Transcript International Trade - CERGE-EI

Macroeconomics ECO 110/1, AAU
Lecture 11
INTERNATIONAL TRADE
Eva Hromádková, 3.5 2010
Trade Patterns of CR
2


Czech Republic is a small open economy:
Imports are goods and services purchased from
foreign sources:
 CR

(2009): 1,981 bil. CZK; 82% of 2008 values
Exports are goods and services sold to foreign
buyers.
 CR
(2009): 2,132 bil. CZK; 86% of 2008 values
 GDP = 3,627 bil CZK; export ratio = 59%
Export Ratios
3
Trade Balances
4


The trade balance is the difference between the
value of exports and imports.
Any imbalance in one country’s trade must be offset
by reverse imbalances elsewhere.
Trade balance = exports – imports
Trade Balances II
5



Trade deficit is the amount by which the value of
imports exceeds the value of exports in a given time
period.
Trade surplus is the amount by which the value of
exports exceeds the value of imports in a given time
period.
CR is running a trade surplus

151 bil. CZK (2009); 67 bil. CZK (2008)
Bilateral Trade Balances:
Top Deficit Countries
6
Country
China
Japan
Russia
South Korea
Azerbaijan
Trade Balance
(in billions of CZK)
–183
–54
–53
–20
–11
Bilateral Trade Balances:
Top Surplus Countries
7
Country
Germany
Slovakia
UK
France
Austria
Trade Balance
(in billions of dollars)
+162
+84
+62
+43
+27
Motivation to Trade
8

LO2
Why trade when . . .
. . . we import many of the things we also export.
. . . we could produce many of the other things we
import.
. . . we seem to seem to worry so much about trade
imbalances.
Specialization
9

Trade allows nations to specialize and
specialization increases total output.
 Example:
Would you grow your food and produce all
your possessions? Or would you rather work in your
field and buy everything else on the market?

LO2
Trade increases world output and the standards of
living in all trading countries.
Production and Consumption
Without Trade
10

The gains from trade can be illustrated using production
possibilities curves.



LO2
Production possibilities – The alternative combinations of final
goods and services that could be produced in a given time
period with all available resources and technology.
Consumption possibilities - The alternative combinations of goods
and services that a country could consume in a given time period.
In the absence of trade, a country’s consumption
possibilities are identical to its production possibilities.
Consumption Possibilities
Without Trade
11
U.S. Production
Possibilities
Bread
Wine
100
0
80
10
60
20
40
30
20
40
0
50
LO2
French Production
Possibilities
Bread
Wine
15
0
12
12
9
24
6
36
3
48
0
60
Consumption Possibilities
Without Trade - US
12
U.S. production possibilities
OUTPUT OF BREAD
(zillions of loaves per year)
100 A
B
80
C
60
D
40
E
20
0
10
20
30
40
F
50
OUTPUT OF WINE (zillions of barrels per year)
LO2
60
Consumption Possibilities
Without Trade - France
13
French production possibilities
OUTPUT OF BREAD
(zillions of loaves per year)
25
20
15 G
H
10
I
J
5
0
K
10
20
30
40
50
L
60
OUTPUT OF WINE (zillions of barrels per year)
LO2
Production and Consumption
With Trade
14



To assess the potential gain from trade, we need to consider
the combined output of trading nations.
By changing the mix of output in each trading country, we can
increase total world output.
Each country produces those goods it makes best, then trades
with other countries to acquire the goods it desires to consume.


LO2
E.g.: US is better in bread and France in wine making
When a country engages in international trade, its consumption
possibilities always exceed its production possibilities.
Consumption Possibilities
Comparison without and with trade
15
LO2
U.S. (at point D)
France (at point I)
World total
Bread
40
9
49
Wine
30
24
54
U.S. (at point C)
France (at point K)
World total
Bread
60
3
63
Wine
20
48
68
Consumption Possibilities
With Trade – US and France
16
LO2
Comparative Advantage
17


Although international trade can make everyone better off, it’s
not obvious which goods should be traded, or on what terms.
The decision to export is based on comparative advantage:
The ability of a country to produce a specific good at a lower
relative opportunity cost than its trading partners.



