99CHAPTE

R

DYNAMIC POWERPOINT™ SLIDES BY SOLINA LINDAHL

International TradeInternational Trade

CHAPTER OUTLINE

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Analyzing Trade with Supply and Demand

The Costs of Protectionism

Arguments against International Trade

For applications, click here

To Try it! To Try it! questionsquestions

To To VideoVideo

Some good blogs and other sites to get the juices flowing:

Food for Food for Thought….Thought….

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Analyzing Trade with Supply and Demand

We can use the demand and supply model to determine:

The effects of free trade on:Domestic equilibrium price and quantityImports

The effects of trade barriers on:Domestic equilibrium price and quantity Imports

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with free trade:•World price prevails.•Domestic consumption =•Domestic production =

Analyzing Trade with Supply and Demand

Price

Quantity of semiconductors

P no trade

Free tradeequilibrium

tradefree

Stradefree

D QQ

tradeno

Q

trade freeSQ

Domestic demand

Domestic supply

World supplyWorld price

No tradeequilibrium

Domesticproduction

Domestic consumption

Imports

tradefree

DQtradefree

SQ

trade freeDQ

• imports =

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With Tariff:•World price + tariff prevails.•Domestic consumption= •Domestic production =

Analyzing Trade with Supply and Demand

Price

Quantity of semiconductors

pno trade

tariffS

tariffD QQ

tradeno

Q

tariffSQ

Domestic demand

Domestic supply

World supply + tariffWorld price+ tariff

Equilibrium with tariff

Domesticproduction

tariffDQ

• imports =

World price World Supplytariff

tradefree

SQ tradefree

DQ

Domestic consumption

Imports w/tariff

• tariff revenue

Importsw/ free trade

tariffDQtariff

SQ

Try it!Try it!

A tariff results in a higher:I. consumer surplus.II. producer surplus.III. government revenue.

a)I and II onlyb)II and III onlyc)I and III onlyd)I, II, and III

To next To next Try it! Try it!

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The Costs of Protectionism

Protectionism Protectionism = policy of restraining trade through quotas, tariffs, or other regulations which burden foreign (but not domestic) producers.

TariffTariff = a tax on imports

Trade Quota Trade Quota = a restriction on the quantity of goods that can be imported: imports greater than the quota amount are forbidden (or heavily taxed.)

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The Costs of Protectionism

A tariff has two effects:1. ↑ domestic production, ↓ domestic

consumption.More of the good is produced by the higher-cost domestic producers.

2. Less is consumed → lower gains from trade.

Measuring the losses and wasted resources

Can we measure the value of wasted resources? Yes!

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The Costs of Protectionism

Price perpound(in cents)

Quantity(in billions of pounds)

Domestic demand

Domestic supply

World supply + tariff

World price

Free tradeequilibrium

20

20

9

24

U. S. costs

Worldcosts

Wasted resources

World supply

Lost gains from tradeor deadweight loss

Tariffequilibrium

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The Costs of Protectionism

Price perpound(in cents)

Quantity(in billions of pounds)

Domestic demand

Domestic supply

World supply + tariff

World price

20

20

9

24

$1.1 billion

World supply

Value of wasted resources = [(.20 – .09) x 20]/2 = $1.1 billion

Lost gains from trade= [(.20 - .09) x (24 – 20)]/2 = $.22 billion

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The Costs of Protectionism

Conclusions:A tariff reduces economic efficiency:

Low-cost producers are prevented from selling.

Mutually profitable gains from trade are prevented by law.

U.S. consumers pay more, and workers in other countries (many of whom are poor) lose income.

Try it!Try it!A $1 tariff results in:a)An increase in imports of 80 million units.b)A decrease in imports of 80 million units.c)An increase in imports of 100 million units.d)A decrease in imports of 100 million units.

To next To next Try it! Try it!

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The Costs of Protectionism

One final cost: lobbyingThe loss to domestic consumers is

greater than the gains to domestic producers.

Why does congress pass tariffs?Small number of producers → Benefit

per producer is high.Large number of consumers → Loss per

consumer is low.

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Arguments Against International Trade

Most Common Arguments1. Trade reduces the number of jobs in the

U.S.2. It’s wrong to trade with countries that use

child labor.3. We need to keep some industries for

reasons of national security.4. We need to keep some “key” industries

because of beneficial spillovers onto other sectors.

5. We can increase U.S. well-being with strategic trade protectionism.

Try it!Try it!Which argument against trade is the strongest in your opinion?a)Trade reduces the number of jobs in the U.S.b)It’s wrong to trade with countries that use child labor.c)We need to keep some industries for reasons of national security.d)We need to keep some “key” industries because of beneficial spillovers onto other sectors.e)We can increase U.S. well-being with strategic trade protectionism.

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Rebuttals

Trade and JobsTariffs raise the price of protected goods.

Consumers have less money to spend on other goods.Jobs are lost in other industries—these

lost jobs are hard to see.

Trade creates jobsThe U.S. dollars we spend on other

country’s good are often used to buy our goods.Jobs are created in U.S. exporting

industries.17

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Rebuttals

Child LaborRestricting imports made by child labor may do more harm than good.

Children work out of necessity—what else will they do?

Often the alternative is worse.ProstitutionScrounging in refuse dumps

Child labor is a poverty problem, not a trade problem.

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Poverty and Child Labor

Source: Edmonds, E. and N. Pavcnik, 2005. “Child Labor in the global economy” Journal of Economic Perspectives

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Rebuttals

Trade and National SecurityTrue: Some industries probably should be protected to protect National Security.BUT: This is subject to great abuse—almost every industry can make this argument for protection.Examples:

Vaccine production?—probably a good idea.

Angora Goat fleece?--are you kidding? No. This is protected.

iI think I am vital to your security. No

kidding.

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Rebuttals

Key IndustriesSome industries are characterized by large spillovers to other industries (and should be encouraged).

Example: Computer chips have spillover spillover benefits that go beyond the computer chip industry

BUT:Subsidy (to chip makers) is a better

option than a tariff. Tariff would be second-best.

Hard to determine which industries are key.

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Rebuttals

Strategic Trade Protectionism Strategic Trade Protectionism = Government helps domestic firms act like a cartel when they sell to international buyers.

May be able to grab up a larger share of the gains from trade than with free trade.

This is done by forcing other countries to pay MORE for your goods, usually with an export tax.

Will the exporting country see more revenue?Success depends on Price Elasticity of Demand. OPEC succeeds because oil has few substitutes.If the U.S. taxes car exports, it may just encourage foreigners to switch to a substitute good (Japanese cars, for instance).

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At TEDIndia, TED favorite Hans Rosling gives another lively and humorous talk- and graphs global economic growth since 1858. He also predicts the exact date that India and China will outstrip the US. (15:50 minutes)

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SEE THE SEE THE INVISIBLEINVISIBLE HANDHAND

SEE THE SEE THE INVISIBLEINVISIBLE HANDHAND

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Globalization is not new Phoenicians: 1550 B.C. TradersRoman Empire: 753 B.C. Specialization and TradeCollapse of trade networks? 476 A.D. “Dark Ages”Revitalized trade routes? 1300s “European Renaissance”

Periods of increased trade and the spread of ideas have been among the best for human progress.