International Trade

1
International Trade
The Trade Sector of the US
Growth - In 1975, exports and imports were
each approximately 8 of the U.S. economy. -
In 2000, exports accounted for 11.2 of GDP and
imports made up 14.9. Major Trading
Partners - Canada, Mexico, and Japan -China,
Europe
2
The Growth of the U.S. Trade Sector

• Rapid growth since 1975.
• During the 1975-2000 period
• imports rose from 7.5 of GDP to 14.9, and,
• exports rose from 8.3 to 11.2 of GDP.

• Reductions in transport and communication costs,
  as well as lower trade barriers have contributed
  to this growth.

Source Economic Report of the President, 2002.
Table B-2. The figures are based on data for
real imports, exports, and GDP.
Source http//www.economagic.com/. The figures
are based on data for real imports, exports, and
GDP.
3
The Growth of the U.S. Trade Sector

• Both exports and imports have grown substantially
  as a share of the U.S. economy.
• Their growth has accelerated since 1975.
• Reductions in transport and communication costs,
  as well as lower trade barriers have contributed
  to this growth.

Imports( of GDP)
Exports( of GDP)
15
15
10
10
5
5
1960
1970
1980
1990
1960
1970
1980
1990
2000
2000
Source http//www.economagic.com/. The figures
are based on data for real imports, exports, and
GDP.
4
Leading Trading Partners of the U.S.
Percent of Total U.S. Trade, 2002

Percent of Total U.S. Trade, 2006

Canada
Mexico
China
Japan
Germany
United Kingdom
South Korea
Taiwan
France
Malaysia
All other countries

• Today, Canada, Mexico, China, and Japan are the
  leading trading partners with the United States.
• The impact of international trade varies across
  industries. --some compete effectively, some do
  not.

5

• Gains from
• Specialization and Trade

Law of Comparative Advantage

• A group of individuals, regions, or nations can
  produce a larger joint output if each specializes
  in the production of goods in which it is a
  low-opportunity cost producer and trades for
  goods for which it is a high opportunity cost
  producer.

6
Gains from Specialization and Trade

• International trade allows each country to
  specialize according to the law of comparative
  advantage.
• Each country can produce those goods that it can
  produce at a relatively low cost.
• Trading partners can consume a wider variety of
  goods than they could produce domestically.

7
Production Possibilities
Bonsai
Areca

• Guns Butter
• 0
• 2
• 4
• 0 6

• Guns Butter
• 0
• 12 1
• 2
• 3
• 0 4

Guns
Guns
Butter
Butter
8
International Example
Production Possibilities - Mexico
1 S __ A
1 A __ S
Production Possibilities - US
1 S __ A
1 A __ S
US should produce?
Mexico should produce?
Terms of Trade? ___ A for ___ S
9

• Columns (1) and (2) show the daily per worker
  output of the food clothing industry in the
  U.S. and Japan.

2
1
6
- 3
3
9
- 3
9
5
6
Change in total output

• If the U.S. moves 3 workers from clothing to
  food, it produces 6 more units of food and only 3
  fewer of clothing.

• If Japan moves 1 worker from food to clothing, it
  produces 9 more units of clothing and only 3
  fewer of food.

• With such a reallocation of labor, the U.S. and
  Japan are able to increase their aggregate output
  of both food and clothing.

10
PPC Before Specialization and Trade

• Output of the labor force of both the US (200
  million) and Japan (50 million) given the
  production costs of food and clothing from the
  previous slide.

• In the absence of trade, consumption
  possibilities will be restricted to points like
  US1 in the U.S. and J1 in Japan.

• Each of these points lay along the production
  possibilities curve (PPC) of the respective
  nation.

United States
Japan
Clothing(million units)
Clothing(million units)
450
450
400
375
350
300
300
250
225
200
150
150
100
75
50
Food(million units)
Food(million units)
150
75
100
200
300
400
11
Consumption Possibilities with Trade

• Specialization and trade expand consumption
  possibilities.

• If the U.S. trades food for clothing (1-for-1),
  it can specialize in the production of food and
  consume along the ON line (rather than its
  original production-possibilities constraint, MN).

