International Trade
The Trade Sector of the US
Growth:
- In 1975, exports and imports were each
approximately 8% of the U.S. economy.
- In 2000, exports accounted for 11.2% of GDP and
imports made up 14.9%.
Major Trading Partners:
- Canada, Mexico, and Japan
-China, Europe
The Growth of the U.S. Trade Sector
• Rapid growth since 1975.
• During the 1975-2000 period:
• imports rose from 7.5% of GDP to 14.9%, and,
• exports rose from 8.3% to 11.2% of GDP.
• Reductions in transport and communication costs, as well as
lower trade barriers have contributed to this growth.
Imports
Exports
(% of GDP)
14.9 %
(% of GDP)
15
15
10
10
5
5
1960
1970
1980
1990
2000
1960
11.2 %
1970
1980
1990
2000
Source: Economic Report of the President, 2002. Table B-2. The figures are based on data for real imports, exports, and
GDP.
Source: http://www.economagic.com/. The figures are based on data for real imports, exports, and GDP.
The Growth of the U.S. Trade Sector
• Both exports and imports have grown substantially as a
share of the U.S. economy.
• Their growth has accelerated since 1975.
• Reductions in transport and communication costs, as well as
lower trade barriers have contributed to this growth.
Imports
Exports
(% of GDP)
(% of GDP)
15
15
10
10
5
5
1960
1970
1980
1990
2000
1960
1970
1980
Source: http://www.economagic.com/. The figures are based on data for real
imports, exports, and GDP.
1990
2000
Leading Trading Partners of the U.S.
–––––––– Percent of Total U.S. Trade, 2002 ––––––––
–––––––– Percent of Total U.S. Trade, 2006 –––––
–––
Canada
19.8% 18.5%
Mexico
China
Japan
Germany
United Kingdom
South Korea
Taiwan
France
Malaysia
All other countries
11.5%
11.9%
11.9%
9.1%
7.2%
8.6%
4.9% 4.5%
3.9% 3.4%
3.1% 2.7%
2.5% 2.1%
2.3% 2.1%
1.8% 1.7%
34.4%
32.2%
• Today, Canada, Mexico, China, and Japan are the leading
trading partners with the United States.
• The impact of international trade varies across industries. -some compete effectively, some do not.
Gains from
Specialization and Trade
Law of Comparative Advantage
• A group of individuals, regions, or nations can
produce a larger joint output if each specializes in
the production of goods in which it is a lowopportunity cost producer and trades for goods for
which it is a high opportunity cost producer.
Gains from Specialization and Trade
• International trade allows each country to
specialize according to the law of comparative
advantage.
• Each country can produce those goods that it
can produce at a relatively low cost.
• Trading partners can consume a wider variety of
goods than they could produce domestically.
Bonsai
Areca
Guns
12
8
4
0
Butter
0
2
4
6
Guns
16
12
8
4
0
Butter
0
1
2
3
4
Production Possibilities - Mexico
Product
A
B
C
D
E
Avocados
0
20
24
40
60
Soybeans
15
10
9
5
0
Production Possibilities - US
1 S = __ A
1 A = __ S
Product
A
B
C
D
E
1 S = __ A
Avocados
0
30
33
60
90
1 A = __ S
Soybeans
30
20
19
10
0
US should produce?
Mexico should produce?
Terms of Trade? ___ A for ___ S
• Columns (1) and (2) show the daily per worker output of
the food & clothing industry in the U.S. and Japan.
Output per worker day
Food Clothing
(1)
(2)
Country
United States
Japan
Change in total output
2
3
1
9
Potential change in output*
Food Clothing
(3)
(4)
+6
-3
+5
-3
+9
+6
* Change in output if US shifts 3 workers from clothing to food industry and if Japan shifts one from food to the clothing.
• If the U.S. moves 3 workers from clothing to food, it
produces 6 more units of food and only 3 fewer of clothing.
