InternationalTrade

Chapter 37

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Objectives

• Comparative advantage and the gains from trade

• Exports and imports• Economic effects of tariffs and

quotas• Arguments for protectionism

37-2

Some Key Facts

• U.S. trade deficit in goods –$815 billion in 2007

• U.S. trade surplus in services –$107 billion in 2007

• Canada largest U.S. trade partner• Trade deficit with China

–$257 billion in 2007• Exports are 12% U.S. output• Dependence on oil

37-3

World Exports

GermanyUnited States

ChinaJapan

FranceNetherlands

United KingdomItaly

0 2 4 6 8 10 12

9.20

8.59

8.025.38

4.063.83

3.71

3.40

Source: World Trade Organization

Percentage Share of World Exports, Selected Nations, 2007

37-4

Economic Basis for Trade

• Nations have different resource endowments

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

37-5

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–Coffee sacrificed per ton of wheat

37-6

Co

ffe

e (T

on

s)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30

Wheat (Tons)

Co

ffe

e (T

on

s)

30

25

20

15

10

5

0

35

40

45

5 10 15 20

Wheat (Tons)

(a) United States (b) Brazil

12

18 8

4

A

B

Comparative Advantage

37-7

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

domestic opportunity cost• Opportunity cost 1 ton wheat

–1 pound of coffee in U.S.–2 pounds of coffee in Brazil

Comparative Advantage

37-8

• Terms of trade–U.S. 1W = 1C

–U.S. will sell 1W for more than 1C

–Brazil 1W = 2C

–Brazil will pay less than 2C for 1W

–Settle between the two

–Depends on supply/demand factors

–Assume 1W = 1.5C

Comparative Advantage

37-9

• Gains from trade–Trade possibilities line

–Slope equals terms of trade

–Improved options

• Complete specialization

• More of both goods

• More efficient resource allocation

Comparative Advantage

37-10

Economic Basis for Trade

Co

ffe

e (T

on

s)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30

Wheat (Tons)C

off

ee

(To

ns)

30

25

20

15

10

5

0

35

40

45

5 10 15 20

Wheat (Tons)

(a) United States (b) Brazil

12

18 8

4

A

B

A’

B’

C

C’

W

c

w w’

TradingPossibilities Line

TradingPossibilities Line

37-11

Comparative Advantage

• Trade with increasing costs–Concave production curve–Resources not perfectly

substitutable –Incomplete specialization

• The case for free trade–Promote efficiency–Promote competition

37-12

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

37-13

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) 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

Supply and Demand Analysis

37-14

Supply and Demand Analysis

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

37-15

International Equilibrium

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

CanadianImport Demand

e

U.S.ExportSupply

U.S.Import

Demand

Equilibrium

37-16

Trade Barriers

• Tariffs–Revenue tariff–Protective tariff

• Import quota• Nontariff barrier (NTB)• Voluntary export restriction

(VER)

37-17

Trade Barriers

• Economic impact of tariffs• Direct effects

–Decline in domestic consumption–Increase in domestic production–Decline in imports–Tariff revenue

• Indirect effects

37-18

The Case for Protection

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

37-19

The WTO Protests• 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

standards37-20

Key Terms

• labor-intensive goods• land-intensive goods• capital-intensive goods• opportunity-cost ratio• principle of comparative

advantage• terms of trade• trading possibilities line• gains from trade• world price• domestic price• export supply curve• import demand curve• equilibrium world price

• tariffs• revenue tariff• protective tariff• import quota• nontariff barrier (NTB)• voluntary export restriction

(VER)• strategic trade policy• dumping• Smoot-Hawley Tariff Act• World Trade Organization

(WTO)• Doha Round

37-21

Next Chapter Preview…

The Balance of Payments, Exchange Rates, and Trade Deficits

37-22