chapter 16 international trade - dr. nghia trong nguyen · chapter 16 international trade 1 ......

CHAPTER 16

International Trade

1

Slides prepared by Bruno Fullone, George Brown College

Copyright © 2010 McGraw-Hill Ryerson Limited.

PART 6: INTERNATIONAL

ECONOMICS

• Learning Objective 16.1: Some key facts about Canada’s international trade

• Learning Objective 16.2 : About specialization, comparative advantage, and international trade

• Learning Objective 16.3 About supply and demand analysis of exports and imports

• Learning Objective 16.4 : About trade barriers and their negative effects on nations’ economic well-being

• Learning Objective 16.5 : The usual arguments against free trade

• Learning Objective 16.6: The role played by free- trade zones and the World Trade Organization (WTO) in promoting international trade

2 Chapter 16

In This Chapter You Will Learn

LO16.1.1 3

Other

National

Economies

Canadian

Economy

Goods & Services

Capital & Labour

Info & Technology

Money

Figure 16-1 International Linkages

16.1 Canada and International Linkages

LO16.1 4

• Volume

– Exports are about 35% of Canadian GDP

– Imports are about 33% of Canadian GDP

Canada and World Trade

5 LO16.1

16.1 Global Perspective

6 LO16.1

Figure 16-2 Canadian Trade as

Percentage of GDP

LO16.1 7

• Dependence

– Canada almost entirely dependent on other countries for bananas, cocoa, coffee, spices, tea, raw silk, tin, and natural rubber

– Many Canadian industries rely on sales abroad: agricultural products, computers, chemicals, aircraft, automobiles, etc.


LO16.1 8

• Trade Patterns

• A trade surplus occurs when exports exceed imports. Canada had a trade surplus in goods in 2008:

• A trade deficit occurs when imports exceed exports. Canada had a trade deficit in services in 2008

• Canada imports some of the same categories of goods that it exports, called intraindustry trade

• Canada’s export and import trade is mainly with other industrially advanced nations


9 LO16.1

Table 16-1 Principal Canadian

Exports and Imports of Goods, 2008

10 LO16.1

Table 16-2 Canadian Exports and

Imports of Goods by Area, 2008

LO16.1 11

• Transportation Technology

• Communications Technology

• General Decline in Tariffs

Rapid Trade Growth

• Germany, the United States, China, and Japan had combined exports of $3.6 trillion in 2006

• Along with Germany, other western European nations such as France, Britain, and Italy are major exporters

• Southeast Asian countries of South Korea, Taiwan, and Singapore have combined exports which exceed those of France, Britain, or Italy

• China with its reintegration of Hong Kong, has quickly emerged as a major international trader

12 LO16.1

Participants in International Trade

13

16.2 Global Perspective

LO16.2 14

Why do nations trade?

• The distribution of resources is uneven

• Efficient production requires different technologies or resource combinations

• Products are differentiated as to quality & other non-price attributes

The Economic Basis for Trade

LO16.2 15

• labour-intensive goods

• land-intensive goods

• capital-intensive goods

The Economic Basis for Trade

LO16.2 16

The Basic Principle

• Specialization according to comparative advantage reduces costs

• This is true even if a nation has an absolute advantage

Specialization and

Comparative Advantage

LO16.2 17

Two isolated nations (Canada and Brazil)

1. Constant Costs

– straight-line production possibilities curves

2. Different Costs

– different technology & resources

3. Canada has absolute advantage in both steel and soybeans

Specialization and


LO16.2 18

So

yb

ean

s (

ton

nes)

5 8 10 15 20

Canada Brazil

5 10 15 18 20 25 30

Steel (tonnes)

So

yb

ean

s (

ton

nes)

A

30

25

20

15

12

10

5

0

18 steel

12 soybeans

30

25

20

15

10

4

0

B

8 steel

4 soybeans

Steel (tonnes)

Production Possibilities Curve

Figure 16-3

LO16.2 19

Opportunity Cost Table

Country 1 Steel Cost 1 Soybean Cost

Canada 1 soybean 1 steel

Brazil 2 soybeans .5 steel

Who has the comparative advantage

in steel?