• If Japan moves 1 worker from food to clothing, it produces 9
more units of clothing and only 3 fewer of food.
• With such a reallocation of labor, the U.S. and Japan are able
to increase their aggregate output of both food and clothing.
PPC Before Specialization and Trade
• Output of the labor force of both the US (200 million) and
Japan (50 million) given the production costs of food and
clothing from the previous slide.
• In the absence of trade, consumption possibilities will be
restricted to points like US1 in the U.S. and J1 in Japan.
• Each of these points lay along the production possibilities
curve (PPC) of the respective nation.
Clothing
United States
(million units)
450
400
350
Production possibilities, U.S.
300
250
M
200
150
US1
100
50
Clothing
450
R
375
Production possibilities, Japan
300
225
J1
150
75
S
N
100
200
300
Food
400 (million units)
Japan
(million units)
75
150
Food
(million units)
Consumption Possibilities with Trade
• Specialization and trade expand consumption possibilities.
• If the U.S. trades food for clothing (1-for-1), it can specialize
in the production of food and consume along the ON line
(rather than its original production-possibilities constraint, MN).
• Similarly, if Japan trades clothing for food (1-for-1), it can
specialize in the production of clothing and consume any
combination along the RT line (rather than its original, RS).
Clothing
United States
(million units)
450
400 O
350
300
250
M
200
150
US1
100
50
100
Clothing
450
Consumption possibilities
of U.S. with trade
Japan
(million units)
R
Consumption possibilities
of Japan with trade
375
300
225
J1
150
75
S
N
200
300
Food
400 (million units)
75
150
T
Food
400 (million units)
Consumption Possibilities with Trade
• For example, with specialization and trade, the U.S. could
increase its consumption from US1 to US2, gaining 50 million
units of clothing and 100 million units of food.
• Simultaneously, Japan could increase consumption from
J1 to J2, a gain of 125 million units of food and 25 million units of
clothing.
Clothing
United States
(million units)
450
400 O
350
300
250
M
200
150
US1
100
50
100
Clothing
Japan
(million units)
450
R
375
300
250
225
US2
J1
J2
150
75
200
300
Food
400 (million units)
T
S
N
75
150
Food
200
400 (million units)
Consumption Possibilities with Trade
• How exactly do the U.S. and Japan consume at US2 and J2?
• The U.S. produces 400 million units of food, consumes 200
million, and exports 200 million to Japan.
• Japan produces 450 million units of clothing, consumes 250
million, and exports 200 million to the U.S..
• They consume more together than they could individually.
Clothing
United States
(million units)
450
375
300
250
225
US imports
US2
Japan
(million units)
R
Japan exports
450
400 O
350
300
250
M
200
150
100
50
Clothing
J2
150
75
US exports
100
200
300
N
Food
400 (million units)
Japan imports
S 150 200
T
Food
400 (million units)
Gains from Specialization and Trade
• International trade leads to gains from:
• Economies of Scale:
reductions in per-unit costs that often
accompany large-scale production, marketing,
and distribution.
• More Competitive Markets:
Promotes competition in domestic markets and
allows consumers to purchase a wide variety of
goods at economical prices.
A Hard Lesson to Learn
Exports and Imports are Linked
• Exports provide the foreign exchange needed
for the purchase of imports.
• Imports provide trading partners with the
currency needed to purchase exported goods
and services.
• Therefore, restrictions that limit one will also
limit the other.
U.S. Has a Comparative Advantage
• The price of soybeans and other internationally traded
commodities is determined by the forces of supply and demand
in the world market.
• If U.S. soybean producers were prohibited from selling to
foreigners, the domestic price would be Pn.
• Free trade permits U.S. soybean producers to sell Qp units at
the higher world price of Pw.
