Transcript International Trade

International Trade
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Chapter 17: International Trade
KEY CONCEPT
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Economic interdependence involves producers in one nation that
depend on producers in other nations to supply them with certain
goods and services.
WHY THE CONCEPT MATTERS
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Nations choose to produce some things and trade for others. For
example, Japan trades for the raw materials it uses to produce
automobiles. It then turns around and trades the automobiles for
other goods.
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Benefits and Issues of
International Trade
Resource Distribution and Specialization
KEY CONCEPTS
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Nation’s economic patterns based on factors of production it has
– patterns change over time; for example, U.S. originally agricultural
Specialization occurs when narrow range of products made
– increased productivity and profit
– economic interdependence—reliance on others for products not
made
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Resource Distribution and Specialization
Example: Specialization
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Costa Rica exports bananas; has warm, wet climate bananas need
– relatively low agricultural wages are beneficial—production is labor
intensive
New Zealand exports wool, lamb, and mutton
– has temperate climate, water, open grasslands needed for grazing
– has low population density, scientific breeding, mechanized
processing
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David Ricardo: The Theory of Comparative
Advantage
Example: Trading in Opportunity
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Ricardo (1772–1823): English economist; lived at turn of 19th century
In his time, international trade based on absolute advantage
Ricardo showed nations can benefit from comparative advantage
– produce products it can make at lower opportunity cost than others
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Absolute and Comparative Advantage
KEY CONCEPTS
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Absolute advantage—nation’s ability to make product more efficiently
– due to uneven distribution of production factors in different areas
Comparative advantage—ability to produce at lower opportunity cost
– absolute cost of product not important, just opportunity cost
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Absolute and Comparative Advantage
Example: Absolute Advantage
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Australia produces more iron ore and steel than China with same
labor
– Australia has absolute advantage
Before Ricardo, logic held Australia should not trade for either
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Absolute and Comparative Advantage
Example: Comparative Advantage
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Law of comparative advantage—countries gain when
– produce items they are most efficient at producing
– and are at the lowest opportunity cost
If Australia’s ratio of steel to iron ore is 1:5 tons and China’s is 1:3
– China has comparative advantage in steel production
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Absolute and Comparative Advantage
Example: Advantages of Free Trade
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If China, Australia specialize, set trade ratio steel to iron ore at 1:4
– China gets 4 tons iron ore for 1 of steel, got 3 before
– Australia gets 1 ton of steel for 4 of iron ore; cost 5 before
Specialization, trade raise nations’ production ratios, world output
Increased output is mark of economic growth
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International Trade Affects the National
Economy
KEY CONCEPTS
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Exports—goods and services produced in one country, sold in others
Imports—products produced in one country, purchased by another
Costs and benefits of international trade vary by nation
– economists examine impact of exports and imports on prices and
quantity
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International Trade Affects the National
Economy
Impact 1: Exports on Prices and Quantity
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If a country begins exporting product, foreign buyers increase total
demand
– demand curve shifts right, sets higher equilibrium price
Higher prices at home offset by more jobs and income
– created by production expanded to meet demand
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International Trade Affects the National
Economy
Impact 2: Imports on Prices and Quantity
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Imports shift supply curve right, lower equilibrium price
Lower prices lead domestic producers to offer less of product
– improve efficiency, worker productivity, customer service
Trade gives consumers increased selection of goods, lower prices
Gives producers new markets, chance for more profits
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International Trade Affects the National
Economy
The United States in the World Economy
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U.S. is world’s largest exporter; exports more services than imports
– tourism, transportation, architecture, construction, information
systems
Also world’s largest importer; imports more goods than it exports
– oil and refined oil products, machinery, raw materials
Main trading partners: Canada, China, Mexico, Japan
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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specialization and economic interdependence
absolute advantage and comparative advantage
export and import
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Trade Barriers
Barriers to Trade
KEY CONCEPTS
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Most nations pass trade limit laws to protect domestic industries
Laws lead to higher prices, economic retaliation by other nations
In long run, industries can only be saved by becoming competitive
Trade restrictions are basically a political issue
