PowerPoint Presentation by
Mehdi Arzandeh, University of Manitoba
International Trade
17
LEARNING OBJECTIVES
LO17.1
LO17.2
LO17.3
LO17.4
LO17.5
LO17.6
List and discuss several key facts about Canada’s international trade.
Define comparative advantage, and demonstrate how specialization and trade add
to a nation’s output.
Describe how differences between world prices prompt exports and imports.
Analyze the economic effects of tariffs and quotas.
Analyze the validity of the most frequently presented arguments for protectionism.
Identify and explain the objectives of GATT, WTO, EU, Euro Zone, and NAFTA, and
discuss offshoring and those hurt by free trade.
© 2016 McGraw‐Hill Education Limited
17-2
FIGURE 17-1
International Linkages
Goods & Services
Canadian
Economy
Capital & Labour
Info & Technology
Other
National
Economies
Money
LO1
© 2016 McGraw‐Hill Education Limited
17-3
17.1
Canada, International Linkages,
and Globalization
Canada and World Trade
• Volume
• Exports are about 28% of Canadian GDP
• Imports are about 29% of Canadian GDP
LO1
© 2016 McGraw‐Hill Education Limited
17-4
17.1 GLOBAL PERSPECTIVE
China has the largest share of world exports, followed by the United States and
Germany. The eight largest export nations account for over 40 percent of world
exports.
LO1
© 2016 McGraw‐Hill Education Limited
17-5
FIGURE 17-2
LO1
Canadian Trade as Percentage of GDP
© 2016 McGraw‐Hill Education Limited
17-6
17.1
Canada, International Linkages,
and Globalization
• Dependence
• Canada almost entirely dependent on other countries for
bananas, cocoa, coffee, spices, tea, raw silk, tin, and
natural rubber.
• Many Canadian industries rely on sales abroad:
agricultural products, computers, chemicals, aircraft,
automobiles, etc.
LO1
© 2016 McGraw‐Hill Education Limited
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17.1
Canada, International Linkages,
and Globalization
• Trade Patterns
• A trade surplus occurs when exports exceed imports. Canada
had a trade surplus in goods in 2014.
• A trade deficit occurs when imports exceed exports. Canada
had a trade deficit in services in 2014.
• Canada imports some of the same categories of goods that it
exports, called intra-industry trade.
• Canada’s export and import trade is mainly with other
industrially advanced nations.
LO1
© 2016 McGraw‐Hill Education Limited
17-8
TABLE 17-1
Exports
Principal Canadian Exports and Imports of
Goods, 2014
% of total
Imports
% of total
Machinery and
equipment
16
Machinery and
equipment
10
Automotive
products
22
Automotive
products
17
Industrial goods
and materials
18
Industrial goods
and materials
10
Forestry products
7
Consumer goods
20
Energy products
24
Agricultural and
fishing products
3
Agricultural and
fishing products
7
Energy products
8
Source: Statistics Canada. At: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/gblec04-eng.htm and
http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/gblec05-eng.htm. Accessed May 28, 2015
LO1
© 2016 McGraw‐Hill Education Limited
17-9
TABLE 17-2
Exports to
Canadian Exports and Imports of Goods by
Area, 2014
% of total
Imports from
% of total
United States
76
United States
67
United Kingdom
8
United Kingdom
9
European Union
3
European Union
2
Japan
2
Japan
2
Other countries
11
Other countries
20
Source: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/gblec02a-eng.htm Accessed May 28, 2015
LO1
© 2016 McGraw‐Hill Education Limited
17-10
17.1
Canada, International Linkages,
and Globalization
Rapid Trade Growth
• Transportation Technology
• Communications Technology
• General Decline in Tariffs
LO1
© 2016 McGraw‐Hill Education Limited
17-11
17.1
Canada, International Linkages,
and Globalization
Participants in International Trade
• Germany, the United States, China, and Germany had
combined exports of over five trillion in 2014.
• Along with Germany, other western European nations such
as France, Britain, and Italy are major exporters.
• Southeast Asian countries of South Korea, Taiwan, and
Singapore have combined exports which exceed those of
France, Britain, or Italy.
• China with its increased reliance on the market system and
reintegration of Hong Kong, has quickly emerged as a major
international trader.
LO1
© 2016 McGraw‐Hill Education Limited
17-12
17.2 GLOBAL PERSPECTIVE
Comparative Exports
LO1
© 2016 McGraw‐Hill Education Limited
17-13
The Economic Basis for
17.2
Trade
Why do nations trade?
