copyright 2008 the mcgraw-hill companies 23-1 some key facts the economic basis for trade supply and...

Copyright 2008 The McGraw-Hill Companies23-1

Some Key FactsThe Economic Basis for TradeSupply and Demand Analysis of Exports and ImportsTrade BarrierTrade Adjustment AssistanceLast Word

Key Terms

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23

InternationalTrade



Key Terms

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Chapter Objectives• The Graphical Model of Comparative

Advantage, Specialization, and the Gains From Trade

• How Differences Between World Prices and Domestic Prices Prompt Exports and Imports

• How Economists Analyze the Economic Effects of Tariffs and Quotas

• The Rebuttals to the Most Frequently Presented Arguments for Protectionism

• About the Assistance Provided Workers Under the Trade Adjustment Act of 2002

• How the Offshoring of U.S. Jobs Relates to the Growing International Trade in Services

Some Key Trade Facts

• U.S. trade deficit in goods

• $517 billion in 2009

• U.S. trade surplus in services


• Canada largest U.S. trade partner

• Trade deficit with China


• Exports are 13% U.S. output

• Dependence on oilLO1 23-3



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Some Key Facts• U.S. Sizable Trade Deficit with

China• U.S. Dependence on Oil is

Reflected• U.S. has World’s Highest Trading

Volume (Exports and Imports)• China a Major Trade Force• International Trade Links World

Economies• International Trade is the Center

of Policy Debates


• Principal U.S. exports include:

• Chemicals

• Agricultural products

• Consumer durables

• Semiconductors

• Aircraft

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

LO1 23-5


LO1 23-6



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Some Key Facts

GLOBAL PERSPECTIVE

GermanyUnited States

ChinaJapan

FranceNetherlands

ItalyUnited Kingdom

0 2 4 6 8 10 12

10.0

8.9

6.5

6.2

4.9

3.9

3.8

3.8

Source: World Trade Organization

Shares of World Exports, Selected Nations

Percentage Share of World Exports, 2004


LO1 23-8

Economic Basis for Trade

• Nations have different resource endowments

• Labor-intensive goods

• Land-intensive goods

• Capital-intensive goods

LO2 23-9

• 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

• Wheat sacrificed per ton of CoffeeLO2

Comparative Advantage

23-10



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The 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



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The Economic Basis for Trade• Self-Sufficiency Output Mix• Specializing Based on

Comparative Advantage– Principle of Comparative

Advantage• Terms of Trade

– 1W ≡ 1C in the U.S.– 1W ≡ 2C in Brazil

• Gains from Trade• Trading Possibility Line

– Improved Options– Added Output

W23.1

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 23-13



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The 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



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The Economic Basis for Trade• Trade with Increasing Costs

(curve would be concave, not linear)

• The Case for Free Trade



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Supply and Demand Analysis of Exports and Imports

• World Price• Domestic Price• Supply and Demand in

the United States–U.S. Export Supply

• Export Supply Curve

–U.S. Import Demand• Import Demand Curve



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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


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

U.S. Aluminum Market



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Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

1.50

1.25

1.00

.75

.50

050 75 100 125 150


1.50

1.25

1.00

.75

.50

050 100


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

a

r

s

t

Surplus = 50

Surplus = 100

Shortage = 50

Canadian Aluminum Market



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1.00

.75

.88

050 100


Pri

ce (

Per

Po

un

d;

U.S

. D

oll

ars

Equilibrium World Price andQuantity of Exports and Imports

CanadianExportSupply

CanadianImport Demand

e

World Market for Aluminum

U.S.ExportSupply

U.S.Import

Demand

Equilibrium

W23.2

Trade Barriers and Export Subsidies

• Tariffs

• Revenue tariff

• Protective tariff

• Import quota

• Nontariff barrier (NTB)

• Voluntary export restriction (VER)

• Export subsidy

LO4 23-20

Economic Impact of Tariffs

• Direct effects

• Decline in consumption

• Increase in domestic production

• Decline in imports

• Tariff revenue

• Indirect effects

LO4 23-21

Economic Impact of Quotas




• Quotas do not provide for any government revenue but instead transfer it to foreign producers

LO4 23-22



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Trade Barriers

Quantity

Pri

ce

0

Dd

Sd

Pd

Q

Sd + Q

Pt

Pw

a b c d

Economic Effects of a Protective Tariff or an Import Quota



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Consider Tariff Impact

• Example of tariff gone awry:

Water Intensive California Rice (shortage of water and uncertain future of meeting water needs).

“The U.S. government supports domestic rice production through tariffs on imported rice and direct taxpayer subsidies based on production, prices, and historical acreage”..



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Trade Barriers• The Case for Protection: A Critical

Review– Military Self-Sufficiency Argument– Diversification-for-Stability

Argument– Infant Industry Argument

• Counterarguments• Strategic Trade Policy

– Protection-Against-Dumping Argument

• Dumping– Increased Domestic Employment

Argument• Smoot-Hawley Tariff Act

– Cheap Foreign Labor Argument

Economic Impact of Quotas




• Quotas do not provide for any government revenue but instead transfer it to foreign producers

LO4 23-26

Multilateral Trade Agreements

• General Agreement on Tariffs and Trade (GATT)

• World Trade Organization (WTO)

• European Union (EU)

• North American Free Trade Agreement (NAFTA)

LO5 23-27

GATT

• Three principles:

• Equal, nondiscriminatory trade between member nations

• Reduction in tariffs

• Elimination of import quotas

LO5 23-28

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 23-29

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 23-30

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 23-31

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

LO5 23-32

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 23-33



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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• Trade Adjustment

Assistance Act• offshoring• World Trade

Organization (WTO• Doha Round

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