Chapter 20: International Trade

International TradeMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Some Key Trade FactsLO1Principal U.S. exports include:Principal U.S. imports include:ChemicalsAgricultural productsConsumer durablesSemiconductorsAircraft U.S. provides about 8.5% of world’s exportsPetroleumAutomobilesMetalsHousehold appliancesComputersEconomic Basis for TradeNations have different resource endowmentsLabor-intensive goodsLand-intensive goodsCapital-intensive goodsLO2AssumptionsTwo nationsSame size labor forceConstant costs in each countryDifferent costs between countriesU.S. absolute advantage in bothOpportunity cost ratioSlope of the curveVegetables sacrificed per ton of beefLO2Comparative AdvantageVegetables (Tons)3025201510503540455101520Beef (Tons)Vegetables (Tons)30252015105035404551015202530Beef (Tons)(a) United States(b) Mexico121884AZComparative AdvantageLO2Comparative AdvantageLO2Comparative AdvantageTerms of tradeU.S. 1V = 1BU.S. will sell 1B for more than 1VMexico 2V = 1BMexico will pay less than 2V for 1BSettle between the twoDepends on supply/demand factorsAssume 1B = 1.5VLO2Comparative AdvantageGains from tradeTrading possibilities lineSlope equals terms of tradeImproved optionsComplete specializationMore of both goodsMore efficient resource allocationLO2Trade Barriers and Export SubsidiesTariffsRevenue tariffProtective tariffImport quotaNontariff barrier (NTB)Voluntary export restriction (VER)Export subsidyLO4Economic Impact of TariffsDirect effectsDecline in consumptionIncrease in domestic productionDecline in importsTariff revenueIndirect effectsLO4Economic Impact of QuotasDecline in consumptionIncrease in domestic productionDecline in importsQuotas do not provide for any government revenue but instead transfer it to foreign producersLO4The Case for ProtectionMilitary self-sufficiencyDiversification for stabilityInfant industry Protection against dumpingIncreased domestic employmentCheap foreign laborLO5GATTThree principles:Equal, nondiscriminatory trade between member nationsReduction in tariffsElimination of import quotasLO5WTOEstablished by Uruguay Round of GATT 153 member nations in 2010Oversees trade agreements and rules on disputesCritics argue that it may allow nations to circumvent environmental and worker-protection lawsLO5European UnionInitiated in 1958 as Common MarketAbolished tariffs and import quotas between member nationsEstablished common tariff with nations outside the EUCreated Euro Zone with one currencyLO5NAFTAAgreement between U.S., Canada, and MexicoEstablished a free trade zone between the countriesTrade has increased in all countriesEnhanced standard of livingLO5