Lecture Economics (9/e): Chapter 10 - David C. Colander

Chapter 10, International trade policy. After reading this chapter, you should be able to: Summarize some important data of trade, explain policies countries use to restrict trade, summarize the reasons for trade restrictions and why economists generally oppose trade restrictions, explain how free trade associations both help and hinder international trade.

Thinking Like an Economist 1

CHAPTER  2

International Trade Policy

Manufacturing and commercial  monopolies owe their origin not to a  tendency imminent in a capitalist  economy but to governmental  interventionist policy directed  against free trade.

— Ludwig von Mises

CHAPTER 10

Chapter Goals

Ø Summarize some important data of trade

Ø Explain how free trade associations both help

and hinder international trade

Ø Explain policies countries use to restrict trade

Ø Summarize the reasons for trade restrictions and

why economists generally oppose trade

restrictions

The Nature and Patterns of Trade

Differences in the importance of trade

Total Output ($) Export Ratio (%) Import Ratio (%)

Netherlands 844 78 71

United Kingdom 2,462 30 33

United States 15,094 13 16

OPEC 4% Central and

South America

11%

Other 10%

Pacific Rim 25%

European Union

Mexico 13%

Canada 19%

U.S Exports by Region, 2012

U.S Imports by Region, 2012

OPEC 9%

Central and South America

8%

Other 9%

Pacific Rim 31%

European

Union

17%

Mexico 11%

Canada 15%

The Changing Nature of Trade

Ø As technological changes in telecommunications reduce

costs, foreign countries will be able to provide more

services

Ø This trade in services is often called outsourcing

Ø Customer service calls for U.S companies are now

more frequently answered in India

Ø The nature of trade is continually changing, both in

terms of the countries with which the U.S trades and

the goods and services traded

The Changing Nature of Trade

Ø Using overseas suppliers is not a new development in

trade

Ø Because technology is growing in these countries, the

U.S economy must develop new technologies to remain

competitive

Ø The difference is the potential size of outsourcing to India

and China with combined populations of 2.5 billion people

Is Chinese and Indian outsourcing different from

previous outsourcing?

Balance of Trade

Ø Trade deficit = exports < imports

Ø Trade surplus = exports > imports

Ø The U.S has a significant trade deficit of approximately

$820 billion which is 5.5% of GDP

Ø The U.S is financing its trade deficit by selling off financial assets, stocks and bonds, and real assets, corporations

and real estate

Debtor and Creditor Nations

Ø The U.S is currently financing its trade deficit by selling

off assets

Ø The U.S has gone from being a large creditor nation

to being the world’s biggest debtor; international

considerations have been forced on the nation

Ø The U.S has not always had a trade deficit; following

WWII, it had trade surpluses

Ø Running a deficit isn’t necessarily bad

Varieties of Trade Restrictions

Ø Quotas are quantity limits placed on imports

Ø Voluntary restraint agreements are when countries

voluntarily restrict their exports

Ø Tariffs are taxes governments place on internationally

traded goods (generally imports)

Ø An embargo is a total restriction on the import or export

of a good

Ø Regulatory trade restrictions are government-imposed

procedural rules that limit imports

Ø Nationalistic appeals, such as “Buy American” can help

to restrict international trade

Reasons for Trade Restrictions

Ø Haggling by companies over the gains from trade

Ø Haggling by countries over trade restrictions

Ø Unequal internal distribution of the gains from trade

Ø Specialized production

• Learning by doing and economies of scale

Ø Macroeconomic costs of trade

Ø National security

Ø International politics

Why Economists Generally Oppose

Trade Restrictions

Ø International trade provides competition for domestic

companies

Ø Restrictions based on national security are often

abused or evaded

Ø From a global perspective, free trade increases total

output

Ø Trade restrictions are addictive

Institutions Supporting Free Trade

• e.g the European Union (EU) and the North American

Free Trade Association (NAFTA)

Ø Countries strengthen trading relationships with

most-favored nation status – those countries will be charged

as low a tariff on exports as any other country

Ø Free trade associations are groups of countries that

allow free trade among its members and put up common

barriers against all other countries’ goods

Ø The World Trade Organization (WTO) has over 150

members

Chapter Summary

Ø The nature of trade is continually changing

Ø The U.S is importing more and more high-tech

goods and services from India and China and

other East Asian countries

Ø Outsourcing is a type of trade Outsourcing is a

larger phenomenon today compared to 30 years

ago because China and India are so large

Ø Trade restrictions include tariffs and quotas,

embargoes, voluntary restraint agreements,

regulatory trade restrictions, and nationalistic appeals

Chapter Summary

Ø Reasons that countries impose trade restrictions

include unequal internal distribution of the gains from

trade and haggling by countries over trade restrictions

Ø Economists generally oppose trade restrictions

because of their understanding of the advantages

of free trade

Ø The World Trade Organization is an international

organization committed to reducing trade barriers

Ø Free trade associations, such as the European Union,

help trade by reducing barriers to trade among member