International Trade

Outline

•How open is the U.S. economy?

•Patterns and Trends in International Trade

•Gains from International

•International Trade Restrictions

An index of openness

100

GDP

MX

This is a simple

measure of the relative

importance of the foreign

sector

Let

•O denote the index of openness

•X is exports

•M is imports

•GDP is gross domestic product

Thus, we have:

8

12

16

20

24

28

70 75 80 85 90 95 00

Imports + Exports as a Percent of U.S. GDP, 1969-2000

per

cen

t

What do we trade with other nations?

Source: Bureau of Economic Analysis

Source: Bureau of Economic Analysis

Who are our major trading partners?

0

400

800

1200

1600

65 70 75 80 85 90 95 00

EXPORTS IMPORTS

Exports and Imports of the United States, 1965-2001Billions of 1998 dollars

www.economagic.com

800

1000

1200

1400

1600

97:1 97:3 98:1 98:3 99:1 99:3 00:1 00:3 01:1 01:3

EXPORTS IMPORTS

Exports and Imports of the United States, 1997-2001

Billions of 1998 dollars

www.economagic.com

Top Exporting Countries, 2002

Source: World Trade Organization

U.S.

Germany

Japan

France

China

U.K.

Canada

Italy

Netherlands

Belgium

Billions of U.S. Dollars

800700600500400300200100

213

243

252

253

276

326

330

416

612

694

Comparative Advantage

Recall that a county has a comparative

advantage in the production of a good of service if it can produce

a unit at lower opportunity cost than its

trading partners

Why does the U.S. export aircraft?

Why does the U.S. import T-shirts

The gains from trade

Notice that by specializing and trading according to

comparative advantage, both China and the U.S. reach a

point outside their respective domestic PPFs.

Trade Restrictions

The term “protectionism” refers to anymeasure that has the effect of reducing

the quantity of imported goods or services.

Commercial policy: Government policy that influences international trade flows.

Types of Trade Restrictions

•Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba.

•Tariffs: Taxes imposed on imported goods.

•Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber.

•Subsidies: payments by government to exporters. These stimulate trade by allowing the exporter to charge a lower price.

Protectionism, part 2•Government procurement: Most nations require their governments to buy from domestic producers. Example: the 1933 “Buy American” Act applicable to federal agencies.

•Non-tariff trade barriers: Other policies that have the effect of reducing the flow of imports or exports. Example: Health and safety standards, import licensing, product design standards, bureaucratic red tape. The Japanese trade ministry

(MITI) decided that snow skis made in the U.S. were not safe

enough for Japanese ski enthusiasts

Other examples: European ban on hormone treated beef and genetically-modified soybeans

Average Tariff Rates, 2001

Source: World Trade Organization; World Bank

India

Nigeria

Pakistan

Kenya

China

Brazil

Percent

353025201510

13

15

20

21

23

31

Average Tariff Rates, 2001

Source: World Trade Organization; World Bank

Japan

Canada

U.S.

EU

Percent

5.25.04.84.64.44.24.03.83.6

3.9

4.0

4.4

5.1

Arguments for protectionism

•Save domestic jobs

•Dumping

•Government revenue creation.

•National security

•Infant industries

President Bush’s trade representative Robert Zoeller says “I want

fair trade.”

IndustryCost to Consumers

Per Job Saved

Autos $105,000

Color TVs 420,000

Motorcycles 150,000

Athletic Footwear 30,000

Apparel 37,000

Specialty Steel 1,000,000

Glassware 200,000

Sugar 60,000

Ball Bearings 90,000

Costs of protecting U.S. jobs from foreign competition

Source: Coughlin, et al. (1988) and Hufbauer, et al. 1986.

CountryTariffs as a % of

Government Revenue

U.K. 0.1%Japan 1.2U.S. 1.5

Costa Rica 16.1Ghana 31.2

Dominican Republic

44.2

Lesotho 55.1

Tariffs as a percentage of total government revenue

Source: World Bank