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International Trade: Comparative Advantage, Tariffs, and Gains

This chapter explores the concepts of comparative advantage, tariffs, and the gains from international trade. It discusses the import/export situation, world exports, reasons for nations to trade, and the benefits and costs of free trade. The chapter also covers supply and demand analysis and trade barriers such as tariffs and import quotas.

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International Trade: Comparative Advantage, Tariffs, and Gains

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  1. Chapter 38 - International Trade Chapter Objectives • Comparative advantage and the gains from trade • Exports and imports • Economic effects of tariffs and quotas • Arguments for protectionism 37-1

  2. Some Key Facts • What is the import/export situation with goods? Services? • U.S. trade deficit in goods • $750 billion in 2016 • U.S. trade surplus in services • $248 billion in 2016 • Total deficit of $502 billion in 2016 • Who is the largest U.S. trade partner? • Trade deficit with China • $257 billion in 2007 – 2016? • $347 billion in 2016 37-2

  3. World Exports Percentage Share of World Exports, Selected Nations, 2007 0 2 4 6 8 10 12 Germany United States China Japan France Netherlands United Kingdom Italy 9.20 8.59 8.02 5.38 2012, 13% 4.06 3.83 3.71 3.40 Source: World Trade Organization 37-3

  4. Why should/do nations trade? • Nations have different resource endowments • Labor-intensive goods • Land-intensive goods • Capital-intensive goods 37-5

  5. Comparative Advantage • Assumptions • Two nations • Same size labor force • Constant costs in each country • Different costs across countries • U.S. absolute advantage in both • Opportunity cost ratio • Slope of the curve • Vegetables sacrificed per ton of Beef 37-6

  6. Comparative Advantage 45 45 40 40 35 35 30 30 25 25 Vegetables (Tons) Vegetables (Tons) 20 20 15 15 10 10 5 5 0 0 5 10 15 20 25 30 5 10 15 20 Beef (Tons) Beef (Tons) (b) Mexico (a) United States 12 A 4 B 8 18 37-7

  7. Comparative Advantage • Self-sufficiency output mix • US – 12V, 18B • Mexico – 4V, 8B • Specialization and trade • Produce good with lowest domestic opportunity cost • Opportunity cost of 1 ton beef • 1 pound of vegetables in U.S. • 2 pounds of vegetables in Mexico 37-8

  8. Comparative Advantage • Terms of trade • U.S. 1B = 1V • U.S. will sell 1B for more than 1V • Mexico 1B = 2V • Mexico will pay less than 2V for 1B • Settle between the two • Depends on supply/demand factors • Assume 1B = 1.5V 37-9

  9. Comparative Advantage • Gains from trade • Self-sufficiency output mix • US – 12V, 18B • Mexico – 4V, 8B • Total – 16V, 26B • Complete Specialization • US – 30B • Mexico – 20V • Complete specialization • More of both goods • More efficient resource allocation • Homework!!!!!!!! 37-10

  10. Benefits of Free Trade • The case for free trade? • Promote efficiency • If China can produce steel cheaper than the U.S., shouldn’t they? • If the U.S. can create pharmaceuticals more efficiently than China, shouldn’t they? • Promote competition • More and better stuff! • Adapt or Die, right? • Ties nations together economically with diplomatic spillover 37-11

  11. Costs of Free Trade • What if you’re a steelworker in Pittsburgh? • What if you’re a chemist in Shenzhen, China? • Americans benefit from cheaper steel, but the nightly news has no problem profiling the loss of steel jobs • The benefits are spread out and hard to see, the harmed are easily identified • Special interests will mobilize, seeking protection…examples?

  12. Homework: Read pgs. 848 - 861

  13. 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 37-14

  14. Supply and Demand Analysis 1.50 1.50 1.25 1.25 Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars 1.00 1.00 .75 .75 .50 .50 0 0 50 100 Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) 50 75 100 125 150 • U.S. Domestic Aluminum Market (b) U.S. Export Supply and Import Demand Surplus = 100 Sd c Surplus = 50 U.S. Export Supply b a U.S. Import Demand x Shortage = 50 y Dd Shortage = 100 37-15

  15. 1.50 1.50 1.25 1.25 Price (Per Pound; U.S. Dollars Price (Per Pound; U.S. Dollars 1.00 1.00 .75 .75 .50 .50 0 0 50 100 Quantity of Aluminum (Millions of Pounds) Quantity of Aluminum (Millions of Pounds) 50 75 100 125 150 Supply and Demand Analysis • Canada’s Domestic Aluminum Market (b) Canada’s Export Supply and Import Demand Surplus = 100 Sd s Surplus = 50 Canadian Export Supply r q Canadian Import Demand t Shortage = 50 Dd 37-16

  16. Price (Per Pound; U.S. Dollars 1.00 .88 .75 0 50 100 Quantity of Aluminum (Millions of Pounds) International Equilibrium Import demand = Export supply U.S. Export Supply Canadian Export Supply e Equilibrium U.S. Import Demand Canadian Import Demand 37-17

  17. Trade Barriers • Tariffs • Revenue tariff • Protective tariff • What’s the difference? • Import quota • Nontariff barrier (NTB) • Licensing, standards, etc. • Voluntary export restriction (VER) • Why would a producer voluntarily restrict their exports? • Domestic Export Subsidy 37-18

  18. Trade Barriers • Economic impact of tariffs • Direct effects • Decline in domestic consumption • Increase in (more costly?) domestic production • Decline in imports • Tariff revenue • Indirect effects • Promote inefficiency • Hurt growth • Retaliation? 37-19

  19. Price 0 Quantity Trade Barriers Economic Effects of a Tariff or Quota Free trade provides consumers with a higher quantity at a lower price! Sd • Who/What benefits from the tariff? • Who/What suffers? Sd + Q Pd Pt What about a quota? Why would a nation choose a quota over a tariff? Pw Dd a b q c d 37-20

  20. The Case for Protection • Different arguments – examples? • Military self-sufficiency • Diversification for stability • Infant industry • Protection against dumping • Increased domestic employment • Cheap foreign labor 37-21

  21. Multilateral Trade Agreements • General Agreement on Tariffs and Trade (GATT) (1947) • World Trade Organization (WTO) (1995) • European Union (EU) (1958/1993) • North American Free Trade Agreement (NAFTA) (1994) LO6

  22. The WTO • World Trade Organization has 151 member nations • Liberalize trade through negotiation • Protest groups • Labor unions, environmentalists, socialists, anarchists • Key issues for the protestors • Labor protection and environmental standards 37-23

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