International Trade
Your pencil contains:
Graphite from Sri Lanka
Mississippi mud
Mexican carnauba wax
Canadian wood
Lacquer made from Mexican castor beans
Australian zinc or Michigan copper
Rubber from Malaysia
Pumice (derivative of rapeseed oil) from
Indonesia
Trade isn’t very important, now, is it?
Is Trade Good or Bad?
Depends on who you ask
UAW Worker: Trade bad
Economist: Trade maximizes economic
efficiency
Defense Secretary: Jeopardizes national
security if you ship high-powered computers or
B-2s.
Average consumer: Trade is wonderful, lowers
prices and improves quality
Without international trade, many products
would not be available on the world market
Trade Activity
Myths about Trade
#1: International Trade is “Different.”
#2: International Trade is about competition between
nations
#3: Exports are the goal of international trade
#4: High productivity is the key to competition.
#5: International Trade destroys jobs.
#6: “We need a new partnership between business and
government.”
When’s the last time the US competed with another country? Nations don’t
compete—firms do
Michael Dell and Bill Gates destroyed the auto industry—we’re too good at
producing other stuff—comparative advantage
VW Beetle made in Mexico creates jobs in U.S. export industries. Japanese
voluntary restrictions to avoid tariffs under Reagan hurt U.S.
Resource Distribution and
Trade
Each country of the world possesses different types
and quantities of land, labor, and capital resources.
By specializing in the production of certain goods
and services, nations can use their resources more
efficiently.
Specialization and trade can benefit all nations.
David Ricardo & Comparative Advantage
David Ricardo (1772-1823) was a Classical Economist who
opposed England’s Corn Laws. The Corn Laws, in force
between 1815 and 1846, were import tariffs ostensibly
designed to "protect" British farmers and landowners against
competition from cheap foreign grain imports. They were
repealed by PM Robert Peel after the Irish potato famine.
A person or nation has an absolute advantage when it can
produce a particular good at a lower cost than another person
or nation. Korea has absolute advantage in producing cars.
Comparative advantage is the ability of one person or nation
to produce a good at a lower opportunity cost than that of
another person or nation. South Korea can make cars and tshirts cheaper than the U.S., but it is more productive at cars.
The law of comparative advantage states that nations are
better off when they produce goods and services for which they
have a comparative advantage in supplying.
Key Assumptions of Ricardo
There are no transport costs.
Costs are constant and there are no economies of
scale.
There are only two economies producing two goods.
The theory assumes that traded goods are
homogeneous (ie identical).
Factors of production are assumed to be perfectly
mobile.
There are no tariffs or other trade barriers.
There is perfect knowledge, so that all buyers and
sellers know where the cheapest goods can be found
internationally.
Imports and Exports of the United States
Major Imports and Exports of the United States
The United States is the
world’s largest exporter.
Chemicals
Industrial machinery
Electrical machinery
Data-processing
equipment
Exports
Airplanes and parts
Vehicles:parts
Power-generating
machinery
The United States is also the
world’s largest importer
Vehicles: cars and trucks
Scientific instruments
Telecommunications
equipment
10
Imports
20
30
40
50
60
70
80
Vehicles: cars and trucks
Crude oil and petroleum
preparations
Electrical machinery
Data-processing
equipment
Clothing
Industrial machinery
Telecommunications
equipment
Vehicles; parts
Power-generating
machinery
Chemicals
10
20
30
40
50
60
70
Dollars per year (in billions)
Source: Statistical Abstract of the United States
80
The United States’ main
trading partners are Canada,
Mexico and Japan. See
handouts for trade
deficits/surpluses between
the U.S. and other countries
Trade and Employment
As nations begin to specialize in certain goods, dramatic
changes in the nation’s employment patterns also
occur.
Workers who lose their jobs due to specialization face
three options:
Unemployment: inability to adapt and find a new job
Relocation: moving to where current skills meet
current jobs
Retraining: gaining new human capital to meet the
demands of specialized labor markets
Section 1 Review
1. Trade benefits both wealthy and poor countries because
(a) self-sufficiency is too costly.
(b) both wealthy and poor countries increase their wealth if
they specialize.
(c) both wealthy and poor countries lack human resources.
(d) without trade neither wealthy nor poor countries could
increase their wealth.
2. What is the law of comparative advantage?
(a) A country is better off producing goods in which they have a
comparative advantage in supplying.
(b) A country that supplies things for others has a comparative
advantage in trade.
(c) A country has a comparative advantage if it produces goods
for export.
(d) A country’s greatest advantage is in the import of goods
that it cannot produce.
Trade Barriers
A trade barrier is a means of preventing a foreign product
or service from freely entering a nation’s territory.
Import Quotas--An import quota is a limit on the
amount of a good that can be imported.
Voluntary Export Restraints--a self-imposed limitation
on the number of products shipped to a certain country.
Best example: Japanese car companies and President
Reagan
Tariffs--a tax on imported goods, such as a customs
duty. EX: Bush 30% import steel tax. Tariffs can be
protective or revenue tariffs.
Other Barriers to Trade--include high government
licensing fees and costly product standards.
The Effects of Trade Restrictions:
(Arguments AGAINST)
Increased Prices for Foreign Goods
Tariffs and other trade barriers increase the cost of
imported products, making domestic products more
competitive. EX: American cars were forced to
improve by Japanese competition
Although manufacturers of many products may
benefit from trade barriers, consumers can lose out.
Trade Wars
When one country restricts imports, its trading
partner may impose its own retaliatory restrictions.
