Transcript Chapter Objectives

Chapter 14
International Trade
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
• Explain why global trade has increased so
much in recent years.
• Summarize the main gains to trade.
• Compare and contrast absolute advantage
and comparative advantage.
• Discuss the winners and losers from trade
and analyze the arguments for
protectionism.
• Describe what it means for a currency to
appreciate or depreciate.
• List explanations for why the United States
consistently runs a trade deficit.
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Nature of International Trade
• There has been a boom in international
trade over the last decade.
• Both trade in goods and services has
been soaring.
• Service exports include such items as
foreign students studying in the U.S. and
foreigners watching U.S.-produced TV
shows and movies.
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Global Exports (and Imports) as a
Percent of Global GDP
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Top Ten Purchasers of
U.S. Exports
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Top Ten Sources of U.S.
Imports
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Barriers to Trade
• Historically, businesses that want to sell
to buyers in another country faced both
the natural barriers to trade and the
legal barriers to trade.
• The natural barriers include distance,
differences in culture and values, and the
difficulty of delivering services remotely.
• The legal barriers include tariffs, quotas,
and other regulatory impediments.
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Barriers to Trade
• Both natural and legal barriers to
trade have fallen due to technology
and a commitment among countries
toward a policy of free trade.
• Technology has reduced the cost of
shipping and made communication
over long distances much easier.
• The ease of communication has
reduced problems associated with
different languages and cultures.
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Lowering of Legal Barriers
• Historically, countries have put barriers
on trading in the form of tariffs and
quotas.
– Tariffs are the taxes leveled on imports by
a country.
– Quotas are numerical limits on the number
of imported products coming into a country.
– Tariffs and quotas are applied to raise
revenues and to protect domestic
industries from foreign competition.
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Lowering of Legal Barriers
• Since the end of World War II, most
countries – led by the United States –
have made a concerted global effort to
reduce tariffs, quotas, and other trade
barriers.
• The reduction of these barriers has led
to a significant increase in global trade.
• Tariffs act as a tax on imported goods,
and thus raise their price.
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Lowering of Legal Barriers
• When the tariff is removed, the price of
the import goes down and the quantity
demanded for imports rises.
• Quotas are numerical limits on imports
which effectively reduce the quantity
supplied of the good.
– This supply restriction also drives up the
price.
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Eliminating a Tariff Increases the
Quantity of Imports
Price
Price paid by
consumers
with a tariff
A
Tariff
Market price
without a tariff
Price received
by importers
with a tariff
Supply curve for
imports
C
B
Demand curve for
imports
Level of imports Level of imports
with a tariff
without a tariff
Imports
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Gains from Trade
• Countries trade with each other
because of the gains from trade.
• The first gain from trade is lower prices.
– Goods and services that are produced
overseas have lower prices than the
comparable domestic goods and services.
– Also, the increased competition from
foreign producers forces domestic
companies to keep prices low.
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Furniture Prices versus CPI,
1990-2010
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Furniture Imports to the U.S.,
1990-2010
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Access to Natural Resources
• A second gain from trade is access to
natural resources that are either
unavailable or too expensive to
produce domestically.
– The U.S. imports a long list of resources,
with the most important being crude oil.
– Countries like Japan have few resources,
and import virtually all of them.
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Access to Global Markets
• A third gain from trade is that
companies obtain access to global
markets.
– Businesses can benefit because the
market for their product is now much
larger than any single nation.
– A global sales strategy is especially
beneficial for companies that have
development costs such as Boeing.
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Access to New Ideas
• The final gain from trade is the access to new
ideas developed in other countries.
– This improves growth in the domestic economy,
as knowledge is one of the key factors
determining long-term growth.
– In the current economy, many products are either
designed overseas or are the result of crosscountry collaboration.
– The development of the flat-panel television is a
good example.
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Comparative versus
Absolute Advantage
• A country has an absolute advantage in producing
a good if it takes less resources to produce the good
in that country than in another.
• But countries with an absolute advantage in
producing a good may not export it. It depends on
the comparative advantage.
• Comparative advantage means that countries
specialize in the products or services where they
have the biggest productivity advantage – or the
smallest productivity disadvantage.
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Labor Costs in Manufacturing,
2009
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Winners and Losers from Trade
• While the theory of comparative advantage
states that international trade will benefit an
overall economy, some companies and
individuals will be hurt.