U.S. Market
Sd
Price
Pw
a
b
Sw
World Market
Price
Sw
Pw
c
Pn
Dw
Dd
Qc
Qn
Qp
Soybeans
(bushels)
Qw
Soybeans
(bushels)
U.S. Has a Comparative Advantage
• At the world price of Pw, the quantity (Qp – Qc) is exported.
• Compared to the no-trade situation, the producers’ gain from the
higher price (Pw b c Pn) exceeds the cost imposed on domestic
consumers (Pw a c Pn) by the triangle (area) a b c.
U.S. Market
Sd
Price
Pw
a
b
Sw
World Market
Price
Sw
Pw
c
Pn
Dw
Dd
U.S. exports
Qc
Qn
Qp
Soybeans
(bushels)
Qw
Soybeans
(bushels)
Foreigners Have a Comparative
Advantage
• Consider the international market for manufacturing shoes.
• In the absence of trade, the domestic price would be Pn.
• Since many foreign producers have a comparative advantage in
the production of shoes, international trade leads to lower prices
Pw.
U.S. Market
World Market
Price
Sd
Price
Sw
Pn
a
Pw
Dd
Dw
Qn
Shoes
Qw
Shoes
Foreigners Have a Comparative
Advantage
• At the price Pw, U.S. consumers demand Qc units of which
(Qc – Qp) are imported.
• Compared to no trade, consumers gain Pn a b Pw,
while domestic producers lose Pn a c Pw.
• A net gain of a b c results.
U.S. Market
World Market
Price
Sd
Price
Sw
a
Pn
Pw
b
c
Sw
Pw
Dd
Dw
U.S. imports
Qp Qn Qc
Shoes
Qw
Shoes
The Economics of
Trade Restrictions
U.S. Tariff Rates: 1890 to the Present
–––––––– U.S. Average Tariff Rate ––––––––
(Duties collected as a share of dutiable imports)
60%
50%
40%
30%
20%
4.5%
10%
1890
1910
1930
1950
1970
1990
2006
Trade Restrictions: Impact of a Tariff.
• Consider a tariff on autos imports.
• Without a tariff, the world price
of autos is Pw. At Pw consumers
in the U.S. purchase Q1 units …
Price
SDomestic
Qd1 from U.S. producers and …
Q1 – Qd1 from foreign producers.
• A tariff t makes it more costly for
Americans to purchase autos from
abroad. U.S. prices rise to Pw+ t
and purchases fall from Q1 to Q2. Pw+ t
• U.S. purchases from domestic
producers rise from Qd1 to Qd2 …
imports fall to Q2 – Qd2.
Pw
Imports after tariff
S
U
T
V
Initial imports
DDomestic
• Producers gain area S … the
tariff generates T tax revenues for
the government…
areas
U & V are deadweight losses from
reduction in allocative efficiency.
Tariff = t
Qd1 Qd2 Q2 Q1
Quantity
(automobiles)
Trade Restrictions: Impact of a Quota
• Consider a quota on peanuts.
• Without trade restraints, Pw (the
world price of peanuts) would be
the domestic price. At Pw U.S.
consumers would purchase Q1 …
Price
SDomestic
Qd1 from U.S. producers and …
Q1 – Qd1 imported from abroad.
• A quota of Q2 – Qd2 imports
pushes the U.S. price up to P2.
• While total U.S. purchases fall
(from Q1 to Q2), those from U.S.
producers rise (from Qd1 to Qd2)
and … imports fall to Q2 – Qd2.
Import quota:
Q2 – Qd2
P2
Pw
S
U
T
V
Initial imports
• U.S. producers gain area S. Area
T goes to foreign producers with
permits to import into the U.S.
•U & V are deadweight losses.
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(peanuts)
Note: The government derives no
additional revenue from quotas.
Trade Restriction Impacts
Price
SDomestic
Price
SDomestic
Import quota:
Imports after tariff
Pw
Q2 – Qd2
P2
Pw+ t
S
U
T
V
Tariff = t
Pw
S
U
T
V
Initial imports
Initial imports
DDomestic
DDomestic
Qd1 Qd2 Q2 Q1
Quantity
(automobiles)
Qd1 Qd2 Q2 Q1
Quantity
(peanuts)
Why do Nations Adopt
Trade Restrictions?