Specialization Based on


LO16.2 20





Who has the comparative advantage in soy?

Specialization Based on


LO16.2 21

So

yb

ean

s (

ton

nes)

5 8 10 15 20

Canada Brazil

5 10 15 18 20 25 30

Steel (tonnes)

So

yb

ean

s (

ton

nes)

A

30

25

20

15

12

10

5

0

30

25

20

15

10

4

0

B

Steel (tonnes)

Production Possibilities Curve –

after specialization, Figure 16-3

30 steel

0 soybeans 0 steel

20 soybeans

LO16.2 22

• What will the terms of trade be?

• Many possibilities

• For trade to be mutually beneficial the terms of trade must be between each nation’s opportunity costs

Terms of Trade

LO16.2 23





for example:

• 1 steel for 1.5 soybeans

• gains from trade can be illustrated with

trading possibilities line

Terms of Trade

LO16.2 24

Figure 15-4 45

40

35

30

25

20

15

12

10

5

0

30

25

20

15

10

4

0

5 10 15 18 20 25 30 5 8 10 15 20

A

B

Canada Brazil

So

yb

ean

s (

ton

ne

s)

So

yb

ean

s (

ton

ne

s)

Steel (tonnes) Steel (tonnes)

1.5 soy

for 1

steel

Trading

possibilities

line

Trading

possibilities

line

.67

steel for

1 soy

Trading Possibilities Lines and the Gain from Trade

LO16.2 25

Canada Brazil

steel soybeans steel soybeans

Outputs before

specialization 18 12 8 4

Outputs after

specialization

Amounts exported (-

) & imported (+)

Outputs available

after trade

Gains from

specialization &

trade

30 0 0 20

-10 +15 +10 -15

20 15 10 5

2 3 2 1

Table 16-3: Comparative Advantages & the Gain from Trade

LO16.2 26

• Improved Options

• Added Output

Gains from Specialization

and Trade

So

yb

ea

ns

(To

nn

es)

30

25

20

15

10

5

0

35

40

45

5 10 15 20 25 30

Steel (Tonnes)

So

yb

ea

ns

(To

nn

es)

30

25

20

15

10

5

0

35

40

45

5 10 15 20

Steel (Tonnes)

(a) Canada (b) Brazil

12

18 8

4

A

B

A’

B’

C

C’

W

c

w w’

Trading Possibilities Line

Trading Possibilities Line

27 LO16.2

Economic Basis for Trade

LO16.2 28

A more realistic model:

• increasing opportunity costs

• less than complete specialization

Trade with Increasing Costs

LO16.2 29

• Through free trade based on the principle of comparative advantage, the world economy can achieve a more efficient allocation of resources & a higher level of material well-being than without free trade

• Side benefits:

– promotion of competition, deterrence of monopoly

– linking of national interests, reduction of national animosities

The Case for Free Trade Restated

LO16.3 30

• When world prices increase relative to domestic prices, domestic exports will increase, resulting in an upward sloping export supply curve

• When world prices decrease relative to domestic prices, domestic imports will increase, resulting in a downward sloping import demand curve

16.3 Supply & Demand Analysis

of Exports and Imports

LO16.3 31

Cdn. domestic aluminum market Cdn. export supply and

import demand

100 50

Sd

Dd

100 50 75 125 150

If the world price

exceeds the Cdn.

price by 25 cents....

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

$1.75

1.50

1.25

1.00

.75

$1.75

1.50

1.25

1.00

.75

Canadian Export Supply and Import

Demand, Figure 16-5

LO16.3 32

100 50

Sd

Dd

100 50 75 125 150

EXPORTS = 50 SURPLUS = 50

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)


import demand

$1.75

1.50

1.25

1.00

.75

$1.75

1.50

1.25

1.00

.75

If the world price

goes further up....


