1980
1985
1990
1995
2000
2005
• U.S. trade with both Canada and Mexico grew rapidly
following the passage of NAFTA.
Trade Fallacies
• Trade fallacies abound because people often fail
to consider the secondary effects.
• Key elements of international trade are often
linked – you cannot change one element without
changing the other.
• This is the case with imports and exports;
policies that restrain imports also restrain
exports.
Trade Fallacies
• Trade fallacy 1:
“Trade restrictions that limit imports save jobs
for Americans.”
• This view is false because if foreigners sell less to us
they will have fewer dollars with which to buy things
from us.
• Trade restrictions do not “save” jobs; they merely
reshuffle them. Jobs “saved” in protected
industries will be offset by jobs “lost” in export
industries.
• As the result of trade restrictions, fewer Americans
are employed in areas where we have a comparative
advantage.
Trade Fallacies
• Trade fallacy 2:
"Free trade with low-wage countries, such as
Mexico and China, will reduce the wages of
Americans."
• Both high- and low-wage countries will gain when
they are able to focus more of their resources on
those productive activities that they do well.
• The key to this issue is how will U.S. resources be
used. If a low-wage country can supply a good
cheaper than we can produce it, the U.S. can gain by
purchasing the good from the low-wage country and
using its resources to produce other goods for
which it has a comparative advantage.
1. Measured as a share of the economy, the size of the trade
sector (exports plus imports) of the United States has
a. been increasing since 1980, but it declined during 1960–
1980.
b.been relatively constant during the last four decades.
c. increased by about 10 percent during the last four
decades.
d.approximately doubled since 1980 and tripled since 1960.
2. A U.S. trade policy that restricts the sale of foreign goods
in the U.S. market will
a. reduce the demand for U.S. export goods since foreigners
will be less able to buy our goods if they cannot sell to us.
b.benefit producers in industries that export goods.
c. increase the nation’s income since it protects domestic
jobs.
d.enhance economic efficiency by allocating more resources
to the areas of their greatest comparative advantage.
True or False
1. The purchase of goods and services from abroad is
called exporting.
2. The largest category of U.S. exports is foods and
beverages.
3. The country with which the United States carries on
the largest amount of international trade is Canada.
4. The scarcity problem can be eliminated by increasing
production through specialization.
5. A country is said to have a comparative advantage over
another country if it can produce a product at a lower
opportunity cost than can the other country
6.
The availability of appropriate markets and the ability
to trade are necessary if countries are to specialize in their
production
7.
Trade restrictions must be imposed between countries
if they are to gain the full benefits of production according to
comparative advantage.
8.
A total ban on imports from another country is a quota.
9.
A tariff is a restriction on the quantity of a product that
can enter a country.
10.
The complete prohibition of trade in a particular
commodity with a particular nation is called an embargo
11.
The prices and availabilities of goods and services
should be lower with free trade than with restricted trade
12.
One of the protectionist arguments is that trade
restrictions should be imposed to ensure national security
13.
The sale of a product in a foreign market at a price
below cost is called dumping
14.
Negotiations under the General Agreement on Tariffs
and Trade have resulted in lower tariffs between nations.