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Chapter 38
International Trade
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Some Key Trade Facts
LO1
• U.S. trade deficit in goods
• $735 billion in 2012
• U.S. trade surplus in services
• $196 billion in 2012
• Canada largest U.S. trade partner
• Trade deficit with China
• $315 billion in 2012
• Exports are 14% U.S. output
• Dependence on oil
38-2
Some Key Trade Facts
• Principal U.S. exports include:
• Chemicals
• Agricultural products
• Consumer durables
• Semiconductors
• Aircraft
• U.S. provides about 8.1% of world’s exports
LO1
38-3
Some Key Trade Facts
• Principal U.S. imports include:
• Petroleum
• Automobiles
• Metals
• Household appliances
• Computers
LO1
38-4
Some Key Trade Facts
LO1
38-5
Some Key Trade Facts
LO1
38-6
Economic Basis for Trade
• Nations have different resource
endowments
• Labor-intensive goods
• Land-intensive goods
• Capital-intensive goods
LO2
38-7
Comparative Advantage
• 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
• Vegetables sacrificed per ton of beef
LO2
38-8
Comparative Advantage
(b) Mexico
45
45
40
40
35
35
Vegetables (Tons)
Vegetables (Tons)
(a) United States
30
25
20
15
12
10
A
LO2
25
20
15
10
5
0
30
5
4
5
10
15 18 20
Beef (Tons)
25
30
0
Z
5
8 10
15
Beef (Tons)
20
38-9
Comparative Advantage
• Self-sufficiency output mix
• Specialization and trade
• Produce the good with the lowest domestic
opportunity cost
• Opportunity cost of 1 ton of beef:
• 1 pound of vegetables in U.S.
• 2 pounds of vegetables in Mexico
38-10
Comparative Advantage
LO2
38-11
Comparative Advantage
• Terms of trade
• U.S. 1V = 1B
• U.S. will sell 1B for more than 1V
• Mexico 2V = 1B
• Mexico will pay less than 2V for 1B
• Settle between the two
• Depends on supply/demand factors
• Assume 1B = 1.5V
LO2
38-12
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
38-13
Gains from Trade
(a) United States
45
(b) Mexico
45
V’
40
40
35
Trading
Possibilities Line
30
Vegetables (Tons)
Vegetables (Tons)
35
V
25
20
A’
15
12
20
Trading
Possibilities Line
v
15
10
Z’
5
LO2
25
A
10
0
30
5
4
B
5
10
15 18 20
Beef (Tons)
25
30
W
0
Z
5
b
8 10
b’
15
Beef (Tons)
20
38-14
Comparative Advantage
• Trade with increasing costs
• Concave production curve
• Resources not perfectly substitutable
• Incomplete specialization
• Case for free trade
• Promote efficiency
• Promote competition
LO2
38-15
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
LO3
38-16
Supply and Demand Analysis
Surplus = 100
(b) U.S. Export Supply
and Import Demand
Sd
1.50
1.50
Surplus = 50
1.25
c
1.25
1.00
1.00
.75
Shortage = 50
.50
0
50
75
100
125
Quantity of Aluminum
(Millions of Pounds)
b
U.S.
Export
Supply
a
U.S.
Import
Demand
.75
x
.50
y
Dd
Shortage = 100
LO3
Price (Per Pound; U.S. Dollars
Price (Per Pound; U.S. Dollars
(a) U.S. Domestic
Aluminum Market
150
0
50
100
Quantity of Aluminum
(Millions of Pounds)
38-17
Supply and Demand Analysis
(b) Canada’s Export Supply
and Import Demand
1.50
1.50
Surplus = 100
Sd
1.25
1.25
Surplus = 50
s
1.00
1.00
.75
.50
Shortage = 50
Dd
0
50
75
100
125
Quantity of Aluminum
(Millions of Pounds)
LO3
Price (Per Pound; U.S. Dollars
Price (Per Pound; U.S. Dollars
(a) Canada’s Domestic
Aluminum Market
150
.75
r
Canadian
Export
Supply
q
Canadian
Import
Demand
.50
t
0
50
100
Quantity of Aluminum
(Millions of Pounds)
38-18
International Equilibrium
Price (Per Pound; U.S. Dollars
Import demand = Export supply
LO3
U.S.
Export
Supply
Canadian
Export
Supply
1.00
.88
.75
e
Equilibrium
U.S.
Import
Demand
Canadian
Import Demand
0
50
100
Quantity of Aluminum
(Millions of Pounds)
38-19
Trade Barriers and Export
Subsidies
• Tariffs
• Revenue tariff
• Protective tariff
• Import quota
• Nontariff barrier (NTB)
• Voluntary export restriction (VER)
• Export subsidy
LO4
38-20
Economic Impact of Tariffs
• Direct effects
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Tariff revenue
• Indirect effects
LO4
38-21
Economic Impact of Quotas
•
•
•
•
LO4
Decline in consumption
Increase in domestic production
Decline in imports
Quotas do not provide for any government
revenue but instead transfer it to foreign
producers
38-22
Economic Effects of Tariff/Quota
Sd
Price
Sd + Q
Pd
Pt
Pw
Dd
0
LO4
a
b
q c d
Quantity
38-23
The Case for Protection
•
•
•
•
•
•
LO5
Military self-sufficiency
Diversification for stability
Infant industry
Protection against dumping
Increased domestic employment
Cheap foreign labor
38-24
Multilateral Trade Agreements
• General Agreement on Tariffs and Trade
(GATT)
• World Trade Organization (WTO)
• European Union (EU)
• North American Free Trade Agreement
(NAFTA)
LO6
38-25
GATT
• Three principles:
• Equal, nondiscriminatory trade between
member nations
• Reduction in tariffs
• Elimination of import quotas
LO6
38-26
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 workerprotection laws
LO6
38-27
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
LO6
38-28
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
LO6
38-29
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
LO6
38-30
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
38-31