• Similarly, if Japan trades clothing for food
  (1-for-1), it can specialize in the production of
  clothing and consume any combination along the RT
  line (rather than its original, RS).

United States
Japan
Clothing(million units)
Clothing(million units)
450
R
450
400
375
350
300
300
250
M
225
J1
200
150
150
US1
100
75
50
S
N
Food(million units)
Food(million units)
400
100
200
300
400
150
75
12
Consumption Possibilities with Trade

• For example, with specialization and trade, the
  U.S. could increase its consumption from US1 to
  US2, gaining 50 million units of clothing and 100
  million units of food.

• Simultaneously, Japan could increase consumption
  from J1 to J2, a gain of 125 million units of
  food and 25 million units of clothing.

United States
Japan
Clothing(million units)
Clothing(million units)
R
450
450
O
400
375
350
300
300
250
M
225
J1
200
150
150
US1
100
75
50
T
S
N
Food(million units)
Food(million units)
100
200
300
400
400
150
75
13
Consumption Possibilities with Trade

• How exactly do the U.S. and Japan consume at US2
  and J2?

• The U.S. produces 400 million units of food,
  consumes 200 million, and exports 200 million to
  Japan.

• Japan produces 450 million units of clothing,
  consumes 250 million, and exports 200 million to
  the U.S..

• They consume more together than they could
  individually.

United States
Japan
Clothing(million units)
Clothing(million units)
R
450
450
O
400
375
350
300
300
250
250
M
225
J2
200
US2
150
150
100
75
50
T
N
Food(million units)
Food(million units)
S
100
200
300
400
400
150
200
14
Gains from Specialization and Trade

• International trade leads to gains from
• Economies of Scalereductions in per-unit costs
  that often accompany large-scale production,
  marketing, and distribution.
• More Competitive MarketsPromotes competition in
  domestic markets and allows consumers to purchase
  a wide variety of goods at economical prices.

15
A Hard Lesson to Learn
Exports and Imports are Linked

• Exports provide the foreign exchange needed for
  the purchase of imports.
• Imports provide trading partners with the
  currency needed to purchase exported goods and
  services.
• Therefore, restrictions that limit one will also
  limit the other.

16
U.S. Has a Comparative Advantage

• The price of soybeans and other internationally
  traded commodities is determined by the forces of
  supply and demand in the world market.

• If U.S. soybean producers were prohibited from
  selling to foreigners, the domestic price would
  be Pn.

• Free trade permits U.S. soybean producers to sell
  Qp units at the higher world price of Pw.

U.S. Market
World Market
a
b
Pw
Pw
Pn
Qn
Qc
Qp
Qw
17
U.S. Has a Comparative Advantage

• At the world price of Pw, the quantity (Qp Qc)
  is exported.

• Compared to the no-trade situation, the
  producers gain from the higher price (Pw b c Pn)
  exceeds the cost imposed on domestic consumers
  (Pw a c Pn) by the triangle (area) a b c.

Sw
U.S. Market
World Market
Sd
a
b
Sw
Pw
Pw
c
Pn
Dw
Dd
Qn
Qc
Qp
Qw
18
Foreigners Have a Comparative Advantage

• Consider the international market for
  manufacturing shoes.

• In the absence of trade, the domestic price would
  be Pn.

• Since many foreign producers have a comparative
  advantage in the production of shoes,
  international trade leads to lower prices Pw.

U.S. Market
World Market
Pn
Pw
Qn
Qw
19
Foreigners Have a Comparative Advantage

• At the price Pw, U.S. consumers demand Qc units
  of which (Qc Qp) are imported.

• Compared to no trade, consumers gain Pn a b Pw,
  while domestic producers lose Pn a c Pw.
• A net gain of a b c results.

U.S. Market
World Market
Sd
Sw
a
Pn
c
b
Pw
Pw
Dd
Dw
Qn
Qw
Qp
Qc
20

• The Economics of
• Trade Restrictions

21
U.S. Tariff Rates 1890 to the Present
U.S. Average Tariff Rate
(Duties collected as a share of dutiable
imports)
60
50
40
30
20
4.5
10
1890
1910
2006
1990
1970
1950
1930
22
Trade Restrictions Impact of a Tariff.