1. National Defense argument
2. Self sufficiency argument
3. Prevents Dumping:
a. The sale of goods abroad at a price below cost
b. Allows foreign firms to achieve economies of
scale.
c. Foreign firms may want to gain entry to
another market. Sell below cost to gain sales.
4. Infant Industry argument
a. Protect developing industries while growing
b. Difficult to tell when they are adult.
Trade Fallacies
• Trade fallacies abound because people often fail
to consider the secondary effects.
• Key elements of international trade are often
linked – you cannot change one element without
changing the other.
• This is the case with imports and exports;
policies that restrain imports also restrain
exports.
Trade Fallacies
• Trade fallacy 1:
“Trade restrictions that limit imports save jobs
for Americans.”
• This view is false because if foreigners sell less to us
they will have fewer dollars with which to buy things
from us.
• Trade restrictions do not “save” jobs; they merely
reshuffle them. Jobs “saved” in protected
industries will be offset by jobs “lost” in export
industries.
• As the result of trade restrictions, fewer Americans
are employed in areas where we have a comparative
advantage.
Practical Application:
In 2002, the Bush administration imposed
tariffs of up to 25% on imported steel
products. This action
a. reduced the supply of steel in the domestic
market and led to higher steel prices.
b.increased U.S. employment because it saved
jobs in the steel industry.
c. reduced employment in the U.S. steel container
industry because the higher steel prices made it
more difficult for them to compete with foreign
rivals.
Trade Fallacies
• Trade fallacy 2:
"Free trade with low-wage countries, such as
Mexico and China, will reduce the wages of
Americans."
• Both high- and low-wage countries will gain when
they are able to focus more of their resources on
those productive activities that they do well.
• The key to this issue is how will U.S. resources be
used. If a low-wage country can supply a good
cheaper than we can produce it, the U.S. can gain by
purchasing the good from the low-wage country and
using its resources to produce other goods for
which it has a comparative advantage.
Trade Openness, Income, and Growth
10 Most Open Economies, 1980-2002
TOI
Hong Kong 10.0
Singapore
9.9
Bahrain
8.6
Belgium
8.6
Malaysia
8.6
Luxembourg 8.5
Netherlands 8.4
Taiwan
8.4
Ireland
8.1
Australia
7.9
Average:
Growth rate
2005 GDP
per capita 1980-2005
$ 30,989
3.9 %
$ 26,390
4.3 %
$ 19,112
1.0 %
$ 28,575
1.7 %
$ 9,681
3.6 %
$ 53,583
3.7 %
$ 29,078
1.6 %
$ 20,868
5.1 %
$ 34,256
4.5 %
$ 29,981
1.9 %
8.7 $ 28,251
3.1 %
10 Least Open Economies, 1980-2002
TOI
India
4.3
Tanzania
4.1
Egypt
4.1
Pakistan
3.9
Syria
3.8
Algeria
3.4
Sierra Leone3.4
Burundi
3.0
Iran
2.9
Bangladesh 2.5
Average:
3.5
Growth rate
2005 GDP
per capita 1980-2005
$ 3,072
4.0 %
$ 662
2.3 %
$ 3,858
2.5 %
$ 2,109
2.4 %
$ 3,388
0.6 %
$ 6,283
0.5 %
$ 717
- 1.1 %
$ 622
- 1.0 %
$ 7,089
1.1 %
$ 1,827
1.2 %
$ 2,963
1.4 %
Sources: TOI data are from Charles Skipton, The Measurement of Trade Openness. Doctoral Dissertation, Florida State Univer
The per capita GDP and growth data are from The World Bank, World Development Indicators, CD-ROM, 2004.
