International Trade: Made in USA, Japan, Mexico, Italy ' ' '

1
International Trade Made in USA, Japan, Mexico,
Italy . . .
ECON 1101 Economics for Non-Majors

• Chapter 17

President Bush left for Canada today to attend a
trade summit. Reportedly, the trade summit got
off to an awkward start when the president pulled
out his baseball cards. Conan O'Brien
2
Exports, Imports Why Bother?
By means of glasses, hotbeds, and hotwalls, very
good grapes can be raised in Scotland, and very
good wine too can be made of them at about thirty
times the expense for which at least equally good
can be brought from foreign countries. Would it
be a reasonable law to prohibit the importation
of all foreign wines, merely to encourage the
making of claret and burgundy in Scotland?
Adam Smith The Wealth of Nations, Book IV,
Chapter II
Ch 17 International Trade
3
Exports, Imports Why Bother?
It is the maxim of every prudent master of a
family, never to attempt to make at home what it
will cost him more to make than to buy...What is
prudence in the conduct of every private family,
can scarce be folly in that of a great kingdom.
If a foreign country can supply us with a
commodity cheaper than we ourselves can make it,
better buy it of them with some part of the
produce of our own industry, employed in a way in
which we have some advantage. Adam Smith The
Wealth of Nations, Book IV, Chapter II
Ch 17 International Trade
4
Exports, Imports Why Bother?

• Comparative advantage is the fundamental force
  that generates trade between nations.
• A country has a comparative advantage in
  producing a good if it can produce that good at a
  lower opportunity cost than any other country.
• The basis for comparative trade is differentials
  in opportunity costs between countries (and
  individuals).
• Example If the US can produce automobiles at a
  lower opportunity cost than Mexico, and Mexico
  can produce wheat at a lower opportunity cost
  than US, then US should produce all the cars,
  Mexico should produce all the wheat, and they
  should trade the excess. This deal gets us more
  cars and wheat than any other production
  combination.

Ch 17 International Trade
5
Barriers to International Trade

• Types of International Trade Restrictions
• (Barriers to Trade)
• Tariff
• Tax, or duty, levied on a product when it crosses
  a nations boundaries.
• Quota
• Quantitative restriction on imported goods.
• Negative welfare effects Benefits concentrated
  in select group, generally domestic producers of
  protected goods.
• Pushes up price of imported good AND domestic
  good
• Costs (higher prices, loss of welfare) tend to
  spread out to all consumers.
• Makes barriers politically appealing, but
  economically unattractive.

Ch 17 International Trade
6
The Argument for Free Trade

• Nations (and individuals) can increase the
  consumption of goods and services when they
  allocate resources to the production of those
  goods and services for which they have a
  comparative advantage.
• Incomes Increase
• Employment Increases
• Competition Increases
• Efficiency Increases
• Trade does not create a winner and a loser . . .
  .BOTH partners gain.

Ch 17 International Trade
7
Arguments Against Free Trade (and why they dont
hold water)

• Despite the fact that free trade promotes
  prosperity for all countries, trade is
  restricted.
• Arguments most often heard are
• Important to keep jobs in the US
• We dont want money leaving the country
• National security is at stake
• Other nations dont treat their workers fairly
• Other nations dump cheap goods into the US and
  dont open their markets to us

Ch 17 International Trade
8
Arguments Against Free Trade (and why they dont
hold water)

• Important to keep jobs in the US
• Protecting industries in which we do not have
  comparative advantage is subsidizing
  inefficiency.
• Free trade destroys some jobs and creates other
  better jobs.
• Free trade also increases foreign incomes and
  enables foreigners to buy more domestic
  production.
• Protection to save particular jobs is very
  costly.
• Example The steel industry is protected from
  free trade by import taxes. Steel workers
  benefit by keeping their jobs, everyone else pays
  the cost in terms of higher prices of steel and
  everything made from steel.
• Research shows that the cost to society of the
  protection is about 750,000 per steel worker per
  year.
• We would be better off paying the steel workers
  something less than 750k each NOT to work.

Ch 17 International Trade
9
Arguments Against Free Trade (and why they dont
hold water)

• We dont want money leaving the country
• We dont export to keep money in the US, but to
  fuel domestic production and incomes.
• We can then use increased incomes to import more
  goods.
• When other countries have increased incomes, they
  can afford to buy more US goods.

Ch 17 International Trade

• National security is at stake
• Some industries do warrant protection under this
  argument.
• Not all industries that claim this protection
  actually warrant it.
• Example the American watchmakers

10
Arguments Against Free Trade (and why they dont
hold water)

• Other nations dont treat their workers fairly
• Difficult to document because everything is
  relative.
• Sweatshop jobs may be better than no jobs.
• When we limit imports from those nations we may
  be harming the very people we want to help.

Ch 17 International Trade

• Other nations dump goods in US
• If US producers can prove dumping is taking
  place, US has laws to prevent it and drive up
  price of the goods.
• Dumping is rare very little empirical evidence
  to support the claims made by industries that
  want protection.

11
International Trade Agreements

• Regional Trade Agreements
• North American Free Trade Agreement (NAFTA)
• US, Canada, Mexico - 1992
• Controversial because of industrialized economies
  joining trade union with developing nation.
• European Union
• Twenty seven nations (8 potential candidates)
• Greenland withdrew, four nations have no plans to
  join.
• Monetary union, most nations use euro as common
  currency (Denmark, Sweden, UK, and Greece have
  not switched to using euro).
• Why Use Common Currency?
• Benefits of common currency
• Lower transaction costs
• Easier wage/price comparisons
• Common measure of value.
• Costs
• Changing ATMs, vending, posted prices, cash
  registers
• Learning curve for using currencies

Ch 17 International Trade