11

DisclaimerDisclaimer

The views expressed are my own and do not necessarily reflect official positions of the The views expressed are my own and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis, or the Federal Reserve System.Federal Reserve Bank of St. Louis, or the Federal Reserve System.

22

Why Trade?Why Trade?

The Fundamentals of The Fundamentals of

International TradeInternational Trade

Chris NeelyChris Neely

33

Why Do We Trade?Why Do We Trade?

Post-NAFTA OverviewPost-NAFTA Overview Why Do We Trade? Why Do We Trade? Who Trades?Who Trades? What Is a Trade Deficit?What Is a Trade Deficit? Do Trade Deficits Lead to Unemployment? Do Trade Deficits Lead to Unemployment? Trade Negatives: Inequality & DislocationsTrade Negatives: Inequality & Dislocations

44

U.S. Trade U.S. Trade

U.S. Trading PartnersU.S. Trading Partners1) Canada1) Canada

2) Japan2) Japan

3) Mexico3) Mexico

Trade in billions of U.S. $Trade in billions of U.S. $ExportsExports ImportsImports 134134 157157

68 68 115115

5757 73 73

55

U.S. TradeU.S. Trade

U.S. ImportsU.S. Imports

1) Autos and parts 1) Autos and parts $130 b$130 b

2) Computer Access. 2) Computer Access. $ 55 b $ 55 b

3) Crude Oil 3) Crude Oil $ 51 b$ 51 b

U.S. ExportsU.S. Exports

1) Autos and parts 1) Autos and parts $ 64 b$ 64 b

2) Semiconductors 2) Semiconductors $ 36 b$ 36 b

3) Computer Access. 3) Computer Access. $ 32 b $ 32 b

66

U.S. Trade BalanceU.S. Trade Balance

76 79 82 85 88 91 94-0.25-0.20-0.15-0.10-0.050.000.050.100.15

76 79 82 85 88 91 9476 79 82 85 88 91 94-4.0-3.5-3.0-2.5-2.0-1.5-1.0-0.50.0

76 79 82 85 88 91 94

U.S. Trade BalanceU.S. Trade Balanceas a percentage of GDPas a percentage of GDP

Percent (%)Percent (%) Percent (%)Percent (%)

U.S.-Mexico Trade BalanceU.S.-Mexico Trade Balance as a percentage of GDPas a percentage of GDP

77

Why Do We Trade?Why Do We Trade?The Simple StoryThe Simple Story

Why do kids trade in the lunchroom?Why do kids trade in the lunchroom?

They trade for what they want but don’t have.They trade for what they want but don’t have.

How does this change when we add in How does this change when we add in

production?production?

We trade for what we want and can’t produce as

cheaply domestically.

88

Reasons for TradeReasons for Trade

Comparative AdvantageComparative Advantage

Increasing Returns to ScaleIncreasing Returns to Scale

Increase CompetitionIncrease Competition

99

Comparative AdvantageComparative Advantage

Comparative advantage is not absolute advantage. Comparative advantage is not absolute advantage.

Absolute advantage is the ability to do something Absolute advantage is the ability to do something more efficiently - with less labor or resources - more efficiently - with less labor or resources - than another country. than another country.

Comparative advantage is what you do relatively Comparative advantage is what you do relatively well - or less badly. well - or less badly.

– Bill Clinton has a comparative advantage in golf when Bill Clinton has a comparative advantage in golf when compared to Michael Jordan.compared to Michael Jordan.

1010

Comparative AdvantageComparative Advantage

A country always has a comparative advantage in A country always has a comparative advantage in something. It must. something. It must.

The United States tends to have a comparative The United States tends to have a comparative advantage in industries intensive in skilled labor, advantage in industries intensive in skilled labor, land, and capital. land, and capital.

1111

Other Reasons for TradeOther Reasons for Trade

Increasing Returns to ScaleIncreasing Returns to Scale

– Some industries, such as shipbuilding, are only Some industries, such as shipbuilding, are only efficient at very large scales. For example, one efficient at very large scales. For example, one country may specialize at shipbuilding.country may specialize at shipbuilding.

Imperfect CompetitionImperfect Competition

– International trade reduces national monopoly power International trade reduces national monopoly power in industries like automobiles, airlines, electronics, in industries like automobiles, airlines, electronics, etc..etc..

1212

Who Trades Internationally?Who Trades Internationally?

When consumers or firms decide what to When consumers or firms decide what to buy or where to sell, they influence buy or where to sell, they influence international trade.international trade.

Governments do some international trade, Governments do some international trade, but only as consumers of resources.but only as consumers of resources.

1313

What is a Trade Deficit?What is a Trade Deficit? We run a trade deficit when U.S. exports are less We run a trade deficit when U.S. exports are less

than imports. The rest-of-the-world ships us more than imports. The rest-of-the-world ships us more real goods and services than we ship them.real goods and services than we ship them.

Foreign countries are willing to do this because we Foreign countries are willing to do this because we ship them real or financial assets in return. This is ship them real or financial assets in return. This is called “dissaving” or borrowing money. called “dissaving” or borrowing money.

A trade deficit is an exchange of assets for goods A trade deficit is an exchange of assets for goods and services. It is borrowing from abroad. and services. It is borrowing from abroad.

1414

Negatives of Trade Negatives of Trade

Higher Unemployment? Higher Unemployment?

– No. Trade doesn’t change the unemployment rate. No. Trade doesn’t change the unemployment rate.

Depressing Wages of low-skilled U.S. workers?Depressing Wages of low-skilled U.S. workers?

– Yes. Trade permits us to import unskilled labor.Yes. Trade permits us to import unskilled labor.

Dislocation?Dislocation?

– Many workers are temporarily (sometimes permanently) Many workers are temporarily (sometimes permanently) unemployed by changes in industry structure. unemployed by changes in industry structure.

1515

Unemployment & Labor SupplyUnemployment & Labor Supply

Employment is determined by the supply of labor Employment is determined by the supply of labor in the long run.in the long run.

1616

Key Points to RememberKey Points to Remember

Reasons for TradeReasons for Trade

– Comparative AdvantageComparative Advantage

– Increasing Returns to Scale Increasing Returns to Scale

– Trade increases competition in the market.Trade increases competition in the market.

Consumers and firms do most international trade.Consumers and firms do most international trade.

A trade deficit is an exchange of assets for goods A trade deficit is an exchange of assets for goods and services. It is borrowing from abroad.and services. It is borrowing from abroad.

International trade does not benefit everyone. In International trade does not benefit everyone. In particular, low-skill U.S. workers may lose out.particular, low-skill U.S. workers may lose out.

1717

Further ReadingFurther Reading

"Pop Internationalism," Paul Krugman, 1996, MIT "Pop Internationalism," Paul Krugman, 1996, MIT Press, Cambridge, MA.Press, Cambridge, MA.

"Age of Diminished Expectations," Paul "Age of Diminished Expectations," Paul Krugman, 1994, MIT Press, Cambridge, MA.Krugman, 1994, MIT Press, Cambridge, MA.

1818

THE ENDTHE END