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Barriers to Trade
Types of Trade Barriers
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Trade barrier—law limiting free trade among nations; most
mandatory
Quota—limits on the amount of a product that can be imported
Dumping—sale of product in other country at lower price than at
home
– hurts domestic producers; gives consumers lower price
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Barriers to Trade
Types of Trade Barriers
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Tariff—fee charged for goods brought from another country
Revenue tariff—tax on imports, specifically to raise money
– rarely used today
Protective tariff—tax on imported goods to protect domestic products
– raise price of goods more cheaply elsewhere
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Barriers to Trade
Types of Trade Barriers
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Voluntary export restraint—nation’s self-imposed limit on exports
– VER used to avoid a quota or tariff
Embargo—law that cuts most or all trade with a specific country
Informal trade barriers—licenses, environmental, health, safety laws
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The Impact of Trade Barriers
KEY CONCEPTS
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Trade barriers may temporarily save domestic jobs
– lack of competition promotes inefficiency, higher prices
Trade limits can lead to a trade war—succession of increasing trade
barriers between nations
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The Impact of Trade Barriers
Impact 1: Higher Prices
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Trade barriers raise prices or keep them high
In 2000, U.S., Japan set tariffs on South Korean semiconductor chips
– Korean and domestic chip prices went up in U.S. and Japan
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The Impact of Trade Barriers
Impact 2: Trade Wars
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Trade wars often result from disagreements over quotas or tariffs
Can result over other issues
– EU banned U.S hormone-treated beef, U.S. set 100% tax on many
EU foods
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Arguments for Protectionism
KEY CONCEPTS
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Protectionism—use of trade barriers to protect domestic industries
Purpose to protect jobs, national security, infant industries
– new industries unable to compete with larger, established
competitors
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Arguments for Protectionism
Argument 1: Protects Domestic Jobs?
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U.S. workers upset over jobs lost to countries with cheaper labor
Trade barriers generally protect inefficient production, higher prices
Laid-off voters influenced government to fund job training programs
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Arguments for Protectionism
Argument 2: Protects Infant Industries?
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Protection expected to allow new industries to grow until competitive
– used by developing nations to keep out goods from developed
nations
Critics say freedom from competition maintains perpetual infancy
– and need for perpetual support
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Arguments for Protectionism
Argument 3: Protects National Security?
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National security affects industries considered vital for safety
– energy industry considered vital by most nations
Political differences exist over which industries are truly vital
– 2006 Dubai forced to abandon deal to operate several port
facilities
– critics doubted security concerns, worried over interference with
trade
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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trade barrier and quota
tariff and voluntary export restraint
trade war and protective tariff
infant industries and protectionism
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Measuring the Value of Trade
Foreign Exchange
KEY CONCEPTS
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Trade needs way to set relative value of trading nations’ currencies
Foreign exchange market—where different currencies bought and
sold
– network of major commercial, investment banks linking world
economies
Foreign exchange rate—price of a currency in other currencies
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Foreign Exchange
Rates of Exchange
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In 1800s, early 1900s, gold standard determined value of currencies
– fixed rate of exchange—nation’s currency constant in relation to
others
Post–World War II to 1970s, currencies pegged to USD—1 oz gold =
$35
Flexible exchange rate—changes along with currency’s supply,
demand
– regulates foreign exchange, balancing imports and exports
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Foreign Exchange
Strong and Weak Currencies
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Trade-weighted value of the dollar—international value of U.S. dollar
– measured by the Fed
Weak dollar makes imported goods more expensive
– easier for domestic goods to compete
– exports become cheaper, easier to sell abroad
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Balance of Trade
KEY CONCEPTS
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Balance of trade—difference between value of imports and exports
Balance of payments—all transactions between nation and rest of
world
– includes government and private transactions, both trade and
investment
Trade surplus—nation exports more than imports; favorable balance
Trade deficit—nation imports more than exports; unfavorable balance
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Balance of Trade
Example: U.S.-China Trade
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China has undergone one of most rapid industrializations in history
Has pegged yuan at fixed rate versus dollar, keeping yuan weak
Made U.S. top destination for Chinese exports
– China has record trade surplus of $200 billion with U.S.
