37

International Trade

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Some Key Trade Facts

LO1

Principal U.S. exports include:

Principal U.S. imports include:

• Chemicals• Agricultural products• Consumer durables• Semiconductors• Aircraft

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

• Petroleum• Automobiles• Metals• Household appliances• Computers

37-2

Economic Basis for Trade

• Nations have different resource endowments

• Labor-intensive goods

• Land-intensive goods

• Capital-intensive goods

LO2 37-3

• 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 beefLO2

Comparative Advantage

37-4

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20

Beef (Tons)

Veg

etab

les

(To

ns

)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30

Beef (Tons)

(a) United States (b) Mexico

12

18 8

4

A

Z

Comparative Advantage

LO2 37-5

Comparative Advantage

LO2 37-6

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 37-7

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 37-8

Trade Barriers and Export Subsidies

• Tariffs

• Revenue tariff

• Protective tariff

• Import quota

• Nontariff barrier (NTB)

• Voluntary export restriction (VER)

• Export subsidy

LO4 37-9

Economic Impact of Tariffs

• Direct effects

• Decline in consumption

• Increase in domestic production

• Decline in imports

• Tariff revenue

• Indirect effects

LO4 37-10

Economic Impact of Quotas

• 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

LO4 37-11

The Case for Protection

• Military self-sufficiency

• Diversification for stability

• Infant industry

• Protection against dumping

• Increased domestic employment

• Cheap foreign labor

LO5 37-12

GATT

• Three principles:

• Equal, nondiscriminatory trade between member nations

• Reduction in tariffs

• Elimination of import quotas

LO5 37-13

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 37-14

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 37-15

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 37-16