CHAPTER
9
DYNAMIC P OWERP OINT™ S LIDES BY S OLINA L INDAHL
International Trade
CHAPTER OUTLINE
Analyzing Trade with Supply and
Demand
The Costs of Protectionism
Arguments against International Trade
For applications, click here
To Try it!
questions
To
Video
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Food for Thought….
Some good blogs and other sites to get the juices flowing:
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Analyzing Trade with
Supply and Demand
We can use the demand and supply
model to determine:
The effects of free trade on:
Domestic equilibrium price and quantity
Imports
The effects of trade barriers on:
Domestic equilibrium price and quantity
Imports
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Analyzing Trade with
Supply and Demand
Price
Domestic
supply
with free trade:
•World price prevails.
free trade
•Domestic consumption = QD
trade
•Domestic production = Qfree
S
• imports =
free
trade
D
Q
Q
free
trade
S
No trade
equilibrium
P no trade
Free trade
equilibrium
World supply
World price
Domestic consumption
Domestic
demand
Imports
Domestic
production
free
trade
S
Q
no
trade
Q
Q
free
trade
D
Quantity of
semiconductors
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Analyzing Trade with
Supply and Demand
Price
With Tariff:
• World price + tariff prevails.
tariff
• Domestic consumption= QD
• Domestic production = Q tariff
S
Domestic
supply
QDtariff  Q tariff
S
• imports =
• tariff revenue
Equilibrium
with tariff
pno trade
World price
+ tariff
World supply + tariff
tariff
World Supply
World price
Domestic
consumption
Imports
w/ free trade
Domestic
production
free
trade
S
Q
no
trade
Q
Q
tariff
S
tariff
D
Q
Q
free
trade
D
Domestic
demand
Imports w/tariff
Quantity of
semiconductors
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Try it!
A tariff results in a higher:
I. consumer surplus.
II. producer surplus.
III. government revenue.
a)
b)
c)
d)
I and II only
II and III only
I and III only
I, II, and III
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Try it!
The Costs of Protectionism
Protectionism = policy of restraining
trade through quotas, tariffs, or other
regulations which burden foreign (but
not domestic) producers.
Tariff = a tax on imports
Trade Quota = a restriction on the
quantity of goods that can be imported:
imports greater than the quota amount
are forbidden (or heavily taxed.)
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The Costs of Protectionism
A tariff has two effects:
1. ↑ domestic production, ↓ domestic
consumption.
More of the good is produced by the higher-cost domestic
producers.
2. Less is consumed → lower gains from
trade.
Measuring the losses and wasted resources
Can we measure the value of wasted resources?
Yes!
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“Unfair Foreign Competition”
Who is hurt and who benefits? To pay for
the subsidies [on products sold to
Americans at a cheaper price] the foreign
government must tax it's citizens. They are
the ones who pay for the subsidies. U.S.
consumers benefit. They get cheap TV sets
or automobiles or whatever it is that is
subsidized. Should we complain about
such a program of reverse foreign aid? Milton Friedman - Free to Choose
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“Unfair Foreign Competition”
“We need tariffs against countries that
compete unfairly by subsidizing their
industries and dumping their products in
our market.”
Same as the July 2014 Import-Export Bank
renewal arguments
Who benefits from foreign subsidies? Who
is harmed?
Another example of concentrated benefits
versus dispersed costs
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We’re better off with free trade, so why
do we have tariffs?
• Trade can be analyzed via public choice
theory - a branch of economics that deals
with the workings of the political market.
• A tariff makes the inhabitants of the country
that imposes it worse off.
• Politicians who pass the tariff are better off,
since it benefits a concentrated interest group
at the cost of dispersed interest groups.
• More concentrated interest groups are better
able to pay politicians to do things for them.
Trade policy is optimized, but for the wrong
objective.
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The Costs of Protectionism
Price per
pound
(in cents)
Domestic
demand
Domestic
supply
20
World supply + tariff
Tariff
equilibrium
U. S.
costs
Lost gains from trade
or deadweight loss
Wasted
resources
World price
World supply
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Free trade
equilibrium
World
costs
20
24
Quantity
(in billions of pounds)
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The Costs of Protectionism
Price per
pound
(in cents)
Domestic
demand
Domestic
supply
20
World supply + tariff
Value of wasted resources
= [(.20 – .09) x 20]/2 = $1.1 billion
Lost gains from trade
= [(.20 - .09) x (24 – 20)]/2 =
$.22 billion
$1.1 billion
World price
World supply
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20
24
Quantity
(in billions of pounds)
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The Costs of Protectionism
Conclusions:
A tariff reduces economic efficiency:
Low-cost producers are prevented from selling.
