International Trade Patterns and Trends in International Trade

International Trade • Patterns and Trends in International Trade • Gains from trade • Absolute and comparative advantage revisited • Tariffs • Quotas • Welfare loss from trade restrictions • Arguments for trade restrictions

Source: www. bls. gov

1985 1983 1981 1979 1977 1975 1973 1971 1969 1967 1965 Year 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 0, 35 (Exports + Imports)/GDP , U. S. 0, 3 0, 25 0, 2 0, 15 0, 1 0, 05 0

1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Percent 7 U. S. Trade Deficit as a Percent of GDP 6 5 4 3 2 1 0 -1 -2 Year

Composition of U. S. Imports and Exports • Composition of US merchandise exports and imports in 2006 7

U. S. production as a percentage of U. S. consumption for various commodities Percent If U. S. production is <100% of consumption, imports make up the difference. If U. S. production exceeds U. S. consumption, then the difference is exported. 8

Ricardo’s principle of comparative advantage shows how trade between nations can be mutually beneficial

Production possibilities for United States and Izodia (a) United States Production possibilities with 100 million workers (millions of units per day) Food Clothing U 1 U 2 U 3 U 4 U 5 U 6 600 0 480 60 360 120 240 180 120 240 0 300 (b) Izodia Production possibilities with 200 million workers (millions of units per day) Food Clothing I 1 I 2 I 3 I 4 I 5 I 6 200 0 160 80 120 160 80 240 40 320 0 400 11

Production possibilities frontiers for the United States and Izodia without trade (millions of units per day) (b) Izodia (a) United States 500 Food 400 300 200 100 0 U 1 600 500 U 2 400 U 3 Food 600 U 4 300 200 U 5 U 6 100 200 300 400 Clothing Slope: opportunity cost of an additional unit of food is ½ unit of clothing 100 0 I 1 I 2 I 3 I 4 I 5 I 6 100 200 300 400 Clothing An additional unit of food costs 2 units of clothing. Food is produced at a lower opportunity cost in the United States. 12

Measuring opportunity cost: For the United States • Food: 60 clothing/120 food = ½ clothing per food. • Clothing: 120 food/60 clothing = 2 food per clothing For Izodia • Food: 80 clothing/40 food = 2 clothing per food • Clothing: 40 food/80 clothing = ½ food per clothing Thus the Unites States has the comparative advantage in food and Izodia has the comparative advantage in clothing.

How much of one good exchanges for a unit of another good. As long as the Americans can get more than ½ unit of clothing for each unit of food , and as long as the Izodians can get more than ½ unit of food for a unit of clothing, both sides benefit from specialization and trade

These terms work for both sides

Production (and consumption) possibility frontiers with trade (millions of units per day) (b) Izodia (a) United States 600 500 U 300 200 U 4 300 100 200 300 400 Clothing I 200 100 0 400 Food 400 0 I 3 100 200 300 400 Clothing Trade: 1 unit of clothing for 1 unit of food. Both countries are better off as a result of international trade. 16

No Trade Gain United States Clothing Food (units) 180 240 200 400 20 160 Izodia Clothing Food (units) 160 120 200 40 80

• Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba. • Tariffs: Taxes imposed on imported goods. • Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber. • Subsidies: payments by government to exporters. These stimulate trade by allowing the exporter to charge a lower price.

• Health and safety standards—such as European ban on genetically-modified soybeans and hormonetreated beef. • Product design standards • Licensing requirements • Bureaucratic red tape The Japanese trade ministry (MITI) decided that snow skis made in the U. S. were not safe enough for Japanese ski enthusiasts

Consumer and producer surplus from market exchange Price per pound Consumer surplus S = marginal cost $0. 50 0. 25 0 Producer surplus D = marginal benefit 60 Chicken (pounds per day) 20

Effect of a tariff Price per pound S $0. 15 0. 10 a b f c d At a world P=$0. 10 per pound, US consumers demand 70 mill. pounds of sugar per month, and US producers supply 20 mill. pounds per month; the difference is imported. Tariff= $0. 05 per pound; P=$0. 15 per pound. US producers increase production to 30 mill. pounds; US consumers cut back to 60 mill. pounds. Imports fall to 30 mill. pounds. D a = increase in producer surplus c = government revenue from the tariff 60 70 Sugar millions of pounds per month) b = higher marginal cost of domestically producing sugar that could have been produced more cheaply abroad. d = loss of consumer surplus from the drop in consumption 0 20 30 Consumers are worse off. Loss of consumer surplus: areas a, b, c, and d. b+d = Net welfare loss to the US economy 21

S S’ e $0. 15 S’ $0. 15 a 0. 10 Sugar 20 50 70 (millions of pounds per month) b c d D D 0 S Price per pound Effect of a quota 0 20 30 60 70 Sugar (millions of pounds per month) Quota=30 mill. , world price=$0. 10. S’=supply curve (imports and US production; new price $0. 15: intersection of D and S’. Loss of consumer surplus: a+b+c+d; a = transfer from US consumers to US producers; b+d = net loss; c = gain for sellers of foreign-grown sugar 22

Given the preceding analysis , why are trade restrictions so pervasive?

• National security • Save domestic jobs • Anti-dumping • Infant industry