•The distribution of resources is uneven.
•Efficient production requires different
technologies or resource combinations.
•Products are differentiated as to quality and
other non-price attributes.
LO2
© 2016 McGraw‐Hill Education Limited
17-14
The Economic Basis for
17.2
Trade
•Labour-intensive goods
•Land-intensive goods
•Capital-intensive goods
LO2
© 2016 McGraw‐Hill Education Limited
17-15
The Economic Basis for
17.2
Trade
•Absolute Advantage
• A country is said to have an absolute advantage over other
producers for a product if it is the most efficient producer of
that product
•Comparative Advantage
• A country is said to have a comparative advantage over
other producers of a product if it can produce the product at
a lower opportunity cost
LO2
© 2016 McGraw‐Hill Education Limited
17-16
The Economic Basis for
17.2
Trade
The Basic Principle
• Specialization according to comparative
advantage reduces costs
• This is true even if a nation has an absolute
advantage
LO2
© 2016 McGraw‐Hill Education Limited
17-17
The Economic Basis for
17.2
Trade
Specialization and Comparative Advantage
Two isolated nations (Canada and Brazil)
1.
Constant Costs
•
2.
Different Costs
•
3.
LO2
straight-line production possibilities curves
different technology & resources
Canada has absolute advantage in both steel and
soybeans
© 2016 McGraw‐Hill Education Limited
17-18
FIGURE 17-3
(a) Canada
45
45
40
40
35
35
30
30
Soybeans (Tonnes)
Soybean s(Tonnes)
Production Possibilities Curve
25
20
15
12
10
A
LO2
25
20
15
10
5
4
5
0
(b) Brazil
5
10
15 18 20
Steel (Tonnes)
25
30
0
© 2016 McGraw‐Hill Education Limited
Z
5
8 10
15
20
Steel (Tonnes)
17-19
The Economic Basis for
17.2
Trade
Specialization Based on Comparative Advantage
• Self-sufficiency output mix
• Specialization and trade
• Produce the good with the lowest domestic opportunity cost
• Opportunity cost of 1 tonnes of steel:
LO2
•
1 tonnes of soybeans in Canada (1St = 1Soy).
•
2 tonnes of soybeans in Brazil (1St = 2Soy)
© 2016 McGraw‐Hill Education Limited
17-20
International Specialization According to Comparative
Advantage and the Gains from Trade (in tonnes)
TABLE 17-3
Country
Canada
Brazil
Total output
(steel and
soybeans)
LO2
(1) Outputs
before
specialization
(2) Outputs
after
specialization
18 steel
12 soybeans
8 steel
4 soybeans
30 steel
0 soybeans
0 steel
20 soybeans
42
50
(3) Amounts
exported (–)
and imported
(+)
–10 steel
+15 soybeans
+10 steel
–15 soybeans
© 2016 McGraw‐Hill Education Limited
(4) Outputs
available after
trade
20 steel
15 soybeans
10 steel
5 soybeans
(5) Gains from
specialization
and trade(4) –
(1)
2 steel
3 soybeans
2 steel
1 soybeans
50
8
17-21
The Economic Basis for
17.2
Trade
Terms of Trade
• What will the terms of trade be?
•
Canada 1St = 1Soy
•
Canada will sell 1St for more than 1Soy
•
Brazil 1St = 2Soy
•
Brazil will pay less than 2Soy for 1St
• For trade to be mutually beneficial the terms of trade must
be between each nation’s opportunity costs.
• Settle between the two, depends on supply/demand factors
(assume trade 1St for 1.5Soy).
LO2
© 2016 McGraw‐Hill Education Limited
17-22
The Economic Basis for
17.2
Trade
Gains from Trade
•
•
•
Trading possibilities line
Slope equals terms of trade
Improved options
• Complete specialization
• More of both goods
• More efficient resource allocation
LO2
© 2016 McGraw‐Hill Education Limited
17-23
FIGURE 17-4
KEY GRAPH - Trading Possibilities Lines and the
Gains from Trade
(a) Canada
45
45
(b) Brazil
V’
40
40
35
30
30
V
Soybeans (Tonnes)
Soybeans (Tonnes)
35
Trading
Possibilities Line
25
20
A’
15
12
25
20
Trading
Possibilities Line
v
15
A
10
10
Z’
5
0
LO2
5
4
B
5
10
15 18 20
Steel (Tonnes)
25
W
30
© 2016 McGraw‐Hill Education Limited
0
Z
5
b
8 10
b’
15
Steel (Tonnes)
20
17-24
The Economic Basis for
17.2
Trade
• Trade with Increasing Costs
• Concave production curve
• Resources not perfectly substitutable
• Incomplete specialization
LO2
© 2016 McGraw‐Hill Education Limited
17-25
The Economic Basis for
17.2
Trade
The Case for Free Trade Restated
• Through free trade based on the principle of comparative
advantage, the world economy can achieve a more efficient
allocation of resources and a higher level of material wellbeing than without free trade.