• The income levels and growth rates of the ten most and
ten least open economies (as measured by the Trade
Openness Index – TOI) are displayed above.
• Note that more open economies both achieved higher
income levels and grew more rapidly.
Trade Openness, Growth, and Income
TOI
(80-98)
Low trade restrictions:
Hong Kong
9.9
Singapore
9.8
Belgium
9.1
Germany
8.5
UK
8.5
Netherlands
8.4
Luxembourg
8.3
Switzerland
8.0
U.S.A.
7.8
Malaysia
7.8
Sweden
7.8
Ireland
7.7
Average:
8.5
High trade restrictions:
3.5
India
3.4
Brazil
3.3
Argentina
3.2
Tanzania
3.1
Madagascar
2.9
Algeria
2.5
Syria
1.9
Sierra Leone
Iran
1.9
Burundi
1.5
Bangladesh
1.5
Myanmar
0.1
Average:
2.4
Effective
Actual vs.
average
expected size
tariff rate
of trade sector
1980
1999
1998
1%
1%
106 %
1%
0%
115 %
1%
1%
49 %
1%
1%
13 %
1%
1%
-3%
1%
1%
18 %
0%
0%
-3%
5%
1%
- 20 %
2%
2%
0%
15 %
3%
286 %
1%
1%
19 %
7%
1%
64 %
3%
1%
54 %
PPP GDP
per capita
1999
$ 22,090
$ 20,767
$ 25,443
$ 23,742
$ 22,093
$ 24,215
$ 42,769
$ 27,171
$ 31,872
$ 8,209
$ 22,636
$ 25,918
$ 24,744
Avg. annual growth
rate of real GDP
per capita
1980-1999
3.9 %
4.9 %
1.7 %
1.4 %
1.9 %
1.8 %
3.9 %
0.9 %
1.9 %
3.7 %
1.4 %
4.4 %
2.7 %
31 %
20 %
19 %
15 %
17 %
.
14 %
27 %
34 %
36 %
27 %
28 %
24 %
$ 2,110
$ 6,908
$ 12,554
$ 482
$ 776
$ 4,869
$ 3,749
$ 487
$ 5,389
$ 581
$ 1,412
$ 1,200
$ 3,250
3.7 %
0.6 %
0.3 %
3.3 %
- 1.8 %
- 0.5 %
1.1 %
- 3.5 %
- 0.2 %
- 1.1 %
2.4 %
- 0.1 %
0.4 %
22 %
17 %
9%
24 %
20 %
18 %
7%
32 %
18 %
18 %
19 %
72 %
23 %
8%
- 33 %
- 37 %
-1%
-2%
1%
9%
- 68 %
- 30 %
- 73 %
- 27 %
- 97 %
- 29 %
U.S. Trade with Canada and Mexico
6%
–––––––– U.S. Trade with Canada and Mexico ––––––
––
5%
(Exports and Imports together as a share of GDP)
Canada
4%
3%
Mexico
2%
1%
1980
1985
1990
1995
2000
2005
• U.S. trade with both Canada and Mexico grew rapidly
following the passage of NAFTA.
IMF - loans and financial assistance
GATT / WTO- tariff reductions
EU - European free trade area
NAFTA - North American free
trade area
1. Measured as a share of the economy, the size of the trade
sector (exports plus imports) of the United States has
a. been increasing since 1980, but it declined during 1960–
1980.
b.been relatively constant during the last four decades.
c. increased by about 10 percent during the last four
decades.
d.approximately doubled since 1980 and tripled since 1960.
2. A U.S. trade policy that restricts the sale of foreign goods
in the U.S. market will
a. reduce the demand for U.S. export goods since foreigners
will be less able to buy our goods if they cannot sell to us.
b.benefit producers in industries that export goods.
c. increase the nation’s income since it protects domestic
jobs.
d.enhance economic efficiency by allocating more resources
to the areas of their greatest comparative advantage.