Mutually profitable gains from trade are
prevented by law.
U.S. consumers pay more, and workers in
other countries (many of whom are poor)
lose income.
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Try it!
A $1 tariff results in:
a) An increase in imports of 80 million units.
b) A decrease in imports of 80 million units.
c) An increase in imports of 100 million units.
d) A decrease in imports of 100 million units.
To next
Try it!
The Costs of Protectionism
One final cost: lobbying
The loss to domestic consumers is greater
than the gains to domestic producers.
Why does congress pass tariffs?
Small number of producers → Benefit per
producer is high.
Large number of consumers → Loss per
consumer is low.
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Arguments Against
International Trade
Most Common Arguments
1. Trade reduces the number of jobs in the U.S.
2. It’s wrong to trade with countries that use child
labor.
3. We need to keep some industries for reasons
of national security.
4. We need to keep some “key” industries
because of beneficial spillovers onto other
sectors.
5. We can increase U.S. well-being with strategic
trade protectionism.
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Try it!
Which argument against trade is the
strongest in your opinion?
a) Trade reduces the number of jobs in
the U.S.
b) It’s wrong to trade with countries that
use child labor.
c) We need to keep some industries for
reasons of national security.
d) We need to keep some “key”
industries because of beneficial
spillovers onto other sectors.
e) We can increase U.S. well-being with
strategic trade protectionism.
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Rebuttals
Trade and Jobs
Tariffs raise the price of protected goods.
Consumers have less money to spend on
other goods.
Jobs are lost in other industries—these lost jobs
are hard to see.
Trade creates jobs
The U.S. dollars we spend on other country’s
good are often used to buy our goods.
Jobs are created in U.S. exporting industries.
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Rebuttals
Child Labor
Restricting imports made by child labor
may do more harm than good.
Children work out of necessity—what else
will they do?
Often the alternative is worse.
Prostitution
Scrounging in refuse dumps
Child labor is a poverty problem, not a
trade problem.
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Rebuttals
Child Labor
Restricting imports made by child labor
may do more harm than good.
Children work out of necessity—what else
will they do?
Often the alternative is worse.
Prostitution
Scrounging in refuse dumps
Child labor is a poverty problem, not a
trade problem.
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Poverty and Child Labor
Source: Edmonds, E. and N. Pavcnik, 2005. “Child Labor in the global economy” Journal of Economic Perspectives
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Rebuttals
Trade and National Security
True: Some industries probably should be
iI think
I am vital
protected to protect National
Security.
to your security.
No kidding.
BUT: This is subject to great abuse—almost
every industry can make this argument for
protection.
Examples:
Vaccine production?—probably a good
idea.
Angora Goat fleece?--are you kidding?
No. This is protected.
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Rebuttals
Key Industries
Some industries are characterized by large
spillovers to other industries (and should be
encouraged).
Example: Computer chips have spillover
benefits that go beyond the computer chip
industry
BUT:
Subsidy (to chip makers) is a better option
than a tariff. Tariff would be second-best.
Hard to determine which industries are key.
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Rebuttals
Strategic Trade Protectionism = Government helps
domestic firms act like a cartel when they sell to
international buyers.
May be able to grab up a larger share of the gains from
trade than with free trade.
This is done by forcing other countries to pay MORE for
your goods, usually with an export tax.
Will the exporting country see more revenue?
Success depends on Price Elasticity of Demand.
OPEC succeeds because oil has few substitutes.
If the U.S. taxes car exports, it may just encourage
foreigners to switch to a substitute good (Japanese
cars, for instance).
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At TEDIndia, TED favorite Hans Rosling gives another lively
and humorous talk- and graphs global economic growth
since 1858. He also predicts the exact date that India
and China will outstrip the US. (15:50 minutes)
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SEE THE INVISIBLE HAND
Globalization is not new
Phoenicians: 1550 B.C. Traders
Roman Empire: 753 B.C. Specialization and
Trade
Collapse of trade networks? 476 A.D.
“Dark Ages”
Revitalized trade routes? 1300s “European
Renaissance”
Periods of increased trade and the
spread of ideas have been among the
best for human progress.
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