Demand, Figure 16-5

LO16.3 33

100 50

Sd

Dd

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

100 50 75 125 150

Cdn.

export

supply

SURPLUS = 100 EXPORTS = 100


import demand

$1.75

1.50

1.25

1.00

.75

$1.75

1.50

1.25

1.00

.75

If world prices

fall below $1.25....


Demand, Figure 16-5

LO16.3 34

100 50

Sd

Dd

100 50 75 125 150

Cdn.

export

supply

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)


import demand

$1.75

1.50

1.25

1.00

.75

$1.75

1.50

1.25

1.00

.75

SHORTAGE = 50 IMPORTS = 50


Demand, Figure 16-5

LO16.3 35

100 50

Sd

Dd

100 50 75 125 150

SHORTAGE = 100

Cdn.

import

demand

Cdn.

export

supply

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)


import demand

$1.75

1.50

1.25

1.00

.75

$1.75

1.50

1.25

1.00

.75

IMPORTS = 100


Demand, Figure 16-5

LO16.3 36

U.S. domestic aluminum market U.S. export supply and

import demand

$1.50

1.25

1.00

.75

.50

100 50

$1.50

1.25

1.00

.75

.50

Sd

Dd

100 50 75 125 150

SURPLUS = 50

SURPLUS = 100

U.S.

export

supply

EXPORTS = 50

EXPORTS = 100



U.S.

import

demand P

ric

e (

pe

r k

g. C

dn

. d

oll

ars

)

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

) U.S. Export Supply and Import Demand

Figure 16-6

LO16.3 37

1.25

1.125

1.00

Pri

ce

(p

er

kg

. C

dn

. d

oll

ars

)

Cdn.

export

supply

Cdn.

import

demand

U.S.

export

supply

U.S.

import

demand

e

World price is where:

U.S. export supply

=Cdn. import demand

25

Equilibrium World Price, Exports &

Imports, Figure 16-7

LO16.3 38

• International equilibrium occurs when one nation’s demand curve intersects another nation’s export supply curve

• Americans will pay more for aluminum with trade than without it

• Americans are willing to export aluminum to Canada because they can gain from the trade (to import other goods)

• Canadian pay less for aluminum with trade. Canadian gain from the trade

Equilibrium World Price, Exports

& Imports, Two-Nation Model

LO16.4 39

• Tariffs

– Revenue tariffs

– Protective tariffs

• Nontariff Barriers (NTB)

• Import Quotas

• Voluntary Export Restrictions (VER)

16.4 Trade Barriers

LO16.4 40

price

quantity

supply

demand

pD

pW

a q d

Domestic Market

imports

open to world

markets:

• quantity

demanded

increases

to d

• quantity

supplied

decreases

to a

• imports are

d-a

The Economic Effects of a Protective

Tariff or an Import Quota, Figure 16-8

Copyright © 2010 McGraw-Hill Ryerson Ltd. Chapter 15.4 41

price

quantity

supply

demand

pD

pW

a q d

pT

b c

Domestic Market

tariff

effects of a

tariff:

• price rises to

pT

• quantity

supplied

increases to

b

• quantity

demanded

decreases to

c

• imports are

c-b

imports

The Economic Effects of a Protective Tariff

or an Import Quota, Figure 16-8

LO16.4 42

price

quantity

supply

demand

pD

pW

a q d

pT

b c

Domestic Market

tariff revenue

= (c-b)X(pT-pW)

=imports X tariff

imports

The Economic Effects of a Protective Tariff

or an Import Quota, Figure 16-8

LO16.4 43

Direct Effects:

• Decline in consumption

• Increased domestic production

• Decline in imports

• Tariff revenue

Indirect Effects:

• expansion of inefficient industries at the expense of relatively efficient ones

Economic Impact of Tariffs

LO16.4 44

• the same as a tariff, without the tariff revenue for the government

• foreign firms reap the benefit of higher prices

Economic Impact of Quotas

LO16.4 45

• Consumer costs – price of imported product goes up

– some consumers shift purchases from imports to higher-priced domestic goods

– prices of domestic goods rise

• gains to protected industries & workers come at the expense of much greater losses for the entire economy

Net Costs of Tariffs and Quotas

LO16.5 46

• Self-Sufficiency Argument

• Diversification for Stability Argument

• Infant-Industry Argument

• Counter-arguments:

• which industries?

