Chapter 33
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Transcript of Chapter 33
International Trade
Chapter 33
Why Nations Trade
Natural Resources U.S. has a lot of fertile soil Southwest Asia has large oil and natural gas
reserves Resources, climate, and location determine what
goods and services economies produce
Why Nations Trade
Human Capital Literacy rate – percentage of people over 15 who
can read and write Countries with high literacy rates: educated,
skilled work force
Why Nations Trade
Physical Capital Factories, machinery, computers, roads and
bridges
Specialization
When nations decide to produce only certain goods and services, rather than producing all the goods ad services they need
Determined by its natural resources, human and physical capital
U.S. grows wheat and soybeans, but we can’t produce diamonds or coffee
Absolute and Comparative Advantage
Absolute Advantage – when a country can produce more of a given product using a given amount of resources (they are simply better at producing something) Even if we have an absolute advantage in producing
everything, does that mean we shouldn’t trade with another country?
Absolute and Comparative Advantage
…not necessarily! We need to look at comparative advantage.
When a country has comparative advantage, they can produce a good at a lower marginal cost than another country (David Ricardo’s idea).
In other words, they give up less in order to produce that good.
France and Germany’s production possibilitiesFrance and Germany’s production possibilities
France and Germany’s opportunity costs (what they give up)
France and Germany’s opportunity costs (what they give up)
Wine Cheese
France 6 2
Germany 2 1
Wine Cheese
France
Germany
Finding Comparative Advantage
France has the absolute advantage in both wine and cheese (they are better at both).
Who has the comparative advantage in wine? In cheese?
Comparative Advantage for Input Problems
If the problem is expressed in terms of how many HOURS it takes a person/country to produce something, then you calculate opportunity cost the opposite way.
Gains from Trade
Terms of trade – the exchange rate between two goods (ex: 2 bananas for 30 grapes)
Gains from trade – the additional amount of goods a country has after specialization and trade in comparison with the combination before specialization and trade. (ex: a country may gain 5 bananas relative to the total amount it had when producing only with its own resources)
Gains from Trade
Oats Bagpipes
U.S. 3 2
Scotland 4 5
Oats Bagpipes
U.S. 3/2 2/3
Scotland 4/5 5/4
How do Americans feel about Trade?
Statement A: The United States needs to focus on keeping American jobs for American workers. Each time an American corporation agrees to send work outside the country, the company also gives away jobs. In the end, even if some new business is created for American exporters, free trade is not worth it because local jobs are lost.
How do Americans feel about Trade?
Statement B: Today large companies that intend to sell their products to worldwide customers must also operate worldwide. Just as American companies build plants in foreign countries where they sell their products, foreign companies build plants in the United States so they can sell their products here. In the end, free trade is worth it because foreign companies and our exports create jobs here.
When asked different questions about international trade…
57% believed that international trade was good for the U.S. economy. 39% said it was bad.
67% said they had a very or somewhat favorable opinion of international trade.
79% agreed that “freer trade helps to increase prosperity, both in the U.S. and in other parts of the world.”
Arguments FOR free trade
Improved product selectionLower prices for consumer productsPromotes good relations between countries
Arguments AGAINST free trade
Benefits are not equally distributed Helps the rich but hurts workers LOSS OF JOBS
Bad for the environmentConcerns about international labor standardsTrade is unfair to poor countriesOther countries benefit more than the U.S.
Trade Barriers and Agreements
Barriers to Trade
There are three main types of barriers to trade. They are:
(1) Tariffs(2) Export Subsidies(3) Quotas
Tariffs
Tariff – a tax on imported goods What goods do you know of that the U.S. places
tariffs on?The U.S. places tariffs on steel, foreign-
made cars, and many other products
Export Subsidies
Export Subsidies - government payments to domestic firms to encourage exports (foreign companies not subsidized can’t compete with the artificially low prices)
What is dumping? – when a firm or industry sells products on world market at prices below cost of production to dominate the market After competition driven out, they raise prices Recently accused: Japanese automobiles,
electronics, silicon computer chips
Quotas
Quota – limit on the quantity of imports (mandatory or voluntary) U.S limits amount of cotton coming into the
country each year Ex: China can only export 621,780 kilograms
Voluntary Export Restraint (VER) - a voluntary limitation on the number of products that a country ships to another country Japan agreed in 1981 to reduce automobile exports to
U.S. by 7.7% to 1.68 million units Why would a country volunteer to decrease its exports to
another country? Reduce the chances that the importing country will set up trade
barriers
Less formal trade barriers…
Can you think of some other, less formal ways that countries limit imports? Sometimes governments will require foreign
companies to get a license to sell (high licensing fees or slow processes)
Health and safety regulations (ex: won’t import anything with insecticides used)
Arguments for Free Trade: Effects of Trade Barriers
(1) Effect on pricesFirst, trade barriers limit supply. Who benefits from the quotas put on cotton imports?
