micro economics chapter 26

26
International Trade

McGraw-Hill/Irwin

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Some Key Trade Facts

• U.S. trade deficit in goods
• $529 billion in 2015
• U.S. trade surplus in services
• $220 billion in 2015
• Canada largest U.S. trade partner
• Trade deficit with China
• $366 billion in 2015
• Exports are 13% U.S. output
LO1


Economic Basis for Trade

• Nations have different resource
•
•
•

LO2

endowments

Labor-intensive goods
Land-intensive goods
Capital-intensive goods


Comparative Advantage

• Assumptions

• Two nations
• Same size labor force
• Constant costs in each country
• Different costs between countries

• Comparative Advantage

• Country produces good with lowest
domestic opportunity cost
• Total output is greatest

LO2


Comparative Advantage

• Case for free trade
• Increase total output
• Efficient allocation of resources
• Promote competition

LO2


•
•
•
•
•
LO4

Trade Barriers and Export
Subsidies
Tariffs
• Revenue tariff
• Protective tariff
Import quota
Nontariff barrier (NTB)
Voluntary export restriction
(VER)
Export subsidy


The Case for Protection

• Military self-sufficiency
• Diversification for stability
• Infant industry
• Alleged exception to free trade
• Protection against dumping
• Increased domestic employment

• Smoot-Hawley Tariff Act
• Cheap foreign labor
LO5


GATT

• Three principles
• Equal, nondiscriminatory trade
between member nations
• Reduction in tariffs
• Elimination of import quotas

LO5


WTO

• Established by Uruguay Round of
•
•
•

LO5

GATT
161 member nations in 2015
Oversees trade agreements and rules
on disputes
Critics argue may allow nations to

circumvent environmental and worker
protection laws


European Union

• Initiated in 1958 as Common Market
• Abolished tariffs and import quotas
•
•
•

LO5

between member nations
Established common tariff with nations
outside the EU
Created Euro Zone with one currency
Increased output, faster economic growth


NAFTA

• Agreement between U.S., Canada,
•
•
•

LO5

Mexico
Establishes free trade zone between
the countries
Trade has increased in all countries
Enhanced standard of living


Trade Adjustment and Offshoring

• Trade Adjustment Assistance Act
• Designed to help individuals hurt by

•

LO5

international trade
• Increases political support for reducing
trade barriers
Offshoring of jobs
• Shifting of work previously done by
American workers to workers abroad