Ch. 17-The Global Economy: Ch. 17-The Global Economy: TRADETRADE

Sara SusachSara Susach

IMPORTANCE OF IMPORTANCE OF INTERNATIONAL TRADEINTERNATIONAL TRADE

It is part of our everyday life.It is part of our everyday life.

Many of the products we consume (food, Many of the products we consume (food, clothes, cars, etc.) come from outside the clothes, cars, etc.) come from outside the USA.USA.

U.S. PARTICIPATION IN WORLD U.S. PARTICIPATION IN WORLD TRADETRADE

US exports and imports have increased a US exports and imports have increased a lot over the past 4 decades.lot over the past 4 decades.

From 1960 to 2001:From 1960 to 2001:

Exports: $25 billion Exports: $25 billion $1034 billion$1034 billion

Imports: $23 billionImports: $23 billion $1383 billion$1383 billion

This is proof of the fact that the US This is proof of the fact that the US economy has become increasingly economy has become increasingly internationalized.internationalized.

TRADE DEFICITTRADE DEFICIT

1960 to 1976 US exports and imports 1960 to 1976 US exports and imports were almost equal.were almost equal.

From 1976 to the present day, US has had From 1976 to the present day, US has had a a trade deficittrade deficit imports > exports.imports > exports.

PEOPLE VS. ECONOMISTSPEOPLE VS. ECONOMISTS

For people:For people:-Exports = source of jobs -Exports = source of jobs -Imports = loss of jobs-Imports = loss of jobs

So: So: trade deficittrade deficit = evidence that intl. trade destroys = evidence that intl. trade destroys more jobs than it createsmore jobs than it creates

-Because of this, people want restrictions on trade to -Because of this, people want restrictions on trade to protect US workforce.protect US workforce.

For economists:For economists:-Intl. trade is beneficial because:-Intl. trade is beneficial because:1.1. It makes both countries better off (comparative It makes both countries better off (comparative

advantage).advantage).2.2. Consumers will pay lower prices, and this consumer Consumers will pay lower prices, and this consumer

gain will exceed the losses to workers.gain will exceed the losses to workers.

COMPARATIVE ADVANTAGE COMPARATIVE ADVANTAGE AND INTERNATIONAL TRADEAND INTERNATIONAL TRADE

A country has a A country has a comparative advantagecomparative advantage in a in a good if it can produce that good at a lower opt. good if it can produce that good at a lower opt. cost than its trading partner.cost than its trading partner.

Countries gain by producing the goods on which Countries gain by producing the goods on which they have a comparative advantage, and they have a comparative advantage, and exchanging them for other goods in which they exchanging them for other goods in which they don’t have a comparative advantage.don’t have a comparative advantage.

This is what makes trade between two countries This is what makes trade between two countries possible and beneficial for both.possible and beneficial for both.

GAINS FROM INTL. TRADEGAINS FROM INTL. TRADE

Goods and services are imported if the price for Goods and services are imported if the price for consumers will be lower than the domestic price.consumers will be lower than the domestic price.

So: although imports create So: although imports create losses forlosses for workers workers (lose jobs) (lose jobs) and producersand producers (sell at lower price to (sell at lower price to compete), they also create compete), they also create gains for consumersgains for consumers..

Also: gains to consumers > losses to workers Also: gains to consumers > losses to workers and producers.and producers.

If no imports, market equilibrium: Qb and PbIf no imports, market equilibrium: Qb and Pb-Gains to consumer: A-Gains to consumer: A-Gains to producer: B+C-Gains to producer: B+C

With trade, P to Pa, consumers buy Qc (Qd from domestic supply With trade, P to Pa, consumers buy Qc (Qd from domestic supply and Qc-Qd from imports)and Qc-Qd from imports)

-Increase in gains to consumers: B+D-Increase in gains to consumers: B+D-Decrease in gains to producer: B-Decrease in gains to producer: B

This creates a This creates a net gain from trade net gain from trade equal to area D [(B+D)- B]equal to area D [(B+D)- B]

