9
Application:
International Trade
International Trade: issues
• What determines whether a country imports
or exports a good?
• Who gains and who loses from free trade
among countries?
• What are the arguments that people use to
advocate trade restrictions?
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
2
Figure 1The Equilibrium without International
Trade
Price
of Steel
Domestic
supply
Consumer
surplus
Equilibrium
price
Producer
surplus
Domestic
demand
0
Equilibrium
quantity
Quantity
of Steel
The World Price and Comparative
Advantage
• If the country decides to engage in
international trade, will it be an importer or
exporter of steel?
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
5
The World Price and Comparative
Advantage
• The effects of free trade can be shown by
comparing the domestic price of a good (in
the absence of trade) and the world price of
the good.
– The world price is the price that prevails in the
world market for that good.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
6
The World Price and Comparative
Advantage
• If a country has a comparative advantage
in steel production, then its domestic price
will be less than the world price
• In this case, the country will be an exporter
of the good.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
7
The World Price and Comparative
Advantage
• If the country does not have a comparative
advantage, then the domestic price will be
higher than the world price, and
• this country will be an importer of the good.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
8
Figure 2 International Trade in an Exporting
Country
Price
of Steel
Domestic
supply
Price
after
trade
World
price
Price
before
trade
Exports
0
Domestic
quantity
demanded
Domestic
demand
Domestic
quantity
supplied
Quantity
of Steel
Figure 2 How Free Trade Affects
Welfare in an Exporting Country
Price
of Steel
Price
after
trade
Domestic
supply
Exports
A
B
Price
before
trade
World
price
D
C
Domestic
demand
0
Quantity
of Steel
The Gains and Losses from trade for
an Importing Country
• If the world price of steel is lower than the
domestic price, the country will be an
importer of steel when trade is permitted.
• Domestic buyers will want to buy steel at
the lower world price.
• Domestic producers of steel will have to
reduce their output because the domestic
price will fall to the world price.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
11
Figure 3 International Trade in an Importing
Country
Price
of Steel
Domestic
supply
Price
before
trade
Price
after
trade
World
price
Imports
0
Domestic
quantity
supplied
Domestic
quantity
demanded
Domestic
demand
Quantity
of Steel
Figure 3 How Free Trade Affects Welfare in an
Importing Country
Price
of Steel
Domestic
supply
A
Price
before trade
Price
after trade
B
C
D
Imports
World
price
Domestic
demand
0
Quantity
of Steel
The Gains and Losses from trade for
an Importing Country
• Domestic producers of the imported good
are worse off
• Domestic consumers of the imported good
are better off.
• Trade raises the economic well-being of the
nation as a whole
– That is, the gains of consumers exceed the
losses of producers.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
14
The Winners And Losers From
Trade
• Irrespective of whether a country exports a
good or imports it, the gains of those who
gain exceed the losses of those who lose.
• That is, the net change in total surplus is
always positive.
• And yet, tariffs/taxes on imported goods are
quite popular. Why?
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
15
TARIFFS
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
16
The Effects of a Tariff
• A tariff is a tax on goods produced abroad
and sold domestically.
• Tariffs raise the price of imported goods
above the world price by the amount of the
tariff.
– Domestic price = World price + Tariff
• This reduces trade and, therefore, the
benefits of trade
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
17
Figure 4 The Effects of a Tariff
Price
of Steel
Domestic
supply
Equilibrium
without trade
Price
with tariff
Tariff
Price
without tariff
0
Imports
with tariff
S
Q
S
Domestic
demand
D
Q
Q
Imports
without tariff
D
Q
World
price
Quantity
of Steel
Figure 4 The Effects of a Tariff
Price
of Steel
Consumer surplus
before tariff
Producer
surplus
before tariff
Domestic
supply
Equilibrium
without trade
Price
without tariff
0
Domestic
demand
S
D
Q
Q
Imports
without tariff
World
price
Quantity
of Steel
Figure 4 The Effects of a Tariff
Price
of Steel
Consumer surplus
with tariff
A
Domestic
supply
Equilibrium
without trade
B
Price
with tariff
Tariff
Price
without tariff
0
Imports
with tariff
S
Q
S
Domestic
demand
D
Q
Q
Imports
without tariff
D
Q
World
price
Quantity
of Steel
Figure 4 The Effects of a Tariff
Price
of Steel
Domestic
supply
Producer
surplus
after tariff
Price
with tariff
Equilibrium
without trade
Tariff
C
Price
without tariff G
0
Imports
with tariff
S
Q
S
Domestic
demand
D
Q
Q
Imports
without tariff
D
Q
World
price
Quantity
of Steel
Figure 4 The Effects of a Tariff
Price
of Steel
Domestic
supply
Tariff Revenue
Price
with tariff
Tariff
E
Price
without tariff
0
Imports
with tariff
S
Q
S
Domestic
demand
D
Q
Q
Imports
without tariff
D
Q
World
price
Quantity
of Steel
Figure 4 The Effects of a Tariff
Price
of Steel
Domestic
supply
A
Deadweight Loss
B
Price
with tariff
Tariff
C
D
Price
without tariff G
0
E
F
Imports
with tariff
S
Q
S
Domestic
demand
D
Q
Q
Imports
without tariff
D
Q
World
price
Quantity
of Steel
The Effects of a Tariff
• A tariff reduces the quantity of imports and
moves the domestic market closer to the
no-trade equilibrium.