• The benefits from trade are broadly
distributed:
– The entire population benefits from lower prices
for goods and services.
– Countries that are open to trade tend to have a
faster rate of economic growth, and living
standards go up.
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Winners and Losers from Trade
• The losers from trade are those industries where
imported goods and services displace
domestically-produced goods and services and
cost the country jobs.
• This has been most prevalent in the manufacturing
side of the economy, where much of the
production has moved to Asia.
• The job losses in manufacturing were, however,
more than offset by gains in other sectors, such as
healthcare and finance.
• Globalization benefits people whose skills are
relatively scarce in world markets.
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Imports and Jobs
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Arguments for Protection
• While the evidence shows that
international trade is beneficial to an
economy, free trade is often attacked by
politicians who believe it is harmful to
many workers.
• There are demands by these politicians
for a return to protectionism.
– That is, using tariffs, quotas, or other
barriers to trade to protect domestic jobs.
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Arguments for Protection
• There are a number of arguments
made for protectionism:
– One argument against free trade is that it
is disruptive in terms of people’s lives.
• The cost of change can be both economic
and social.
• A factory moving out of a small town can
leave the people without a livelihood.
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Arguments for Protection
– The infant industry argument is a
second argument against free trade.
• An infant industry is a new or developing
industry in a country which is vulnerable to
being put out of business by better-funded
and more mature foreign competitors.
• Given a chance to grow while protected,
however, the new industry could be a viable
global competitor.
• In theory this argument makes sense, but in
practice it rarely works since it reduces
competition.
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Arguments for Protection
– Another argument for protectionism is
unfair competition.
• In this case, a foreign country subsidizes its
exporting industries by lowering its taxes,
offering them low-cost loans, or simply by
giving them money.
• Given this subsidy, the foreign industry can
cut the price of their products in the global
market.
• As a result, the subsidized industries may
obtain a bigger share of the global market.
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Arguments for Protection
– The final, and perhaps most compelling,
argument for some form of protection is
national security.
• In the case of war, countries need to protect
some of their defense-related production.
• For example, specialty steel and advanced
electronics need to be produced domestically.
• A country needs to balance the economic
benefits of trade against the potential
vulnerabilities of a global supply chain in the
case of war.
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Exchange Rates
• Almost every country has a national
currency.
• For trade to take place, one country’s
currency must be converted to the other
country’s currency.
• The exchange rate is the rate at which one
currency can be turned into another.
• Exchange rates can be floating or pegged.
– Floating rates are set in the foreign exchange
markets, while pegged rates are managed by
the country to remain fixed.
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Exchange Rates
• When an exchange rate changes so that
one currency can buy more of another, we
say the first currency is appreciating and
the second currency is depreciating.
• The chart on the next slide shows that the
dollar is depreciating against the Chinese
Yuan.
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Exchange Rate of the Yuan
versus the Dollar
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Effects of Appreciation and
Depreciation
• When a currency depreciates, imports
become more expensive, while exports
become cheaper.
– Imports should fall, exports should rise, and the
trade deficit should become smaller.
• When a currency appreciates, imports
become cheaper, while exports become
more expensive.
– Imports should rise, exports should fall, and the
trade deficit should become larger.
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How Depreciation Works
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Trade Balance
• The trade balance is the difference
between exports of goods and services
and imports of goods and services.
• If the trade balance is negative – that is,
if imports exceed exports – we say that
the country is running a trade deficit.
• The U.S. trade deficit has increased
significantly in recent years.
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Goods and Services Trade
Balance for U.S.
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Explanations for the Trade
Deficit
• There are a number of possible
explanations for the trade deficit:
– First, it is our fault because:
• U.S. manufacturers are unable to compete.
• U.S. consumers are overspending, causing
the deficit.
• Overspending by the federal government is
the cause.
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Explanations for the Trade
Deficit
– Second, it is their fault because:
• Foreign countries put up barriers that keep
out U.S. exports and subsidize their own
exports.
– Finally, it is no one’s fault because:
• The strength of the U.S. economy allows us
to import more goods.
• Other countries want to lend to the U.S.
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Paying for Trade
•
The U.S. can pay for what we import
in four ways:
– Sell exports to foreigners.
– Borrow money from foreign investors.
– Sell assets such as stocks, bonds, and
real estate to foreign investors.
– Allow foreign companies to build
factories in the U.S.
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