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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

International Trade

Some Key Trade Facts• U.S. trade deficit in goods

• $517 billion in 2009• U.S. trade surplus in services

• $138 billion in 2009• Canada largest U.S. trade partner• Trade deficit with China

• $220 billion in 2009• Exports are 13% U.S. output• Dependence on oil

LO1

Some Key Trade Facts• Principal U.S. exports include:

• Chemicals• Agricultural products• Consumer durables• Semiconductors• Aircraft

• U.S. provides about 8.5% of world’s exports

LO1

Some Key Trade Facts

• Principal U.S. imports include:• Petroleum• Automobiles• Metals• Household appliances• Computers

LO1

Some Key Trade Facts

LO1

Some Key Trade Facts

LO1

Economic Basis for Trade

• Nations have different resource endowments

• Labor-intensive goods• Land-intensive goods• Capital-intensive goods

LO2

• Assumptions• Two nations• Same size labor force• Constant costs in each country• Different costs between countries• U.S. absolute advantage in both

• Opportunity cost ratio• Slope of the curve• Vegetables sacrificed per ton of beef

LO2

Comparative Advantage

Vege

tabl

es (T

ons)

30

25

20

15

10

5

0

35

40

45

5 10 15 20Beef (Tons)

Vege

tabl

es (T

ons)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30Beef (Tons)

(a) United States (b) Mexico

12

18 8

4

A

Z

Comparative Advantage

LO2

Comparative Advantage

• Self-sufficiency output mix• Specialization and trade• Produce the good with the lowest

domestic opportunity cost• Opportunity cost of 1 ton of beef:

• 1 pound of vegetables in U.S.• 2 pounds of vegetables in Mexico

LO2

Comparative Advantage

LO2

Comparative Advantage• Terms of trade

• U.S. 1V = 1B• U.S. will sell 1B for more than 1V• Mexico 2V = 1B• Mexico will pay less than 2V for 1B• Settle between the two• Depends on supply/demand factors• Assume 1B = 1.5V

LO2

Comparative Advantage

• Gains from trade• Trading possibilities line• Slope equals terms of trade• Improved options

• Complete specialization• More of both goods• More efficient resource allocation

LO2

Vege

tabl

es (T

ons)

30

25

20

15

10

5

0

35

40

45

5 10 15 20Beef (Tons)

Vege

tabl

es (T

ons)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30Beef (Tons)

Gains from Trade(a) United States (b) Mexico

12

18 8

4

A

Z

A’

Z’

V

V’

W

v

b b’

TradingPossibilities Line

TradingPossibilities Line

B

LO2

Comparative Advantage• Trade with increasing costs

• Concave production curve• Resources not perfectly

substitutable • Incomplete specialization

• Case for free trade• Promote efficiency• Promote competition

LO2

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

LO3

1.50

1.25

1.00

.75

.50

050 100

Quantity of Aluminum(Millions of Pounds)

Pric

e (P

er P

ound

; U.S

. Dol

lars

Pric

e (P

er P

ound

; U.S

. Dol

lars

1.50

1.25

1.00

.75

.50

050 75 100 125 150

Quantity of Aluminum(Millions of Pounds)

Supply and Demand Analysis(a) U.S. Domestic

Aluminum Market(b) U.S. Export Supply

and Import Demand

Dd

Sd

U.S.ExportSupply

U.S.Import

Demand

a

b

c

x

y

Surplus = 50

Surplus = 100

Shortage = 50

Shortage = 100

LO3

Pric

e (P

er P

ound

; U.S

. Dol

lars

1.50

1.25

1.00

.75

.50

050 75 100 125 150

Quantity of Aluminum(Millions of Pounds)

1.50

1.25

1.00

.75

.50

050 100

Quantity of Aluminum(Millions of Pounds)

Pric

e (P

er P

ound

; U.S

. Dol

lars

(a) Canada’s Domestic Aluminum Market

(b) Canada’s Export Supplyand Import Demand

Dd

Sd

CanadianExportSupply

CanadianImport

Demand

q

r

s

t

Surplus = 50

Surplus = 100

Shortage = 50

LO3

Supply and Demand Analysis

International Equilibrium

1.00

.75

.88

0 50 100Quantity of Aluminum(Millions of Pounds)

Pric

e (P

er P

ound

; U.S

. Dol

lars

• Import demand = Export supply

CanadianExportSupply

e

U.S.ExportSupply

U.S.Import

Demand

Equilibrium

CanadianImport Demand

LO3

Trade Barriers and Export Subsidies

• Tariffs• Revenue tariff• Protective tariff

• Import quota• Nontariff barrier (NTB)• Voluntary export restriction (VER)• Export subsidy

LO4

Economic Impact of Tariffs

• Direct effects• Decline in consumption• Increase in domestic production• Decline in imports• Tariff revenue

• Indirect effects

LO4

Economic Impact of Quotas

• Decline in consumption• Increase in domestic production• Decline in imports• Quotas do not provide for any

government revenue but instead transfer it to foreign producers

LO4

Economic Effects of Tariff/Quota

Quantity

Pric

e

0Dd

Sd

Pd

q

Sd + Q

Pt

Pw

a b c d

LO4

The Case for Protection

• Military self-sufficiency• Diversification for stability• Infant industry • Protection against dumping• Increased domestic employment• Cheap foreign labor

LO5

Multilateral Trade Agreements• General Agreement on Tariffs and

Trade (GATT)• World Trade Organization (WTO)• European Union (EU)• North American Free Trade

Agreement (NAFTA)

LO5

GATT• Three principles:

• Equal, nondiscriminatory trade between member nations

• Reduction in tariffs• Elimination of import quotas

LO5

WTO

• Established by Uruguay Round of GATT

• 153 member nations in 2010• Oversees trade agreements and rules

on disputes• Critics argue that it may allow nations

to circumvent environmental and worker-protection laws

LO5

European Union

• Initiated in 1958 as Common Market• Abolished tariffs and import quotas

between member nations• Established common tariff with

nations outside the EU• Created Euro Zone with one currency

LO5

NAFTA

• Agreement between U.S., Canada, and Mexico

• Established a free trade zone between the countries

• Trade has increased in all countries• Enhanced standard of living

LO5

Trade Adjustment and Offshoring

• Trade Adjustment Assistance Act• Designed to help individuals hurt by

international trade• Offshoring of jobs

• Shifting of work previously done by a nation’s workers to workers abroad

LO5

Petition of the Candlemakers

• Petition of candlemakers asking for protection from natural light producers such as the sun

• Tongue-in-cheek argument supporting the idea of free trade

LO5