International Trade Policy

18 International Trade Policy CHECKPOINTS

Checkpoint 18.1 Checkpoint 18.2 Checkpoint 18.3 Problem 1 Clicker version Problem 1 Problem 1 Problem 2 Problem 2 Problem 2 Clicker version Clicker version Problem 3 Clicker version Problem 3 Problem 3 Clicker version Problem 4 Clicker version Problem 4 Problem 4 Problem 5

Practice Problem 1 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Does China import or export coal? Who, in China, gains and who loses from international trade in shoes? Does China gain from this trade in coal? CHECKPOINT 18.1

Solution The rest of the world has a comparative advantage in producing coal. China imports coal, Chinese coal users gain, and Chinese coal producers lose. The gains exceed the losses: China gains from international trade in coal. CHECKPOINT 18.1

Study Plan Problem Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. China has a comparative advantage in producing _______. China _____ coal. In China, coal ______ gain and coal ______ lose from international trade in coal. A. coal; imports; producers; users B. coal; exports; users; producers C. shoes; exports; producers; users D. shoes; imports; users; producers CHECKPOINT 18.1

Practice Problem 2 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Draw a graph to illustrate the market for coal in China before and after china trades coal internationally. Show on your graph the gains, losses, and net gain or loss from international trade in coal. CHECKPOINT 18.1

Solution The figure shows the market for coal in China with international trade. The price falls to the world price, the quantity produced in China decreases, and the quantity bought increases. Producers lose from the lower price and the smaller quantity produced. CHECKPOINT 18.1

Consumers gain from the lower price what the producers lose. Consumers gain more from the larger quantity consumed. So the gains to consumers exceed the losses to producers. CHECKPOINT 18.1

Practice Problem 3 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Does China import or export shoes? Who, in China, gains and who loses from international trade in shoes? Does China gain from this trade in shoes? CHECKPOINT 18.1

Solution China has a comparative advantage in producing shoes. China exports shoes, so Chinese shoe producers gain and Chinese shoe consumers lose. The gains exceed the losses: China gains from international trade in shoes. CHECKPOINT 18.1

Study Plan Problem Suppose that the world price of sugar is 10 cents a pound, the United States does not trade internationally, and the price of sugar in the United States is 20 cents a pound. Then the United States begins to trade internationally. The price of sugar in the United States ______. U.S. consumers buy _____ sugar. U.S. sugar growers produce _____ sugar. The United States _____ sugar. A. rises; less; more; exports B. falls; less; more; imports C. falls; more; less; imports D. falls; more; less; exports CHECKPOINT 18.1

Practice Problem 4 Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. Draw a graph to illustrate the market for shoes in China before and after China trades shoes internationally. Show on your graph the gains, losses, and net gain or loss from international trade in shoes. CHECKPOINT 18.1

Solution The figure shows the market for shoes in China with international trade. The price rises to the world price, the quantity produced in China increases, and the quantity bought decreases. Consumers lose from the higher price and the smaller quantity bought. CHECKPOINT 18.1

Producers gain from the higher price what the consumers lose. Producers also gain from the larger quantity produced. So the gains to producers exceed the losses to consumers. CHECKPOINT 18.1

Study Plan Problem Before the 1980s, China did not trade internationally. It produced all its own coal and bought all the shoes that it produced. Then China began to trade internationally in a world in which the price of coal was less than in China’s domestic price and the price of shoes was higher than its domestic price. China _______ shoes. In China, _____ gain and _____ lose from international trade in shoes. A. exports; shoe producers; shoe consumers B. exports; shoe consumers; shoe producers C. import; show consumers; shoe producers D. imports; shoe producers; shoe consumers CHECKPOINT 18.1

Practice Problem 5 Underwater oil discovery to transform Brazil into a major exporter The discovery of a huge oil field could make Brazil a large exporter of gasoline. Until two years ago Brazil imported oil; then it became self-sufficient in oil. With this discovery, Brazil will become a major exporter of oil. Source: The New York Times, January 11, 2008 Describe Brazil’s comparative advantage in producing oil, and explain why its comparative advantage has changed. CHECKPOINT 18.1

Solution Until two years ago, Brazil did not have a comparative advantage in producing oil. Its cost of producing a barrel of oil was higher than the world market price, so Brazil imported oil. With the discovery of the new oil field, the cost of producing a barrel of oil in Brazil will be below the world price. Now Brazil will have a comparative advantage in the production of oil. With this new comparative advantage, Brazil will become an exporter of oil. CHECKPOINT 18.1

Practice Problem 1 Before 1995, the United States imposed tariffs on goods imported from Mexico and Mexico imposed tariffs on goods imported from the United States. In 1995, Mexico joined NAFTA. U.S. tariffs on imports from Mexico and Mexican tariffs on imports from the United States are gradually being removed. Explain how the price that U.S. consumers pay for goods imported from Mexico and the quantity of U.S. imports from Mexico have changed. Who, in the United States, are the winners and who are the losers from this free trade? CHECKPOINT 18.2

Solution The price that U.S. consumers pay for goods imported from Mexico has fallen. The quantity of U.S. imports from Mexico has increased. The winners are U.S. consumers of goods imported from Mexico. The losers are U.S. producers of the goods that compete with the goods imported from Mexico. CHECKPOINT 18.2