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Balance of Trade
Example: The U.S. Trade Balance
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1770–1870: U.S. had deficit in products; surplus in capital investment
1870–1920: paying back debts; was exporting more than importing
1920–1945: had surplus in exports, deficit in foreign investment
1945–1980: had deficit in merchandise; deficit in foreign investments
Today has surplus of foreign investment; merchandise deficit
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Reviewing Key Concepts
Explain the differences between the terms in each of
these pairs:
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foreign exchange market and foreign exchange rate
fixed rate of exchange and flexible rate of exchange
trade surplus and trade deficit
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Modern International Institutions
Regional and World Organizations
KEY CONCEPTS
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Free-trade zones—areas where nations trade without protective
tariffs
Customs unions—agreements that abolish trade barriers among
members
– establish uniform tariffs for non-members
Some trade groups called common markets
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Regional and World Organizations
Group 1: The European Union
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1957, six European nations created Common Market; became EU in
1993
European Union—economic and political union; no barriers for
members
Euro—currency of the EU, used by 12 of 27 member nations
EU has 20% of global exports and imports, world’s biggest trader
– sets low tariffs; wants to remove all barriers to international trade
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Regional and World Organizations
Group 2: NAFTA
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NAFTA—North American Free Trade Agreement of 1994
– phases out trade barriers between Canada, Mexico, U.S. in 15
years
Has led to specialization, efficiency, expanded markets, new jobs
– also competitive advantage over EU and Japan
All countries have had economic gain; trade has more than doubled
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Regional and World Organizations
Group 3: Other Regional Trade Groups
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Various groups formed to specialize, promote free trade, stay
competitive
– include Mercosur, ASEAN, APEC, SADC
OPEC—Organization of Petroleum Exporting Countries is a cartel
– group of producers controls production, pricing, marketing of a
product
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Regional and World Organizations
Group 4: World Trade Organization
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In 1944, Allied nations formed General Agreement on Tariffs and
Trade
World Trade Organization—formed in 1995 by nations that follow
GATT
– negotiates, administers trade agreements; resolves disputes
– monitors policies of 149 members; gives support to developing
countries
WTO successful to varying degrees
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Multinationals Bring Changes to International
Trade
KEY CONCEPTS
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Multinational corporations affect many different nations
– must deal with different sets of tariffs, labor restrictions, taxes
– often bring jobs and technology to developing nations
– boost overall levels of international trade
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Multinationals Bring Changes to International
Trade
International Trade Within Multinationals
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Intrafirm trade is trade between various divisions of a multinational
– exchange of goods between two parts of the company
– coordination of production between parts of the multinational
Materials or parts sent to overseas affiliate count as exports
– intrafirm imports count as imports in balance of trade
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Multinationals Bring Changes to International
Trade
Example: A Multinational Telecom Corporation
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Worldwide Cellular is U.S.-based multinational
– mines raw material in Australia
– manufactures phones in South Korea
– markets phones in Europe
– provides customer service from India
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Reviewing Key Concepts
Explain the relationship between the terms in each of
these pairs:
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free-trade zone and customs union
EU and NAFTA
OPEC and cartel
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Analyzing Tariffs—Who Wins and Who Loses?
Background
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The United States has had tariffs on sugar since the days of the early
republic.
In recent WTO talks, less-developed countries have objected to the lack of
market access for their goods and their price disadvantage.
What’s the Issue
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How do the trade barriers set up by the U.S. government affect producers
(both foreign and domestic) and consumers?
Thinking Economically
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Which argument for protection does document C seem to make? Is this
argument economically valid? Explain.
Is the difference in price shown in document B an unavoidable outcome of
the program outlined in document A? Explain.
How does U.S. government intervention in the sugar industry limit the
functioning of the economy as a free market? Use examples from the
documents in your answer.
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