LO1
1 wine = 2 breads – USA  advantage in bread making
1 wine = 0.25 breads – France  advantage in wine making
World output, and thus potential gains from trade, will be
maximized when each country pursues its comparative
advantage.
Absolute Advantage
18

The absolute advantages in production do not matter

LO1
Absolute advantage – The ability of a country to produce a
specific good with fewer resources (per unit of output) than
other countries.
Terms of Trade
19


The terms of trade establish the trading rate.
Terms of trade is the rate at which goods are exchanged
– the amount of good A given up for good B in trade.
A country will not trade unless the terms of trade are
superior to domestic opportunities.
 The terms of trade between two countries will lie somewhere
between their respective opportunity costs in production.


Ex: 1 loaf of bread between ½ barrel of wine (US) and 4 barrels of
wine (France); in our example 1 loaf of bread = 3.33 barrel of wine
(large gain for US)
Searching for the Terms of Trade
20
Bread
United
States
Bread
France
A
100
80 X
60
C
D
40
Production
20
possibilities
0
120
90
60
30
10
0
10
20
30
Y
Consumption
possibilities
N
40
50
60
70
80
90 100 110
Consumption possibilities
L
M
20
30
Production possibilities
K
40 50 60 70 80 90 100 110
Wine
The Role of Markets and Prices
21


The decision to import or export a particular good is
often left up to the market decisions of individual
consumers and producers.
The terms of trade, like the price of any good, will
depend on the willingness of market participants to
buy or sell at various prices.
 But
will stay within the limit terms of trade
Protectionist Pressures
22


LO3
Although the potential gains from trade are
impressive, not everyone favors free trade.
Imports typically compete with a domestic industry.
Protectionist Pressures
Microeconomic Pressures
23
The affected industries will try to restrict imports in
order to preserve their own jobs and incomes:
 Import competing industries
 E.g. wine producers in California
But also a positive pressure:
 Export industries: import redistributes income from
import-competing industries to export industries
E.g. wheat producers in Kansas
In total, everybody should be better off…

LO3
Protectionist Pressures
Additional Pressures
24


Selfish micro interests are not the only source of trade
restrictions.
Other arguments are used to restrict trade
1.
2.
3.
4.
LO3
National Security Concerns
Dumping
Infant Industries
Improving the Terms of Trade
Protectionist pressures
1. National Security Concerns
25




LO3
Essential defense-related goods are vital during
times of war.
A war could disrupt this flow leaving us vulnerable.
Exporting vital technology to a potential enemy is
not wise.
E.g: food, steel industry
Protectionist pressures
2. Dumping
26

Dumping is the sale of goods in export markets at
prices below domestic prices (even below
production costs)
 Q:

LO3
What is he main goal of importers then?
Import competing industries are placed at risk
Protectionist pressures
3. Infant Industries
27



LO3
Even normal export prices might make it difficult or
impossible for a new domestic industry to develop.
These industries may need temporary protection
from imports.
Trade restrictions are justified only if there is
tangible evidence that the industry can develop a
comparative advantage reasonably quickly. (e.g.
computer industry in Brazil)
Protectionist pressures
4. Improving the Terms of Trade
28




LO3
The distribution of the gains from trade depends on
the terms of trade.
Putting restrictions on imports can move the terms of
trade in our favor
We would end up with a larger share of the gains
from trade.
This strategy can backfire - retaliations
Barriers to Trade
29

1.
2.
3.
4.
5.
LO3
The microeconomic losses associated with trade give
rise to a constant clamor for trade restrictions.
Embargoes
Tariffs
Quotas
Voluntary restraint agreements
Non-tariff barriers
Barriers to trade
1. Embargoes
30


The sure-fire way to restrict trade is simply to
eliminate it.
An embargo is a prohibition against trading
particular goods.
Ex.1: on Soviet mink and fur (US)
 Ex.2: on Cuban goods (cigars, sugar)
 Ex.3: on Georgian wine and mineral water (Russia)

LO3
Barriers to trade
2. Tariffs
31



LO3
A more frequent trade restriction is a tariff.
A tariff is a tax (duty) imposed on imported goods.
A tariff makes imported goods more expensive to
domestic consumers, and less competitive with
domestically priced goods.
Barriers to trade
3. Quotas
32


The same outcome of a tariff can be attained more
directly by imposing an import quota.
A quota is a limit on the quantity of a good that
may be imported in a given time period.
 Ex.1:
max 950 gal. of Jamaican ice-cream (US)
 Ex.2: lower quotas on the import of US chicken meat
(Russia)
 Russia
LO3
is the biggest export market for US chicken meat
Comparative Effects
33

