Begin Slides By David Gillette and Kevin Brady Analyzing International Trade Interactive Examples...

Begin

Slides By

David Gillette and Kevin Brady

Analyzing International Trade

Interactive Examples

CoreEconomics, 2e

To navigate, please click the appropriate green buttons.(Do not use the arrows on your keyboard)

Material from this presentation can be found in:

Chapter 25

NextWithout international trade each country is left to itself to produce all of the goods and services that its citizens will consume. Thus our example of the benefits of international trade and the costs and benefits ofprotectionist intervention in those markets begins at equilibrium in the domestic market.

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

Domestic Demand

$10

Equilibrium price

Equilibrium quantity

$20

40



Hint Answer

QUESTION ONE – Free Trade:Suppose this country is opened up to completely free trade and the world price for this product is $10. What is:

a)the domestic price for this country?

b)the quantity sold by domestic producers?

c)the level of domestic consumption?

d)the quantity of imports?

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

Domestic Demand

$10



HINT:

Assume that world trade in this product is large enough and this country is small enough that its participation in the international market will not impact the world price of this product.

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

Domestic Demand

$10World Price








ANSWER: With a world price of $10 this country will experience:

a) a domestic price of $10

b) sales of 20 by domestic producers

c) domestic consumption of 60

d) imports of 40 (60–20)

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

Domestic Demand

$10World Price






domestic and world price

domestic production

domestic consumption

$10

6020

imports40

Next



Answer

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

Domestic Demand

$10World Price

QUESTION TWO – Tariffs:What happens to trade in this market when domestic producers successfully lobby for a $5 tariff on all imports in this market?

a) What is the new domestic price?

b) What happens to the level of imports?

c) How much tariff revenue is generated?



imports40

Next

ANSWER:

a) $15 (World price of $10 plus the $5 tariff)

b) Imports shrink from 40 to 20

c) Tariff revenue = $100, the area of the green box, calculated as ($5 x (50-30)) = $100

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

$10World Price

world price plus tariff$15

imports20 Domestic

Demand

QUESTION TWO – Tariffs:What happens to trade in this market when domestic producers successfully lobby for a $5 tariff on all imports in this market?

a) What is the new domestic price?

b) What happens to the level of imports?

c) How much tariff revenue is generated?



Answer

QUESTION THREE – Quotas:Suppose that this country wanted to achieve the same outcome that would derive from implementing a $5 tariff.

At what level should the quota be set?

What would the government revenue be with the quota?

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

$10World Price

world price plus tariff

Domestic Demand



ANSWER:To achieve the same effect as a $5 tariff, the quota must be set at 20 units.

A quota will not provide any tariff revenue to the government, and so the green square has vanished.

Next

Price

$15

$20

$25

$30

60 Quantity50403020

Domestic Supply

$10World Price

world price plus tariff

QUESTION THREE – Quotas:Suppose that this country wanted to achieve the same outcome that would derive from implementing a $5 tariff.

At what level should the quota be set?

What would the government revenue be with the quota?

quota20

domestic price with quota

Domestic Demand



Find out.

QUESTION FOUR – To Trade or Not To Trade:

Which of the following arguments against international trade holds sufficient merit to warrant government intervention? Click each choice.

a) International trade reduces the number of domestic jobs.

b) It’s wrong to trade with countries that exploit workers.

c) Some industries need protection for national security reasons.

d) Some industries need protection to prevent dumping.

e) Strategic trade protectionism increases domestic well-being.

f) Each of these arguments warrants protectionist intervention by the government.

Can you see the dog

behind the question?

Can you tell what the dog

is doing?

Start Over



Back to the Question

Considering only the loss of jobs in a competing import industry is like only measuring the costs in a cost-benefit analysis. To address this issue completely the lost jobs must be weighed against the increased purchasing power experienced by all consumers of the less expensive imported good. This increased purchasing power goes towards purchases, and thus jobs, in other areas of the economy. Perhaps not as easily seen, but real nonetheless.



This argument assumes that the reason children work in these countries is international trade, which is not the case. They work because they are impoverished. Increased trade with poor countries raises both wages and living standards in those countries, reduces the need for children to work, and allows greater school attendance.




National Security interests do present some legitimate reasons to avoid dependence on foreign production and foreign supply of certain strategic products.However, much of what has been protected in the “interest” of national security falls squarely in the realm of domestic producers just seeking protection from foreign competition so much so that in May 2009 the OECD adopted to prevent such behavior.


guidelines



More governments invoke national security to restrict foreign investment. OECD adopts guidelines to avoid protectionist use of security measures23 July 2009 - Guidelines for Recipient Country Investment Policies relating to National Security have been adopted by the OECD to help governments preserve their reputation for fair treatment of international investors while meeting their countries' security needs.

Over the last five years, national security reviews of incoming investments have become an increasingly important focus for investment policy makers. In 2005, France established the sectors where foreign investment is subject to review. In 2006, China passed legislation to allow the government to block investments affecting national economic security. In 2007, the United States enhanced the review process under the Committee on Foreign Investment in the United States (CFIUS); Japan expanded the sectoral coverage of its investment regulations for national security. In 2008, Korea clarified the procedures to restrict foreign investment for national security reasons; Russia adopted a law on foreign investment in 42 sectors of strategic importance for defence and security. In 2009, Canada and Germany introduced all-sectors national security review mechanisms. In India, the merits of CFIUS type reviews have been debated. There are indications of a growing number of investment transactions being investigated, mitigated or eventually blocked on national security grounds.

Care must be taken to ensure that such measures address genuine security concerns and avoid disguised protectionism, which would impose high costs on national economies and delay recovery. To prevent protectionist use of national security measures and to increase their effectiveness, the OECD Guidelines, which have been adopted by the 30 OECD countries and now form part of OECD legal acquis, recommend steps which governments should take to make their national security measures:

• least-discriminatory,• transparent and predictable,• proportionate to the objective pursued,• and accountable in their application.

OECD countries, together with other emerging economies participating in the Freedom of Investment process, hosted at the OECD, will monitor use of national security measures and publicly report on observance of the new Guidelines.

Information on recent security related measures can be found in the "Inventory of investment measures taken between 15 November 2008 and 15 June 2009", which has just been published and which monitors investment policy developments in 42 countries since the first G20 Summit.

Back to the Answer


Dumping means that goods are sold at lower prices abroad than in their home market.

While dumping violates American trade laws, the government must distinguish among dumping, legitimate price discrimination, and legitimate instances of lower cost production arising from comparative advantage.




Strategic trade protectionism can work to the benefit of an exporting industry if the demand for that good is relatively inelastic and the country has few competitors, in which case that industry must work in league with the government by sharing an export tax that increases total revenue.


If, however, substitutes are available from other countries sales will be lost and protectionist measures end up harming the domestic producer.



On the surface each of these arguments satisfies the desire of at least some interested parties to pursue an element of protectionist trade policy.Economists, however, generally insist in looking at both the costs and benefits of trade freedom. Furthermore, they point out that protectionist actions are also costly when countries retaliate. Trade liberalization is one area where economists usually gather around the theme of freer trade and increased globalization.




Back to the question.

There were too many

things getting in the way.

Seeing the whole picture,

it’s much easier to tell that the dog

is just shaking off

water.



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