• Consider a tariff on autos imports.

• Without a tariff, the world price of autos is
  Pw. At Pw consumers in the U.S. purchase Q1
  units

Price
SDomestic
Qd1 from U.S. producers and
Q1 Qd1 from foreign producers.

• A tariff t makes it more costly for Americans
  to purchase autos from abroad. U.S. prices
  rise to Pw t and purchases fall from Q1 to Q2.

Pw t

• U.S. purchases from domestic producers rise
  from Qd1 to Qd2

Pw
imports fall to Q2 Qd2.
DDomestic

• Producers gain area S

the tariff generates T tax revenues
for the government
Quantity(automobiles)
Qd1
Qd2
Q1
Q2
areas U V are deadweight losses
from reduction in allocative efficiency.
23
Trade Restrictions Impact of a Quota

• Consider a quota on peanuts.

• Without trade restraints, Pw (the world price
  of peanuts) would be the domestic price. At Pw
  U.S. consumers would purchase Q1

Price
SDomestic
Qd1 from U.S. producers and
Q1 Qd1 imported from abroad.

• A quota of Q2 Qd2 imports pushes the U.S.
  price up to P2.

P2

• While total U.S. purchases fall (from Q1 to
  Q2), those from U.S. producers rise (from Qd1
  to Qd2) and

Pw
imports fall to Q2 Qd2.

• U.S. producers gain area S. Area T goes to
  foreign producers with permits to import into
  the U.S.

DDomestic
Quantity(peanuts)
Qd1
Qd2
Q1
Q2

• U V are deadweight losses.

24
Trade Restriction Impacts
Price
Price
SDomestic
SDomestic


P2
Pw t
Pw
Pw
DDomestic
DDomestic
Quantity(peanuts)
Quantity(automobiles)
Qd1
Qd2
Qd1
Q1
Q2
Qd2
Q1
Q2
25
Why do Nations Adopt Trade Restrictions?

• National Defense argument
• Self sufficiency argument
• Prevents Dumpinga. The sale of goods abroad at
  a price below cost
• b. Allows foreign firms to achieve economies of
  scale.
• c. Foreign firms may want to gain entry to
  another market. Sell below cost to gain sales.
• Infant Industry argument
• a. Protect developing industries while growing
• b. Difficult to tell when they are adult.

26
Trade Fallacies

• Trade fallacies abound because people often fail
  to consider the secondary effects.
• Key elements of international trade are often
  linked you cannot change one element without
  changing the other.
• This is the case with imports and exports
  policies that restrain imports also restrain
  exports.

27
Trade Fallacies

• Trade fallacy 1 Trade restrictions that limit
  imports save jobs for Americans.
• This view is false because if foreigners sell
  less to us they will have fewer dollars with
  which to buy things from us.
• Trade restrictions do not save jobs they
  merely reshuffle them. Jobs saved in protected
  industries will be offset by jobs lost in
  export industries.
• As the result of trade restrictions, fewer
  Americans are employed in areas where we have a
  comparative advantage.

28
Practical Application
In 2002, the Bush administration imposed tariffs
of up to 25 on imported steel products. This
action a. reduced the supply of steel in the
domestic market and led to higher steel
prices. b. increased U.S. employment because it
saved jobs in the steel industry. c. reduced
employment in the U.S. steel container industry
because the higher steel prices made it more
difficult for them to compete with foreign
rivals.
29
Trade Fallacies

• Trade fallacy 2 "Free trade with low-wage
  countries, such as Mexico and China, will
  reduce the wages of Americans."
• Both high- and low-wage countries will gain when
  they are able to focus more of their resources on
  those productive activities that they do well.
• The key to this issue is how will U.S. resources
  be used. If a low-wage country can supply a good
  cheaper than we can produce it, the U.S. can gain
  by purchasing the good from the low-wage country
  and using its resources to produce other goods
  for which it has a comparative advantage.