• how long?

• other methods which are better

• Strategic Trade Policy

16.5 The Case for Protection:

A Critical Review

LO16.5 47

• Protection Against Dumping Argument

– Driving Out Competitors

– Price Discrimination

• Increased Domestic Employment Argument

– job creation from imports

– fallacy of composition

– possibility of retaliation

– long-run feedbacks

• Cheap Foreign Labour Argument

The Case for Protection:

A Critical Review

LO16.5 48

Summing Up

• the arguments for protection are not convincing

• there is compelling historical evidence that free trade has led to prosperity & protectionism has led to the opposite

The Case for Protection:

A Critical Review

LO16.6 49

• High tariffs a contributing cause of the Great Depression

• Reciprocal Trade Agreements

– most-favoured-nation clauses

16.6 Multilateral Trade Agreements

and Free-Trade Zones

LO16.6 50

• First signed in 1947

– equal, non-discriminatory trade treatment for all member nations

– reduction of tariffs by multilateral negotiation

– elimination of import quotas

• Eight rounds of negotiations

– Uruguay Round took effect in 1995

General Agreement on Tariffs

and Trade (GATT)

LO16.6 51

• successor to the GATT

• 151 member organization

• oversees trade agreements

• rules on trade disputes

• forum for further rounds of negotiations

– Doha Round launched in 2001

World Trade Organization (WTO)

LO16.6 52

• Trade liberalizations implemented by 2005:

– tariff reductions

– new rules for trade in services

– reductions in agricultural subsidies

– new protections for intellectual property

– phasing out quotas on textiles & apparel, & replacing them with tariffs


LO16.6 53

• GATT & WTO have been positive forces for liberalized trade

• WTO is highly controversial

– concerns about environment, labour


LO16.6 54

• free-trade zones, trade blocs

• EU initiated in 1958 as the Common Market

• Expanded to 27 countries in 2007

• nearly all internal tariffs & import quotas abolished

• common system of tariffs on non-EU goods

• liberalized movements of capital & labour

within the EU

• common internal economic policies

The European Union (EU)

LO16.6 55

• effects mixed: – Canada benefits from increasing prosperity in

EU market

– but trade barriers make it difficult to compete with EU companies

• the Euro Zone established in early 2000s – ends the inconvenience & expense of

exchanging currencies

The European Union (EU)

LO16.6 56

• Canada, Mexico, United States formed a trade bloc in 1993 – greatly reduced tariffs

– tariffs will be eliminated by 2008

• concerns about job losses not realized

• standard of living has been enhanced in all three countries

North American Free

Trade Agreement (NAFTA)

The Last Word: Fair Trade Products

• In economic terms, the purpose of the fair-trade movement is to redistribute more of the total gains from international trade directly to low-income producers and workers by increasing the demand for fair-trade imports.

• Fair Trade Standards guarantee the producers higher-than-market prices if they agree to pay their workers higher-than-market wages.

• Economists agree that some of the efforts of fair-trade advocates have succeeded in channelling sizable purchases away from otherwise identical substitutes and

toward fair-trade goods.

Chapter 16 58

16.1 Canada & International Linkages

16.2 The Economic Basis for Trade

16.3 Supply & Demand Analysis of

Exports & Imports

16.4 Trade Barriers

16.5 The Case for Protection: A Critical Review

16.6 Multilateral Trade Agreements &

Free-Trade Zones

Chapter 16 Summary

chapter 16 international trade - dr. nghia trong nguyen · chapter 16 international trade 1 ......

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