Download powerpoint file

Chapter 19
International Trade
© OnlineTexts.com
p. 1
Free Trade?
• Free trade has been a controversial topic in
nations throughout history .
• At the extremes, the “free-traders” would like
to open all products to trade while the
“protectionists” prefer to impose punitive taxes
and/or quotas on imports.
• International trade is increasing at a rapid pace
today, creating enormous globalization
tensions.
© OnlineTexts.com
p. 2
Arguments for (U.S.) Protectionism
1. Saves American jobs:
–
By raising the price of imports via tariffs or
quotas, American industries are more competitive
in the domestic market and, therefore, American
workers' jobs will be spared and/or expanded.
2. Protects infant industries:
–
It makes sense to protect firms in new industries
from the perils of foreign competition at first,
until the industry grows and matures. At that time
the protection can be lifted.
© OnlineTexts.com
p. 3
Arguments for Protectionism
3. Raises government revenue:
–
Government revenues increase since the U.S.
government collects the tariff revenue.
4. Keeps firms in U.S.:
–
This effect might occur for two reasons. First, firms
will face less competition domestically and not feel
the pressure to move to low-wage countries. Second,
the firm who moves to another country must pay the
higher import tax to sell the product at home and
thus may not be as willing to relocate.
© OnlineTexts.com
p. 4
Arguments for Protectionism
5. Levels the playing field for those firms who
adhere to stricter environmental and labor
laws.:
–
If firms in the U.S. must adhere to costly
environmental regulation and give laborers
certain rights and minimum working conditions,
then U.S. firms are at a cost disadvantage
compared with firms in nations that do not have
to adhere to such regulations. Trade protection,
therefore, makes the playing field more equal.
© OnlineTexts.com
p. 5
Arguments for Protectionism
6. Political tit for tat:
–
If my trading partner plays unfairly, why should I
play by the rules? The U.S. accuses Japan quite
often of unfair trading practices, hence U.S. firms
have a right to impose similar unfair trading
practices to make trade more equal.
7. Human rights violations:
–
Trade policy may give the U.S. political leverage
in coercing another country to improve its human
rights violations.
© OnlineTexts.com
p. 6
Economic Theory of Protectionism:
Tariffs
• A tariff is a tax on an import.
– When the tariff is imposed, the supply curve in the import market shifts to
the left, but the demand curve for the domestic product shifts to the right.
© OnlineTexts.com
p. 7
Winners and Losers from Tariffs
TABLE 1
Winners and Losers from Tariffs
Winners
Domestic producers who
compete with importers
Losers
U.S. consumers who pay a
higher price for imports
Government via increased
Importers to U.S.
tax revenue
• Tariffs are controversial because they harm some and
benefit others.
© OnlineTexts.com
p. 8
Economic Theory of Protectionism:
Quotas
• Quotas are restrictions on the quantity of imports
allowed to enter the domestic country over a given
amount of time.
© OnlineTexts.com
p. 9
Winners and Losers from Quota
Restrictions
TABLE 2
Winners and Losers from Quota Restrictions
Winners
Losers
Domestic producers who U.S. consumers who pay a
compete with importers higher price for products
Foreign producers who
get in under the quota
Importers who are shut
out of the U.S. market
© OnlineTexts.com
p. 10
The Economic Argument for Free-Trade
• If some people are made better off and other
hurt from protectionism, don’t the costs and
benefits just cancel each other out?
• Economic theory says no. The costs of
protectionism exceed the benefits.
© OnlineTexts.com
p. 11
The Economic Argument for Free-Trade
• The theoretical justification for free-trade
resides in the concept of comparative
advantage.
– Comparative advantage dictates that each nation
should specialize in those products that it can
produce the least inefficiently compared with
production in other nations.
– If each country specializes in producing what it is
relatively good at, then through trading, the world
as a whole can achieve higher standards of living.
© OnlineTexts.com
p. 12
Example: Gains from Trade
Given a certain amount
of resources, the U.S.
can produce 50 airplanes
and 200 shirts. With the
same resources, Mexico
can produce 20 airplanes
and 160 shirts. Notice
that the U.S. has an
absolute advantage in
producing both airplanes
and shirts. Should the
U.S. trade at all?
© OnlineTexts.com
p. 13
Determining Comparative Advantage
• The U.S. has a comparative advantage in
making airplanes.
– the U.S. can produce one plane for every four shirts
that it gives up. Mexico can make one plane for
every eight shirts that it gives up.