• Buyers of the imported good are worse off
• Domestic sellers are better off
• Total surplus decreases by an amount
referred to as a deadweight loss.
– That is, the loss to the nation’s buyers of the
import-competing good exceed the gains to the
nation’s sellers of that good
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
24
The Lessons for Trade Policy
• Tariffs
– raise domestic prices.
– reduce the welfare of domestic consumers.
– increase the welfare of domestic producers.
– cause deadweight losses.
• Free trade maximizes total surplus
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
25
The Lessons for Trade Policy
• Other benefits of international trade
– Increased variety of goods
– Lower costs through economies of scale
– Increased competition
– Enhanced flow of ideas
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
26
The Arguments For Restricting
Trade
•
•
•
•
Jobs are shipped abroad
National Security is endangered
Infant Industries need to be shielded
Unfair Competition
– Cheap labor
– Lax environmental standards
• Hard for domestic regulators to keep out defective
or harmful imported goods
• Protection-as-a-Bargaining Chip
• Increasing inequality
27
CASE STUDY: Trade Agreements
and the World Trade Organization
• Unilateral: when a country removes its
trade restrictions on its own.
• Multilateral: a country reduces its trade
restrictions while other countries do the
same.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
28
CASE STUDY: Trade Agreements
and the World Trade Organization
• Unilateral:
– politically difficult to achieve
– Negative terms-of-trade effect for a large
country
• Multilateral:
– politically easier to achieve because exporters
can be mobilized to oppose the importcompeting industries that oppose free trade
– Less risk of negative terms-of-trade effect
29
CASE STUDY: Trade Agreements
and the World Trade Organization
• NAFTA
– The North American Free Trade Agreement
(NAFTA) is an example of a multilateral trade
agreement.
– In 1993, NAFTA lowered the trade barriers
among the united states, Mexico, and Canada.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
30
CASE STUDY: Trade Agreements
and the World Trade Organization
• GATT
– The General Agreement on Tariffs and Trade
(GATT) refers to a continuing series of
negotiations among many of the world’s
countries with a goal of promoting free trade.
– GATT has successfully reduced the average
tariff among member countries from about 40
percent after WWII to about 5 percent today.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
31
Summary
• The effects of free trade can be determined
by comparing the domestic price without
trade to the world price.
– A low domestic price indicates that the country
has a comparative advantage in producing the
good and that the country will become an
exporter.
– A high domestic price indicates that the rest of
the world has a comparative advantage in
producing the good and that the country will
become
an9 APPLICATION:
importer.
CHAPTER
INTERNATIONAL TRADE
32
Summary
• When a country allows trade and becomes
an exporter of a good, producers of the
good are better off, and consumers of the
good are worse off.
• When a country allows trade and becomes
an importer of a good, consumers of the
good are better off, and producers are
worse off.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
33
Summary
• A tariff—a tax on imports—moves a market
closer to the equilibrium than would exist
without trade, and therefore reduces the
gains from trade.
• Import quotas will have effects similar to
those of tariffs.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
34
Summary
• There are various arguments for restricting
trade: protecting jobs, defending national
security, helping infant industries,
preventing unfair competition, and
responding to foreign trade restrictions.
• Economists, however, believe that free
trade is usually the better policy.
CHAPTER 9 APPLICATION: INTERNATIONAL TRADE
35