Practice Problem 2 Before 1995, the United States imposed tariffs on goods imported from Mexico and Mexico imposed tariffs on goods imported from the United States. In 1995, Mexico joined NAFTA. U.S. tariffs on imports from Mexico and Mexican tariffs on imports from the United States are gradually being removed. Explain how the quantity of U.S. exports to Mexico and the U.S. government’s tariff revenue from trade with Mexico have changed. CHECKPOINT 18.2

Solution The quantity of U.S. exports to Mexico has increased. The U.S. government’s tariff revenue from trade with Mexico has fallen to zero. CHECKPOINT 18.2

Study Plan Problem In 1995, Mexico joined NAFTA and all tariffs on trade between the United States and Mexico are gradually being removed. The quantity of U.S. exports to Mexico has _____ and the U.S. government’s tariff revenue from trade with Mexico has _____. A. increased; decreased B. increased; increased C. decreased; increased D. decreased; decreased CHECKPOINT 18.2

Practice Problem 3 Suppose that in 2008, tomato growers in Florida lobby the U.S. government to impose an import quota on Mexican tomatoes. Explain who, in the United States, would gain and who would lose from such a quota. CHECKPOINT 18.2

Solution With an import quota, the price of tomatoes in the United States would rise and the quantity bought would decrease. Tomato consumers would lose. Growers would receive a higher price, produce a larger quantity, and their profits would increase. The U.S. consumers of tomatoes would lose more than the U.S. producers of tomatoes gained. CHECKPOINT 18.2

Study Plan Problem Suppose that tomato growers in Florida lobby the U.S. government to impose a quota on Mexican tomatoes. ______ would gain, and ______ would lose. A. The people who live in Florida; U.S. consumers of tomatoes B. U.S. growers and consumers of tomatoes; all U.S. consumers C. U.S. growers of tomatoes; U.S. consumers of tomatoes D. U.S. consumers of tomatoes; U.S. growers of tomatoes CHECKPOINT 18.2

Practice Problem 4 U.S. tariff angers French Just days before Obama took office, the United States raised the tariff on imports of French sheep’s-milk cheese to 300% from 100%—with the hope that the domestic price will be so high that imports of the cheese will cease. Source: The Guardian, January 17, 2009 Explain how this tariff influences the price that U.S. consumers pay for sheep’s-milk cheese, the quantity of sheep’s-milk cheese produced in the United States, and its effect on U.S. gains from trade with France. Who, in the United States, gains from the tariff and who loses? CHECKPOINT 18.2

Solution The tariff raises the price of sheep’s-milk cheese in the United States to 400 percent of the world price (world price + 300 percent of the world price). U.S. imports decrease, U.S. production of sheep’s-milk cheese increases, and the U.S. government collects a tariff revenue. CHECKPOINT 18.2

With the higher U.S. domestic price, consumers lose and producers gain. Some of the consumers’ loss goes to the government as tariff revenue, but some of the consumers’ loss is no one’s gain— consumers pay a higher price for a smaller quantity. CHECKPOINT 18.2

Practice Problem 1 Japan sets an import quota on rice. California rice growers would like to export more rice to Japan. What are Japan’s arguments for restricting imports of California rice? Are these arguments correct? Who loses from this restriction in trade? CHECKPOINT 18.3

Solution The main arguments are that Japanese rice is a better quality rice and that the quota limits competition faced by Japanese farmers. The arguments are not correct. If Japanese consumers do not like the quality of Californian rice, they will not buy it. The import quota limits competition, which allows Japanese farmers to use their land less efficiently. The big losers are the Japanese consumers who pay about three times the U.S. price for rice. CHECKPOINT 18.3

Practice Problem 2 The United States has, from time to time, limited imports of steel from Europe. What argument has the United States used to justify this quota? Who wins from this restriction? Who loses? CHECKPOINT 18.3

Solution The U.S. argument is that European producers dump steel on the U.S. market. With a quota, U.S. producers will face less competition in the market for steel and U.S. jobs will be saved. Workers in the steel industry and owners of steel companies will win at the expense of the U.S. buyers of steel. CHECKPOINT 18.3

Practice Problem 3 The United States maintains a quota on imports of sugar. What is the argument for this quota? Is this argument flawed? If so, explain why. CHECKPOINT 18.3

Solution The argument is that the quota protects the jobs of U.S. workers. The argument is flawed because the United States does not have a comparative advantage in producing sugar and so a quota allows the U.S. sugar industry to be inefficient. With free international trade in sugar, the U.S. sugar industry would exist but it would be much smaller and more efficient. CHECKPOINT 18.3

Practice Problem 4 U.S., China agree on free farm trade Despite the failure of the Doha Round, the United States and China agree on the need to resist protectionist farm tariffs even in the face of the world economic crisis. In 2007, the United States exported $18.4 billion of farm and processed food products to China and imported $8 billion of farm products from China. Source: USA Today, December 6, 2008 With the world in a global economic crisis, what arguments against free trade might U.S. producers of the farm products put forward? What would be wrong with the argument you suggest? CHECKPOINT 18.3

Solution With the United States in recession, a likely argument against free trade with China in farm products would be “impose restrictions to save U.S. jobs.” By reducing imports of farm products, U.S. growers will gain from the higher price, but consumers will lose from the higher price and the consumers would lose more than the producers gain. CHECKPOINT 18.3

International Trade Policy