Spptchap024_3027

International TradeChapter 24Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Some Key Trade FactsU.S. trade deficit in goods $735 billion in 2012U.S. trade surplus in services $196 billion in 2012Canada largest U.S. trade partnerTrade deficit with China$315 billion in 2012Exports are 14% U.S. outputDependence on oilLO1LO1Some Key Trade FactsPrincipal U.S. exports include:ChemicalsAgricultural productsConsumer durablesSemiconductorsAircraftU.S. provides about 8.1% of world’s exportsLO1LO1Principal U.S. imports include:PetroleumAutomobilesMetalsHousehold appliancesComputersEconomic Basis for TradeNations have different resource endowmentsLabor-intensive goodsLand-intensive goodsCapital-intensive goodsLO2LO2AssumptionsTwo 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 AdvantageLO2Comparative AdvantageSelf-sufficiency output mixSpecialization and tradeProduce the good with the lowest domestic opportunity costOpportunity cost of 1 ton of beef:1 pound of vegetables in U.S.2 pounds of vegetables in MexicoLO2Comparative 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 = 1.5VLO2LO2Comparative AdvantageGains from tradeTrading possibilities lineSlope equals terms of tradeImproved optionsComplete specializationMore of both goodsMore efficient resource allocationLO2LO2Comparative AdvantageTrade with increasing costsConcave production curveResources not perfectly substitutable Incomplete specializationCase for free tradePromote efficiencyPromote competitionLO2LO2Supply and Demand Analysis World priceDomestic price with no tradeWorld price > domestic priceExport surplusExport supply curveWorld price < domestic priceImport shortageImport supply curveLO3LO3Trade Barriers and Export SubsidiesTariffsRevenue tariffProtective tariffImport quotaNontariff barrier (NTB)Voluntary export restriction (VER)Export subsidyLO4LO4Economic Impact of TariffsDirect effectsDecline in consumptionIncrease in domestic productionDecline in importsTariff revenueIndirect effectsLO4LO4Economic Impact of QuotasDecline in consumptionIncrease in domestic productionDecline in importsQuotas do not provide for any government revenue but instead transfer it to foreign producersLO4LO4The Case for ProtectionMilitary self-sufficiencyDiversification for stabilityInfant industry Protection against dumpingIncreased domestic employmentCheap foreign laborLO5LO5Multilateral Trade AgreementsGeneral Agreement on Tariffs and Trade (GATT)World Trade Organization (WTO)European Union (EU)North American Free Trade Agreement (NAFTA)LO5LO6GATTThree principles:Equal, nondiscriminatory trade between member nationsReduction in tariffsElimination of import quotasLO5LO6WTOEstablished 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 lawsLO5LO6European UnionInitiated in 1958 as Common MarketAbolished tariffs and import quotas between member nationsEstablished common tariff with nations outside the EUCreated Euro Zone with one currencyLO5LO6NAFTAAgreement between U.S., Canada, and MexicoEstablished a free trade zone between the countriesTrade has increased in all countriesEnhanced standard of livingLO5LO6Trade Adjustment and OffshoringTrade Adjustment Assistance ActDesigned to help individuals hurt by international tradeOffshoring of jobsShifting of work previously done by American workers to workers abroadLO5LO6Petition of the CandlemakersPetition of candlemakers asking for protection from natural light producers such as the sunTongue-in-cheek argument supporting the idea of free tradeLO5