Survey: Given the current employment problems in this country, should we discourage foreign imports and impose tariffs and quotas in order to stimulate domestic production?

1. Yes

2. No

3. Not sure

4. No opinion/indifferent

Unit 10 - International Trade

Free Trade versus Protectionism

Free trade is an exchange of products andresources without trade barriers, restrictions,tariffs, or quotas.

Protectionism is a government policy todiscourage trade between countries or areas.

Microeconomics

Unit 10 - International Trade

The Law of Absolute Advantages

A country has an absolute advantage in producing a product if it can make it more efficiently (at lower cost) than another country.

Microeconomics

Unit 10 - International Trade Absolute Advantage Example

The following numbers represent hours of production needed to manufacture one barrel of oil and one watch.

Microeconomics

Oil

China Venezuela

Watch

30 10

12 20

Unit 10 - International Trade

Specialization

Venezuela produces 100 additional barrels of oil (1,000 hours) and decreases watch production by 50 (1,000 hours).

China produces 100 additional watches (1,200 hours) and decreases oil production by 40 (1,200 hours).

Microeconomics

30 10

12 20

C V

Oil

Watch

Unit 10 - International Trade

Specialization

Total world production increases by:Venezuelan oil: +100

Chinese oil: - 40

Additional oil production: + 60

Venezuelan watches: - 50

Chinese watches: +100

Additional watches + 50

Microeconomics

Unit 10 - International Trade

Specialization

Both countries use the same amount of resources, but total world production increases. After sharing (trading) the additional goods produced, each country is able to increase its standard of living.

Microeconomics

If a country produces both products more efficiently, then this country should:

1. Not trade at all with the other country

2. Produce both products and sell both products to the other country

3. Specialize in the product it produces most efficiently

4. None of the above

Unit 10 - International Trade

The Law of comparative advantages

A country has a comparative advantage in producing a good when it produces a good more efficiently relative to the production ratios of the same goods produced by another country.

Microeconomics

Unit 10 - International Trade Comparative Advantage Example

The following numbers represent hours of production needed to manufacture one barrel of oil and one watch.

Microeconomics

Oil

China Venezuela

Watch

30 10

40 20

Unit 10 - International Trade

Specialization

Venezuela is more efficient (has the absolute advantages) in producing both oil and watches.

Which country has the comparative advantage in producing oil?Which country has the comparative advantage in producing watches?

Microeconomics

Unit 10 - International Trade Comparative Advantage Example

Venezuela produces 100 additional barrels of oil (1,000 hours) and decreases its watch production by 50 (1,000 hours).China produces 60 additional watches (2,400 hours) and decreases its oil production by 80 (2,400 hours).

Microeconomics

Oil

China Venezuela

Watch

30 10

40 20

Unit 10 - International Trade

Specialization

Total world production increases by:Venezuelan oil: +100

Chinese oil: - 80

Additional oil production: + 20

Venezuelan watches: - 50

Chinese watches: +60

Additional watches +10

Microeconomics

Unit 10 - International Trade

Specialization

Even in the case where one country is better at making all goods, it pays for countries to specialize and trade.

Both countries use the same amount of resources, but total world production increases. After sharing (trading) the additional goods produced, each country is able to increase its standard of living.

Microeconomics

Unit 10 - International Trade

Arguments against Free Trade

Common arguments against free trade are:

1. National security.

2. Infant industry.

3. Counteracting dumping or foreign subsidies.

4. Protecting domestic jobs.

5. Improving the trade deficit.

Microeconomics

Unit 10 - International Trade

National Security Argument

We should not import defense-related products

(weapons, micro chips) because if we become

enemies with the exporting country, we are

vulnerable.

Microeconomics

Unit 10 - International Trade

Critique of the National Security Argument

Trading defense related products with stable countries serves as a deterrent against conflict.

We can import the product from a variety of countries.

We can produce many defense related products here as well; it would not be difficult to increase production in case of conflict.

Microeconomics

Unit 10 - International Trade

Infant Industry Argument

New industries are not as cost-effective as established industries.

We should protect domestic industries if they are new.

Microeconomics

Unit 10 - International Trade

Critique of the Infant Industry Argument

Countries often protect their “infant” industries longer than necessary.

Once tariffs and quotas are in place, they are politically and economically difficult to eliminate.

Competition, not protectionism, is what strengthens industries.

Microeconomics

Unit 10 - International Trade Counteracting Dumping and Foreign

Subsidies

If foreign countries subsidize their manufacturers (farming, steel, etc.), they have an advantage.

Some foreign manufacturers “dump” (sell at below cost) their products to establish a future monopoly situation in the market.

Tariffs and quotas will offset this unfair advantage.

Microeconomics

Unit 10 - International Trade Critique of the Counteracting Dumping and

Foreign Subsidies Argument

If foreign countries subsidize their manufacturers, or if companies dump their products, it results in lower prices for our consumers. This gives us more money to purchase products, including domestic ones.

Monopolies typically don’t charge high prices. A monopoly will be challenged if the price is high. If they do charge high prices, they don’t last.

Microeconomics

Unit 10 - International Trade

Protecting Domestic Jobs

Making foreign goods moreexpensive through import restrictions,makes domestic products relatively more attractive.

Higher demand for our products will lead to more employment.

Microeconomics

Unit 10 - International Trade Critique of the Protecting Domestic Jobs

Argument

If we impose import restrictions to protect domestic industries, other countries will do the same (retaliation), and our exports will decrease.

Eventually, everyone will lose the advantages of free trade.

Protectionism results in less competition, less efficiency, less production, higher prices, lower quality products, and less variety of products for consumers.

Microeconomics

Unit 10 - International Trade

Improving the Trade Deficit

If we reduce our imports, then our trade deficit will improve.

Microeconomics

Unit 10 - International Trade Critique of the Improving the Trade

Deficit Argument

Restricting imports results in decreases in exports (see previous argument), so the overall deficit will not improve.

Overall productivity and wealth will decline because of decreasing specialization and competition.

Microeconomics

Unit 10 - International Trade Critique of the Improving the Trade Deficit

Argument (cont’d)

A trade deficit does not mean that a country is in debt. It means that the merchandise part of the balance of payments is negative; the other components are on balance, by definition, positive.

Trade deficits are not necessarily bad; they can be a sign of a country’s strength.

Microeconomics

Unit 10 - International Trade

Less-developed Countries (LDCs)

Development Aid given to LDCs in 2010: $128.7 billion ($30.2 billion by U.S.)

Africans living on less than $1.25 per day in 2009: 50% (was 58% in 1996)

Real GDP per capita in sub-Saharan Africa (LDCs) in 2009 was less than $700.

Source: Organization for Economic Cooperation and Development, World Bank

Unit 10 - International Trade Less-developed Countries (LDCs)

Characteristics of LDCs include:Lack of free market policies.Improper domestic economic policies.Government corruption.Poor provision of public

services.

Microeconomics

Unit 10 - International Trade Less-developed Countries (LDCs)

LDCs need structural changes in their governments and economies.

No amount of financial help from industrialized countries will significantly help their situation if structural changes do not take place.

Microeconomics