Introduction: Thinking Like an Economist

1CHAPTER

International Trade Policy

Manufacturing and commercial monopolies owe their origin not to a tendency imminent in a capitalist economy but to governmental interventionist policy directed against free trade.

— Ludwig von Mises

CHAPTER

10

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

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Chapter Goals

Summarize some important data of trade

Explain how free trade associations both help and hinder international trade

Explain policies countries use to restrict trade

Summarize the reasons for trade restrictions and why economists generally oppose trade restrictions

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The Nature and Patterns of Trade

Differences in the importance of trade

Total Output ($) Export Ratio (%) Import Ratio (%)

Netherlands 844 78 71

Germany 3,695 47 41

Canada 1,706 29 31

Italy 2,180 27 29

France 2,825 26 28

United Kingdom 2,462 30 33

Japan 6,078 15 14

United States 15,094 13 16

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OPEC 4% Central andSouth America

11%

Other 10%

Pacific Rim 25%

EuropeanUnion 18%

Mexico 13%

Canada 19%

U.S. Exports by Region, 2012

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U.S. Imports by Region, 2012

OPEC 9%Central and

South America8%

Other 9%

Pacific Rim 31%

EuropeanUnion17%

Mexico 11%

Canada 15%

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The Changing Nature of Trade

As technological changes in telecommunications reduce costs, foreign countries will be able to provide more services

This trade in services is often called outsourcing

Customer service calls for U.S. companies are now more frequently answered in India

The nature of trade is continually changing, both in terms of the countries with which the U.S. trades and the goods and services traded

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The Changing Nature of Trade

Using overseas suppliers is not a new development in trade

Because technology is growing in these countries, the U.S. economy must develop new technologies to remain competitive

The difference is the potential size of outsourcing to India and China with combined populations of 2.5 billion people

Is Chinese and Indian outsourcing different from previous outsourcing?

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Balance of Trade

Trade deficit = exports < imports

Trade surplus = exports > imports

The U.S. has a significant trade deficit of approximately $820 billion which is 5.5% of GDP

The U.S. is financing its trade deficit by selling off financial assets, stocks and bonds, and real assets, corporations and real estate

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Balance of TradePercent of GDP

1970 1980 1990 2000 2010 2020

The United States has been running trade deficits

since the 1970s

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Debtor and Creditor Nations

The U.S. is currently financing its trade deficit by selling off assets

The U.S. has gone from being a large creditor nation to being the world’s biggest debtor; international considerations have been forced on the nation

The U.S. has not always had a trade deficit; following WWII, it had trade surpluses

Running a deficit isn’t necessarily bad

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Varieties of Trade Restrictions

Quotas are quantity limits placed on imports

Voluntary restraint agreements are when countries voluntarily restrict their exports

Tariffs are taxes governments place on internationally traded goods (generally imports)

An embargo is a total restriction on the import or export of a good

Regulatory trade restrictions are government-imposed procedural rules that limit imports

Nationalistic appeals, such as “Buy American” can help to restrict international trade

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Application: Tariffs when the domestic country is small

SDomestic

P

Q

$2.50

Imports

Tariffs decrease imports, increase domestic production, and generate tariff revenue

$3.00

DDomestic

PWorld = SWorld$2.00

PWorld + $0.50Tariff = S’World

Imports’

Tariff revenue

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Application: Quotas when the domestic country is small

SDomestic

P

Q

$2.50

Imports w/o quota

Quotas decrease imports and increase domestic production

$3.00

DDomestic

PWorld = SWorld$2.00

World supply with quota

Quota = 50

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Reasons for Trade Restrictions

Haggling by companies over the gains from trade

Haggling by countries over trade restrictions

Unequal internal distribution of the gains from trade

Specialized production• Learning by doing and economies of scale

Macroeconomic costs of trade

National security

International politics

Increased revenue brought in by tariffs

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Why Economists Generally Oppose Trade Restrictions

International trade provides competition for domestic companies

Restrictions based on national security are often abused or evaded

From a global perspective, free trade increases total output

Trade restrictions are addictive

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Institutions Supporting Free Trade

• e.g. the European Union (EU) and the North American Free Trade Association (NAFTA)

Countries strengthen trading relationships with most-favored nation status – those countries will be charged as low a tariff on exports as any other country

Free trade associations are groups of countries that allow free trade among its members and put up common barriers against all other countries’ goods

The World Trade Organization (WTO) has over 150 members

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Chapter Summary

The nature of trade is continually changing

The U.S. is importing more and more high-tech goods and services from India and China and other East Asian countries

Outsourcing is a type of trade. Outsourcing is a larger phenomenon today compared to 30 years ago because China and India are so large

Trade restrictions include tariffs and quotas, embargoes, voluntary restraint agreements, regulatory trade restrictions, and nationalistic appeals

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Chapter Summary

Reasons that countries impose trade restrictions include unequal internal distribution of the gains from trade and haggling by countries over trade restrictions

Economists generally oppose trade restrictions because of their understanding of the advantages of free trade

The World Trade Organization is an international organization committed to reducing trade barriers

Free trade associations, such as the European Union, help trade by reducing barriers to trade among member nations