Why? American cotton growers because U.S.
manufacturers of jeans / cotton clothing will have to buy some cotton grown in the U.S.
What happens to prices when there are trade barriers, such as tariffs on foreign cars? They go up
Who benefits from this? Domestic producersWho loses? Domestic consumers
Arguments for Free Trade: Effects of Trade Barriers
(2) Effects on international relations What is a trade war? One country restricts imports, so trading partner imposes
more restrictions – a cycle of increasing trade barriers What problems did the trade war that resulted from the
Smoot-Hawley tariff cause for the U.S. in the 1930s? Raised average tariff on all products to 50% (trying to
protect American jobs) other countries responded by raising tariffs against
American-made goods decreased international trade, (esp. demand for our goods)
and made worldwide depression much worse
Arguments for Free Trade: Effects of Trade Barriers
See graph
Arguments for Protectionism
What is protectionism? the use of trade barriers to protect industries from
foreign competition
Protectionism
Protecting JobsWhen we buy foreign goods, American goods
go unsold. Ideally, people would get jobs in other industries, but this is difficult in reality for some people.
The question is: Are we willing to pay premium prices to save domestic jobs in industries that can produce more efficiently abroad?
Protectionism
What other ways could we help victims of free trade? Retrain them for jobs with a future Programs to relocate people in expanding regions If East Asia has a comparative advantage in producing
textile and the U.S. reduced tariffs on these imports, what might happen? American textile manufacturers may not be able to compete
with East Asian imports – lay off workers. In an ideal world, what would laid-off textile workers do?
Take new jobs in other industries In reality, why doesn’t this always happen?
Retraining and relocation is difficult – takes time and money.
Some Countries Engage in Unfair Trade Practices
Cheap Foreign Labor Makes Competition Unfair
Protection Safeguards National Security
Protection Safeguards National SecurityWhat industries does the United States want to
ensure remain active? anything essential to defending our country – need steel
and other products from heavy industries; need industries that provide energy and advanced technologies
Why do most people agree that these types of industries need to be protected?
Don’t want to depend on other nations during a crisis … Protection Discourages Dependency
Protecting Infant IndustriesWhat is an infant industry?
A new industryWhat is the argument for temporarily protecting
them? new industries need time and practice to become
efficient producersDoes it always work out for these industries and for
consumers? (1) A protected infant industry lacks incentive to become
more efficient and competitive (2) it’s difficult to take the protection away
International Agreements
An international free trade agreement is when at least two countries cooperate to reduce trade barriers and tariffs and to trade with each other.
MFN – now NTR – what does this mean? Normal trade relations status All countries with this status pay the same tariffs
The World Trade Organization (WTO) Founded in 1995 to negotiate new trade
agreements and to resolve trade disputes Acts as a referee – enforces rules (Beef war
between U.S. and European Union)
Economic Integration
The European Union Abolished tariffs and trade restrictions among union
members Adopt uniform tariffs for nonmembers Developed slowly over time Single currency: the euro
NAFTA (North American Free Trade Agreement) Eliminate all tariffs and other trade barriers between
Canada, Mexico, and U.S. A lot of controversy
Exchange Rates
Exchange rate – the value of a foreign nation’s currency in relation to your own currency 1 U.S. dollar : 0.762 Euros 1 U.S. dollar : 1.004 Canadian dollars 1 U.S. dollar : 98.95 yen These go up and down daily
Why would you want to know an exchange rate?
If you are traveling to a country, you need to know how expensive items are (in terms of your own currency)!
It affects imports/exportsAny other reasons?
Strong and Weak Currencies
Appreciation – an increase in the value of a currency The currency becomes “stronger” In scenario B, your U.S. dollar could now buy more
pesos, so it has increased in value or appreciated against the peso
When the dollar appreciates, American goods are more expensive for Mexican consumers Mexico will import fewer products from the U.S. Our exports will probably decline
When the dollar appreciates, it also means that foreign products are less expensive for American consumers
We will import more of these cheaper goods
Strong and Weak Currencies
Depreciation – a decrease in the value of a currency The currency becomes “weaker” In scenario C, your U.S. dollar could now buy fewer
pesos, so it has decreased in value or depreciated against the peso
When the dollar depreciates, foreign consumers can afford our products better because their currency can buy more dollars Mexico will import more products from the U.S. Our exports will increase
It also means that foreign products are more expensive for us to buy with our weaker dollars We will import less of these more expensive goods
Foreign exchange market – take care of the buying and selling of foreign currencies
About 2,000 banks and financial institutionsLocated around the world, including New
York, London, Paris, Singapore, Tokyo, and many other cities