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International Trade
Chapter 38
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
38-2
Some Key Trade Facts
• U.S. trade deficit in goods • $735 billion in 2012
• U.S. trade surplus in services • $196 billion in 2012
• Canada largest U.S. trade partner• Trade deficit with China• $315 billion in 2012
• Exports are 14% U.S. output• Dependence on oil
LO1
38-3
Some Key Trade Facts
• Principal U.S. exports include:• Chemicals• Agricultural products• Consumer durables• Semiconductors• Aircraft
• U.S. provides about 8.1% of world’s exports
LO1
38-4
Some Key Trade Facts
• Principal U.S. imports include:• Petroleum• Automobiles• Metals• Household appliances• Computers
LO1
38-7
Economic Basis for Trade
• Nations have different resource endowments
• Labor-intensive goods
• Land-intensive goods
• Capital-intensive goods
LO2
38-8
• 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
Comparative Advantage
LO2
38-9
Comparative Advantage
(a) United States (b) Mexico
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ns) 30
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35
40
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5 10 15 20Beef (Tons)
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A
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LO2
38-10
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
38-12
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
38-13
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
38-14
Gains from Trade
(a) United States (b) Mexico
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) 30
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35
40
45
5 10 15 20Beef (Tons)
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A
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TradingPossibilities Line
TradingPossibilities Line
B
LO2
38-15
Comparative Advantage
• Trade with increasing costs• Concave production curve• Resources not perfectly substitutable
• Incomplete specialization
• Case for free trade• Promote efficiency• Promote competition
LO2
38-16
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
38-17
1.50
1.25
1.00
.75
.50
050 100
Quantity of Aluminum(Millions of Pounds)
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
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 Supplyand 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
38-18
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
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)
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
(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
Supply and Demand Analysis
LO3
38-19
International Equil ibrium
1.00
.75
.88
050 100
Quantity of Aluminum(Millions of Pounds)
Pri
ce (
Per
Po
un
d;
U.S
. D
oll
ars
Import demand = Export supply
CanadianExportSupply
e
U.S.ExportSupply
U.S.Import
Demand
Equilibrium
CanadianImport Demand
LO3
38-20
Trade Barriers and Export Subsidies
• Tariffs• Revenue tariff• Protective tariff
• Import quota• Nontariff barrier (NTB)• Voluntary export restriction (VER)• Export subsidy
LO4
38-21
Economic Impact of Tariffs
• Direct effects• Decline in consumption• Increase in domestic production• Decline in imports• Tariff revenue
• Indirect effects
LO4
38-22
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
38-24
The Case for Protection
• Military self-sufficiency• Diversification for stability• Infant industry • Protection against dumping• Increased domestic employment• Cheap foreign labor
LO5
38-25
Multi lateral Trade Agreements
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)• European Union (EU)• North American Free Trade Agreement
(NAFTA)
LO6
38-26
GATT
• Three principles:• Equal, nondiscriminatory trade between
member nations• Reduction in tariffs• Elimination of import quotas
LO6
38-27
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
LO6
38-28
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
LO6
38-29
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
LO6
38-30
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
American workers to workers abroad
LO6