Chapter 10: International Trade Policy

Chapter Goals Summarize some important data of trade Explain policies countries use to restrict trade Summarize the reasons for trade restrictions and why economists generally oppose trade restrictions Explain how free trade associations both help and hinder international trade

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Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinChapter GoalsSummarize some important data of tradeExplain how free trade associations both help and hinder international tradeExplain policies countries use to restrict tradeSummarize the reasons for trade restrictions and why economists generally oppose trade restrictionsThe Nature and Patterns of TradeDifferences in the importance of tradeTotal Output ($)Export Ratio (%)Import Ratio (%)Netherlands 8447871Germany 3,6954741Canada 1,7062931Italy 2,1802729France 2,8252628United Kingdom 2,4623033Japan 6,0781514United States15,0941316OPEC 4%Central andSouth America11% Other 10%Pacific Rim 25%EuropeanUnion 18%Mexico 13% Canada 19%U.S. Exports by Region, 2012U.S. Imports by Region, 2012OPEC 9%Central and South America8%Other 9%Pacific Rim 31%EuropeanUnion17%Mexico 11%Canada 15%The Changing Nature of TradeAs technological changes in telecommunications reduce costs, foreign countries will be able to provide more services This trade in services is often called outsourcing Customer service calls for U.S. companies are now more frequently answered in IndiaThe nature of trade is continually changing, both in terms of the countries with which the U.S. trades and the goods and services tradedThe Changing Nature of TradeUsing overseas suppliers is not a new development in tradeBecause technology is growing in these countries, the U.S. economy must develop new technologies to remain competitiveThe difference is the potential size of outsourcing to India and China with combined populations of 2.5 billion people Is Chinese and Indian outsourcing different from previous outsourcing?Balance of TradeTrade deficit = exports importsThe U.S. has a significant trade deficit of approximately $820 billion which is 5.5% of GDPThe U.S. is financing its trade deficit by selling off financial assets, stocks and bonds, and real assets, corporations and real estateDebtor and Creditor NationsThe U.S. is currently financing its trade deficit by selling off assetsThe U.S. has gone from being a large creditor nation to being the world’s biggest debtor; international considerations have been forced on the nationThe U.S. has not always had a trade deficit; following WWII, it had trade surplusesRunning a deficit isn’t necessarily badVarieties of Trade RestrictionsQuotas are quantity limits placed on importsVoluntary restraint agreements are when countries voluntarily restrict their exportsTariffs are taxes governments place on internationally traded goods (generally imports)An embargo is a total restriction on the import or export of a goodRegulatory trade restrictions are government-imposed procedural rules that limit importsNationalistic appeals, such as “Buy American” can help to restrict international tradeReasons for Trade RestrictionsHaggling by companies over the gains from tradeHaggling by countries over trade restrictionsUnequal internal distribution of the gains from tradeSpecialized productionLearning by doing and economies of scaleMacroeconomic costs of tradeNational securityInternational politicsIncreased revenue brought in by tariffs Why Economists Generally Oppose Trade RestrictionsInternational trade provides competition for domestic companiesRestrictions based on national security are often abused or evadedFrom a global perspective, free trade increases total output Trade restrictions are addictiveInstitutions Supporting Free Tradee.g. the European Union (EU) and the North American Free Trade Association (NAFTA)Countries strengthen trading relationships with most-favored nation status – those countries will be charged as low a tariff on exports as any other countryFree trade associations are groups of countries that allow free trade among its members and put up common barriers against all other countries’ goodsThe World Trade Organization (WTO) has over 150 membersChapter Summary The nature of trade is continually changingThe U.S. is importing more and more high-tech goods and services from India and China and other East Asian countriesOutsourcing is a type of trade. Outsourcing is a larger phenomenon today compared to 30 years ago because China and India are so largeTrade restrictions include tariffs and quotas, embargoes, voluntary restraint agreements, regulatory trade restrictions, and nationalistic appealsChapter Summary Reasons that countries impose trade restrictions include unequal internal distribution of the gains from trade and haggling by countries over trade restrictionsEconomists generally oppose trade restrictions because of their understanding of the advantages of free tradeThe World Trade Organization is an international organization committed to reducing trade barriersFree trade associations, such as the European Union, help trade by reducing barriers to trade among member nations