30
Trade Openness, Income, and Growth
10 Least Open Economies, 1980-2002
10 Most Open Economies, 1980-2002
2005 GDPper capita
2005 GDPper capita
TOI
TOI
Hong Kong
10.0
3.9
30,989
India
4.3
4.0
3,072
Singapore
9.9
4.3
26,390
Tanzania
4.1
2.3
662
Bahrain
8.6
1.0
19,112
Egypt
4.1
2.5
3,858
Belgium
8.6
1.7
28,575
Pakistan
3.9
2.4
2,109
Malaysia
8.6
3.6
9,681
Syria
3.8
0.6
3,388
Luxembourg
8.5
3.7
53,583
Algeria
3.4
0.5
6,283
Netherlands
8.4
1.6
29,078
Sierra Leone
3.4
- 1.1
717
Taiwan
8.4
5.1
20,868
Burundi
3.0
- 1.0
622
Ireland
8.1
4.5
34,256
Iran
2.9
1.1
7,089
Australia
7.9
1.9
29,981
Bangladesh
2.5
1.2
1,827
Average
8.7
3.1
28,251
Average
3.5
1.4
2,963
Sources TOI data are from Charles Skipton, The
Measurement of Trade Openness. Doctoral
Dissertation, Florida State University, 2003.
The per capita GDP and growth data
are from The World Bank, World Development
Indicators, CD-ROM, 2004.

• The income levels and growth rates of the ten
  most and ten least open economies (as measured by
  the Trade Openness Index TOI) are displayed
  above.
• Note that more open economies both achieved
  higher income levels and grew more rapidly.

31
Trade Openness, Growth, and Income
TOI(80-98)
Low trade restrictions
Hong Kong
9.9
1
1
3.9
106
22,090
Singapore
1
9.8
0
4.9
115
20,767
Belgium
1
9.1
1
1.7
49
25,443
Germany
1
8.5
1
1.4
13
23,742
UK
1
8.5
1
1.9
- 3
22,093
Netherlands
1
8.4
1
1.8
18
24,215
Luxembourg
0
8.3
0
3.9
- 3
42,769
Switzerland
5
8.0
1
0.9
- 20
27,171
U.S.A.
2
7.8
2
1.9
0
31,872
Malaysia
15
7.8
3
3.7
286
8,209
Sweden
1
7.8
1
1.4
19
22,636
Ireland
7
7.7
1
4.4
64
25,918
Average
8.5
3

1
2.7
54
24,744
High trade restrictions
3.5
31
22
3.7
8
2,110
India
20
3.4
17
0.6
- 33
6,908
Brazil
19
3.3
9
0.3
- 37
12,554
Argentina
15
3.2
24
3.3
- 1
482
Tanzania
Madagascar
17
3.1
20
- 1.8
- 2
776
.
2.9
18
- 0.5
1
4,869
Algeria
Syria
14
2.5
7
1.1
9
3,749
Sierra Leone
27
1.9
32
- 3.5
- 68
487
Iran
34
1.9
18
- 0.2
- 30
5,389
Burundi
36
1.5
18
- 1.1
- 73
581
Bangladesh
27
1.5
19
2.4
- 27
1,412
Myanmar
28
0.1
72
- 0.1
- 97
1,200
Average
2.4
24

23
0.4
- 29
3,250
32
U.S. Trade with Canada and Mexico
U.S. Trade with Canada and Mexico
(Exports and Imports together as a share
of GDP)
6
5
Canada
4
3
Mexico
2
1
1980
1990
1985
1995
2000
2005

• U.S. trade with both Canada and Mexico grew
  rapidly following the passage of NAFTA.

33
Examples
Positive
IMF - loans and financial assistance
GATT / WTO- tariff reductions
EU - European free trade area
NAFTA - North American free trade area
34
1. Measured as a share of the economy, the size
of the trade sector (exports plus imports) of the
United States has a. been increasing since 1980,
but it declined during 19601980. b. been
relatively constant during the last four
decades. c. increased by about 10 percent during
the last four decades. d. approximately doubled
since 1980 and tripled since 1960.
2. A U.S. trade policy that restricts the sale of
foreign goods in the U.S. market will a. reduce
the demand for U.S. export goods since foreigners
will be less able to buy our goods if they cannot
sell to us. b. benefit producers in industries
that export goods. c. increase the nations
income since it protects domestic
jobs. d. enhance economic efficiency by
allocating more resources to the areas of their
greatest comparative advantage.