20 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...

20

International Trade

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Some Key Trade Facts

• U.S. trade deficit in goods

• $517 billion in 2009

• U.S. trade surplus in services


• Canada largest U.S. trade partner

• Trade deficit with China


• Exports are 13% U.S. output

• Dependence on oilLO1 20-2


• Principal U.S. exports include:

• Chemicals

• Agricultural products

• Consumer durables

• Semiconductors

• Aircraft

• U.S. provides about 8.5% of world’s exports

LO1 20-3


• Principal U.S. imports include:

• Petroleum

• Automobiles

• Metals

• Household appliances

• Computers

LO1 20-4


LO1 20-5


LO1 20-6

Economic Basis for Trade

• Nations have different resource endowments

• Labor-intensive goods

• Land-intensive goods

• Capital-intensive goods

LO2 20-7

• 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

• Vegetables sacrificed per ton of beefLO2

Comparative Advantage

20-8

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20

Beef (Tons)

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30

Beef (Tons)

(a) United States (b) Mexico

12

18 8

4

A

Z


LO2 20-9


• Self-sufficiency output mix

• Specialization and trade

• Produce the good with the lowest domestic opportunity cost

• Opportunity cost of 1 ton of beef:

• 1 pound of vegetables in U.S.

• 2 pounds of vegetables in Mexico

LO2 20-10


LO2 20-11


• Terms of trade

• U.S. 1V = 1B

• U.S. will sell 1B for more than 1V

• Mexico 2V = 1B

• Mexico will pay less than 2V for 1B

• Settle between the two

• Depends on supply/demand factors

• Assume 1B = 1.5V

LO2 20-12


• Gains from trade

• Trading possibilities line

• Slope equals terms of trade

• Improved options

• Complete specialization

• More of both goods

• More efficient resource allocation

LO2 20-13

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20

Beef (Tons)

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30

Beef (Tons)

Gains from Trade(a) United States (b) Mexico

12

18 8

4

A

Z

A’

Z’

V

V’

W

v

b b’

TradingPossibilities Line

TradingPossibilities Line

B

LO2 20-14


• Trade with increasing costs

• Concave production curve

• Resources not perfectly substitutable

• Incomplete specialization

• Case for free trade

• Promote efficiency

• Promote competition

LO2 20-15

Supply and Demand Analysis

• World price

• Domestic price with no trade

• World price > domestic price

• Export surplus

• Export supply curve

• World price < domestic price

• Import shortage

• Import supply curve

LO3 20-16

1.50

1.25

1.00

.75

.50

050 100

Quantity of Aluminum(Millions of Pounds)

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

1.50

1.25

1.00

.75

.50

050 75 100 125 150



(a) U.S. Domestic Aluminum Market

(b) U.S. Export Supplyand Import Demand

Dd

Sd

U.S.ExportSupply

U.S.Import

Demand

a

b

c

x

y

Surplus = 50

Surplus = 100

Shortage = 50

Shortage = 100

LO3 20-17

Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

1.50

1.25

1.00

.75

.50

050 75 100 125 150


1.50

1.25

1.00

.75

.50

050 100


Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

(a) Canada’s Domestic Aluminum Market

(b) Canada’s Export Supplyand Import Demand

Dd

Sd

CanadianExportSupply

CanadianImport

Demand

q

r

s

t

Surplus = 50

Surplus = 100

Shortage = 50

LO3


20-18

International Equilibrium

1.00

.75

.88

050 100


Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

• Import demand = Export supply

CanadianExportSupply

e

U.S.ExportSupply

U.S.Import

Demand

Equilibrium

CanadianImport Demand

LO3 20-19

Trade Barriers and Export Subsidies

• Tariffs

• Revenue tariff

• Protective tariff

• Import quota

• Nontariff barrier (NTB)

• Voluntary export restriction (VER)

• Export subsidy

LO4 20-20

Economic Impact of Tariffs

• Direct effects

• Decline in consumption

• Increase in domestic production

• Decline in imports

• Tariff revenue

• Indirect effects

LO4 20-21

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

LO4 20-22

Economic Effects of Tariff/Quota

Quantity

Pri

ce

0

Dd

Sd

Pd

q

Sd + Q

Pt

Pw

a b c d

LO4 20-23

The Case for Protection

• Military self-sufficiency

• Diversification for stability

• Infant industry

• Protection against dumping

• Increased domestic employment

• Cheap foreign labor

LO5 20-24

Multilateral Trade Agreements

• General Agreement on Tariffs and Trade (GATT)

• World Trade Organization (WTO)

• European Union (EU)

• North American Free Trade Agreement (NAFTA)

LO5 20-25

GATT

• Three principles:

• Equal, nondiscriminatory trade between member nations

• Reduction in tariffs

• Elimination of import quotas

LO5 20-26

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

LO5 20-27

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

LO5 20-28

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

LO5 20-29

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

LO5 20-30

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

LO5 20-31

20 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...

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Transcript of 20 International Trade McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...