LO3
The effect of quotas on trade is different than the
effect of tariffs.
No-Trade Equilibrium
34

The equilibrium price is completely determined by
domestic demand and supply curves.
 Equilibrium
price – The price at which the quantity of a
good demanded in a given time period equals the
quantity supplied.
LO3
No-Trade Equilibrium
35
PRICE (dollars per unit)
(a) No-trade equilibrium
D1
S1
p1
0
q1
QUANTITY (units per year)
LO3
Free-Trade Equilibrium
36


LO3
Free trade allows the import of unlimited quantity
of foreign supplies at the world price.
Free trade results in reduced prices and increased
consumption.
Free Trade Quilibrium
37
PRICE (dollars per unit)
(b) Free-trade equilibrium
D1
S1
p1
B
p2
0
qd
q1
q2
QUANTITY (units per year)
LO3
S2
Tariff-restricted Trade
38


LO3
Tariffs raise the price of imports and shifts the
import supply curve upward.
Domestic prices rise, domestic production rises, and
domestic consumption falls.
Tariff-restricted trade
39
PRICE (dollars per unit)
(c) Tariff-restricted trade
D1
S1
p1
C
p3
p2
0
qd qt
q1
q3 q2
QUANTITY (units per year)
LO3
S3
S2
Quota-restricted Trade
40

LO3
Quotas are a greater threat to competition than
tariffs because quotas preclude additional imports
at any price.
Quota-restricted trade
41
PRICE (dollars per unit)
(d) Quota-restricted trade
D1
S1
S4
Q
p1
p4
p2
0
q1
q4
q2
QUANTITY (units per year)
LO3
Barriers to trade
4. Voluntary Restraint Agreements
42


A slight variant of quotas has been used in recent
years.
A voluntary restraint agreement (VRA) is an
agreement to reduce the volume of trade in a
specific good – a “voluntary” quota.
 Based
on negotiation
 E.g. Japan’s agreement not to export more than 1.68
mil cars to US in 1981
LO3
Barriers to trade
5. Nontariff Barriers
43


LO3
Embargoes, export controls, tariffs, and quotas are
the most visible barriers to trade, but they are only
the tip of the iceberg.
e.g: product standards, licensing restrictions,
restrictive procurement practices, and other
nontariff barriers restrict roughly 15 percent of
imports (US).
Multilateral Trade Pacts
44


Trade policy is a continuing conflict between the
proponents of free trade and the special interests
that profit from trade protection.
The long-term trend is towards lowering trade
barriers, thereby increasing global competition.
 Protectionist
forces are being countered by the
worldwide recognition of the gains from trade.
 Exporters and firms that use imported inputs push for
free trade.
Global Pacts: GATT and WTO
45




The granddaddy of the multilateral, multiyear freetrade pacts was the General Agreement on Tariffs
and Trade (GATT) in 1947.
The 1994 GATT pact created the World Trade
Organization (WTO) to enforce free-trade rules.
The WTO has become the world’s trade police force.
Latest round – Doha (2001) - 141 countries
WTO Protests
46

Some people see free trade as a mixed blessing.
 Environmentalists
worry about depletion of resources,
congestion and pollution.
 Labor organizations worry about depressed wages and
working conditions.
 Third World countries worry about an unfair trade
playing field.
Regional Pacts
47

Groups of nations have moved even faster toward open
markets by developing regional trade pacts.
European Union
48




The European Union (EU) is a regional pact that
virtually eliminates national boundaries between 25
countries.
The EU eliminated trade barriers and permits full
inter-country mobility of workers and capital.
In effect, Europe has become one large unified
market.
EFTA (Iceland, Norway, Swiss, Liechtenstein) +
CEFTA
NAFTA
49


In December 1992, the United States, Canada, and
Mexico signed the North American Free Trade
Agreement (NAFTA).
The ultimate goal of NAFTA is to eliminate all trade
barriers between these three countries.
CAFTA
50


The success of NAFTA prompted a similar 2005
agreement between the U.S. and central American
nations.
The Central American Free Trade Agreement
(CAFTA) aims to eliminate tariffs and standardize
trade and investment policies in CAFTA nations.