• Mexico has a comparative advantage in making
shirts.
– the U.S. can produce one shirt for every 1/4 plane
that it gives up, whereas Mexico can make one shirt
for every 1/8 plane it gives up.
© OnlineTexts.com
p. 14
Gains from Trade
• Suppose that 6 shirts are traded for one plane. If the U.S. specializes in the
production of airplanes while Mexico specializes in the production of shirts,
and then the two nations trade goods, both countries can consume more than
before trade.
© OnlineTexts.com
p. 15
Protectionism Revisited
1. Saves American jobs.
–
By imposing trade protection, the price of foreign
and domestic goods rise. In return, certain
American jobs are preserved. However, it is often
estimated that the cost to American consumers to
save one job through protectionism is $100,000 to
$150,000. The reason for the high cost is that all
the consumers of a particular product pay a
higher price than they otherwise would pay.
© OnlineTexts.com
p. 16
Protectionism Revisited
2. Protects infant industries.
–
–
If the infant industry is so promising within a
particular nation, why won't private financial
markets support the firms and carry them through
the early years?
In addition, the infant industry tends not to grow
up because the protection rarely ends due to
political lobbying from the industry.
© OnlineTexts.com
p. 17
Protectionism Revisited
3. Raises government revenue.
–
this method is an inefficient way to raise revenue
because consumers end up paying for much of the
tariff via higher consumer prices.
© OnlineTexts.com
p. 18
Protectionism Revisited
4. Keeps firms in U.S.
–
The fallacy of this argument is in assuming that
the lost jobs from firms moving overseas or
across borders will not be replaced. By allowing
production to shift internationally, the U.S.
economy can specialize in its comparative
advantage and replace the lost jobs with higher
skilled, higher paying jobs on average. It can do
better, for example, by allowing clothing
production to be done in other countries, while
the U.S. focuses on, say, software production.
© OnlineTexts.com
p. 19
Protectionism Revisited
5. Levels the playing field for firms who adhere to
stricter environmental and labor laws.
–
–
This argument is harder to dismiss. Many nations
do have environmental and labor laws that are much
less stringent than those in the U.S., and hence, it is
less costly to produce in those nations.
We must be careful to measure correctly the cost
advantages from differing labor and environmental
laws. Differences in labor productivity—not
environmental or labor laws—are often the most
important sources of comparative advantage.
© OnlineTexts.com
p. 20
Protectionism Revisited
6. National security.
–
National security may indeed be a good reason to
limit trade. Usually the scope of this limitation,
however, is narrow and focused. National security
concerns will not widely disrupt free trade.
© OnlineTexts.com
p. 21
Protectionism Revisited
7. Political tit for tat.
–
Adopting protective measures because trading
partners are not playing fair may force the trading
partners to open their economies up. There may
be times when this policy is justified. However, it
should be used as a last resort. Moreover, the end
goal of these types of measures is to have more
free trade, not less.
© OnlineTexts.com
p. 22
Protectionism Revisited
8. Human rights violations.
–
Using trade policies as leverage for improving
human rights may sometimes be justified. There
is an on-going discussion, however, of the
advantages of engaging in trade with a nation (a
long-term approach) rather than taking a more
combative approach and erecting trade barriers (a
short-term approach). One can make a case for
either approach given various circumstances.
© OnlineTexts.com
p. 23
Is Protectionism Justified?
• In sum, some non-economic justifications for
protectionist policies do exist, but purely
economic arguments for trade protection are
difficult to justify.
• Protectionist policies hurt more people than
they help, and the economy is less efficient
because of it.
© OnlineTexts.com
p. 24
NAFTA
• The North American Free Trade Agreement
(NAFTA):
– a pact implemented in 1994 between the U.S.,
Mexico, and Canada
– eliminated or will eliminate most of the tariffs and
other trade restrictions between the countries.
– was the source of enormous controversy and
tension in North America.
© OnlineTexts.com
p. 25
Impacts of NAFTA
• NAFTA
– hurts U.S. producers that compete with importers
from Mexico and Canada because it reduces the
prices of U.S. imports from Mexico and Canada.
– helps U.S. exporters to Mexico & Canada because it
reduces the prices of U.S. exports in those countries.
– Despite intense U.S. opposition from labor unions
and environmentalists, most of the hardship is begin
felt in Mexico due to their severe pre-NAFTA
protectionist policies.
© OnlineTexts.com
p. 26