Arguments FOR Protectionism
Protectionism is the use of trade barriers to protect a
nation’s industries from foreign competition
Balance of Payments Argument—keep them favorable
Protecting Jobs
• Protectionism shelters workers in industries that
would be hurt by specialization and trade.
Protecting Infant Industries
• Protectionist policies protect new industries in the
early stages of development.
Safeguarding National Security
• Certain industries may require protection from
foreign competition because their products are
essential to the defense of the United States.
• Not as needed as you might think—some people are
always betting on war.
International Competition
Recent trends have been toward lowering
trade barriers and increasing trade through
international trade agreements.
In 1948, the General Agreement on Tariffs and
Trade (GATT) was established to reduce tariffs
and expand world trade.
In 1995, the World Trade Organization (WTO)
was founded to ensure compliance with GATT,
to negotiate new trade agreements, and to
resolve trade disputes.
Global Trade Agreements
Many nations have formed regional trade organizations. These
organizations establish free-trade zones--regions where a group of
countries agree to reduce trade barriers among themselves.
Section Review--Protectionism
1. Protectionism does not
(a) protect immigrant labor.
(b) protect domestic jobs.
(c) protect infant industries.
(d) safeguard national security.
2. Members of regional trade organizations
generally work together to
(a) abolish free-trade zones.
(b) limit commerce between member states.
(c) establish centrally planned economies.
(d) eliminate trade barriers.
Measuring Trade—Topics to Examine
How do exchange rates affect
international markets?
How do exchange rate systems
vary?
What is a balance of trade?
What is the United States trade
deficit?
Exchange Rates and
International Markets
The value of a foreign nation’s currency in
relation to your own currency is called the
exchange rate.
An increase in the value of a currency is called
appreciation.
A decrease in the value of a currency is called
depreciation.
Multinational firms convert currencies on the
foreign exchange market, a network of about
2,000 banks and other financial institutions
Activity: Exchange Rates
Types of Exchange Rate Systems
Fixed ExchangeRate Systems
Are a currency
system in which
governments try to
keep the values of
their currencies
constant against one
another
Flexible
exchange-rate
systems
Allow the exchange
rate to be
determined by
supply and demand.
AKA “Floating
system”
Reading an Exchange Rate Table
Foreign Exchange Rates
U.S. $
Aust $
U.K. £
Canadian $
U.S. $
1
0.6489
1.599
0.6764
Australian $
U.K. £
1.541
0.6252
1
0.4057
2.465
1
Canadian $
1.478
0.9593
2.365
¥en
114.3
74.19
182.9
Euro
Mexican NP
0.01
1.051
0.11
0.12
1.042
0.4229
0.01
0.01
1.62
0.657
0.17
0.07
0.19
0.08
1
0.01293
1.554
0.16
0.18
120.2
12.24
13.81
77.34
¥en
1
Chinese renminbi
Euro
0.9516
0.6175
1.522
0.6436
0.01
1
0.1
0.11
Mexican
nuevo peso
9.33
6.06
6.3
6.3
0.08
9.81
1
1.13
Chinese renminbi
8.28
5.37
13.25
5.6
0.07
8.7
9.8
1
A Strong Dollar is….hmmm
Not good for US business overseas, and
definitely bad for the U.S. balance of trade
Overseas goods are cheaper with a strong
dollar.
American goods are more expensive with a
strong dollar.
A strong dollar, however, is good for financial
markets and for Americans traveling abroad.
So either way, the U.S. wins
Balance of Trade
The relationship between a nation’s
imports and its exports is called its
balance of trade.
When a nation exports more than it
imports, it has a trade surplus.
When a nation imports more than it
exports, it creates a trade deficit.
The United States Trade Deficit
DO NOT confuse with National Debt or budget deficit
The Trade Deficit
• The United States has run a trade deficit since the
early 1970s.
Why the Trade Deficit?
• Imports of foreign oil as well as Americans’
enjoyment of imported goods account in part for the
large American trade deficit.
Reducing the Trade Deficit
• Quotas and other trade barriers can be used to raise
prices of foreign-made goods and urge consumers to
buy domestic goods.
But should we try to reduce it??????
Section Review—Net Foreign Trade
1. When a nation imports more than it exports,
economists say it has a
(a) trade insufficiency.
(b) trade deficit.
(c) balance of payments.
(d) trade surplus.
2. When an economist says that a currency has become
stronger, he or she means that
(a) it will buy less foreign goods.
(b) it can be exchanged for more of a foreign
currency.
(c) services, unlike goods, can be exported freely.
(d) there are very few things that the currency
cannot buy in a foreign market.
Sneaker Check!
Nike= Destroys families and
communities
New Balance/Adidas: Sweatshops
Brand X: Slave labor
Nike hurt by activist protests,
Sweatshops good, slave labor morally
repugnant. Let’s see how!
The Good, the Bad, & the Ugly
Sweatshops: Low wages, poor working
conditions, long hours, few government
protections
Slave labor: involuntary exchange, no pay,
universally condemned
Child labor: Semi-voluntary (under 10
involuntary), helps family stay together, takes
away “childhood”
Why are Minimum Wages Bad?
Remember that all trade is based on voluntary
exchange
Higher wagesCompany must CUT BACK on
hiring, benefits, or change locations altogether.
That’s BAD.
Business will shift to more capital-intensive
methods of production. Even more jobs lost 
Destroys Communities: “Squatters’ Villages” are
set up all around factory. With this much nearby
labor, company and management can treat
employees EVEN WORSE THAN BEFORE
Critical Thinking Questions
How does resource distribution affect
trade?
What are the differences between
absolute and comparative advantage?
What are the major imports and
exports of the United States?
How does trade affect employment?