US Supply

US Demand

Trading country Price

0

Pb

Qd Qb Qc

Pa

A

B

C

D

IMPORTS

Quantity

Price

BARRIERS TO INTL. TRADEBARRIERS TO INTL. TRADETariffs:Tariffs:

-A tax charged on a good when it crosses a country’s border.-A tax charged on a good when it crosses a country’s border. -Makes the P of the good rise-Makes the P of the good rise domestic producers get higher P and domestic producers get higher P and

produce more.produce more.Good for producers – get more $ for goodsGood for producers – get more $ for goodsBad for consumers – pay more $ for goodsBad for consumers – pay more $ for goods -Increase in tax revenue – good for government.-Increase in tax revenue – good for government.

Quotas:Quotas: -Set a max. amount of a good that can be imported.-Set a max. amount of a good that can be imported. -Results on increase in P of the good.-Results on increase in P of the good.Good for producers – get more $ for goodsGood for producers – get more $ for goodsBad for consumers – pay more $ for goodsBad for consumers – pay more $ for goods

Voluntary Export Restraints:Voluntary Export Restraints: -Exporting nations agree to limit the amounts of goods shipped to importing -Exporting nations agree to limit the amounts of goods shipped to importing

nations.nations. -Increases price of the goods subjected to this agreement.-Increases price of the goods subjected to this agreement.

BARRIERS TO INTL. TRADEBARRIERS TO INTL. TRADE

Although domestic producers benefit from Although domestic producers benefit from tariffs, quotas and VER’s, society as a tariffs, quotas and VER’s, society as a whole is worse off, because these trade whole is worse off, because these trade restrictions shift resources from industries restrictions shift resources from industries that have a comparative advantage that have a comparative advantage (foreign) to those that have a comparative (foreign) to those that have a comparative disadvantage (domestic).disadvantage (domestic).

Result: Reduction in the nation’s standard Result: Reduction in the nation’s standard of living.of living.

ARGUMENTS FOR FREE TRADEARGUMENTS FOR FREE TRADE

Decreasing costsDecreasing costs-With intl. trade, markets become larger, firms can produce -With intl. trade, markets become larger, firms can produce

more. Large-scale production reduces average cost of more. Large-scale production reduces average cost of production (cost per unit of good).production (cost per unit of good).

Increased CompetitionIncreased Competition-Domestic firms need to lower their prices to compete with -Domestic firms need to lower their prices to compete with

foreign firms that can produce at lower costs (ex. Car foreign firms that can produce at lower costs (ex. Car industry US - Japan).industry US - Japan).

Diversity of productsDiversity of products-Increase the variety of products available to consumers.-Increase the variety of products available to consumers.

ARGUMENTS FOR RESTRICTING ARGUMENTS FOR RESTRICTING FREE TRADEFREE TRADE

Infant industry argument:Infant industry argument:-Protect newly-created industries from competition -Protect newly-created industries from competition

with already established foreign industries.with already established foreign industries.

National Defense:National Defense:-Protect industries that manufacture goods key to -Protect industries that manufacture goods key to

national security (steel, oil, military hardware, national security (steel, oil, military hardware, etc.).etc.).

Save American jobs:Save American jobs:-Foreign competition can reduce domestic output, -Foreign competition can reduce domestic output,

which will result in the loss of domestic jobs.which will result in the loss of domestic jobs.

REDUCING TRADE BARRIERSREDUCING TRADE BARRIERS

Since WWII barriers to intl. trade have been Since WWII barriers to intl. trade have been significantly reduced, through two approaches:significantly reduced, through two approaches:

1. 1. Globally:Globally: -Global trade negotiations, conducted under the General -Global trade negotiations, conducted under the General

Agreement on Tariffs and Trade.Agreement on Tariffs and Trade.

2. 2. Regionally:Regionally: -Many countries have formed regional trading blocs.-Many countries have formed regional trading blocs.Examples:Examples:-North American Free Trade Agreement (NAFTA)-North American Free Trade Agreement (NAFTA)-European Union-European Union