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Chapter 38 International Trade Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 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