• Side benefits:
LO2
•
Promotion of competition, deterrence of monopoly
•
Linking of national interests, reduction of national
animosities
© 2016 McGraw‐Hill Education Limited
17-26
17.3
Supply and Demand Analysis
of Exports and Imports
• When world prices increase relative to domestic
prices, domestic exports will increase, resulting in
an upward sloping export supply curve
• When world prices decrease relative to domestic
prices, domestic imports will increase, resulting in a
downward sloping import demand curve
LO3
© 2016 McGraw‐Hill Education Limited
17-27
FIGURE 17-5
Canadian Export Supply and Import Demand
Surplus = 100
(b) Canada Export Supply
and Import Demand
Sd
1.50
1.50
Surplus = 50
1.25
c
Canadian
Export
b
Supply
1.25
1.00
1.00
.75
Shortage = 50
.50
Dd
Shortage = 100
0
50
75
100
125
Quantity of Aluminum
(Millions of Kilograms)
LO3
Price (Per kilogram; Canadian. Dollars)
Price (Per Kilogram; Canadian Dollars)
(a) Canada Domestic
Aluminum Market
150
a
.75
x
Canadian
Import
Demand
.50
y
0
50
100
Quantity of Aluminum
(Millions of Kilograms)
© 2016 McGraw‐Hill Education Limited
17-28
FIGURE 17-6
U.S. Export Supply and Import Demand
(b) U.S. Export Supply
and Import Demand
Price (Per kilogram, Canadian Dollars)
Price (Per kilogram, Canadian Dollars)
(a) U.S. Domestic
Aluminum Market
1.50
1.50
Surplus = 100
Sd
1.25
1.25
Surplus = 50
s
1.00
1.00
.75
.50
Shortage = 50
Dd
0
50
75
100
125
150
.75
r
q
.50
t
0
Quantity of Aluminum
(Millions of Kilograms)
LO3
U.S.
Export
Supply
© 2016 McGraw‐Hill Education Limited
50
U.S.
Import
Demand
100
Quantity of Aluminum
(Millions of Kilograms)
17-29
Price (Per Kilogram; Canadian Dollars)
FIGURE 17-7
LO3
Equilibrium World Price and Quantity of Exports and
Imports
Canadian
Export
Supply
U.S.
Export
Supply
1.25
1.125
1.00
e
Equilibrium
Canadian
Import
Demand
U.S.
Import Demand
0
25
50
100
Quantity of Aluminum
(Millions of Kilograms)
© 2016 McGraw‐Hill Education Limited
17-30
17.3
Supply and Demand Analysis
of Exports and Imports
Equilibrium World Price, Exports and Imports, Two-Nation
Model
• International equilibrium occurs when one nation’s demand
curve intersects another nation’s export supply curve.
• Americans will pay more for aluminum with trade than
without it.
• Americans are willing to export aluminum to Canada
because they can gain from the trade (to import other
goods).
• Canadians pay less for aluminum with trade. Canadians gain
from the trade.
LO3
© 2016 McGraw‐Hill Education Limited
17-31
Trade Barriers and Export
17.4 Subsidies
• Tariffs
•
Revenue tariffs
•
Protective tariffs
• Nontariff Barriers (NTB)
• Import Quotas
• Voluntary Export Restrictions (VER)
• Export Subsidy
LO4
© 2016 McGraw‐Hill Education Limited
17-32
Trade Barriers and Export
17.4 Subsidies
Economic Impact of Tariffs
•Direct effects
•
Decline in consumption
•
Increase in domestic production
•
Decline in imports
•
Tariff revenue
•Indirect effects
LO4
© 2016 McGraw‐Hill Education Limited
17-33
Trade Barriers and Export
17.4 Subsidies
Economic Impact of Quotas
• Decline in consumption
• Increase in domestic production
• Decline in imports
• Quotas do not provide for any government revenue
but instead transfer it to foreign producers
LO4
© 2016 McGraw‐Hill Education Limited
17-34
FIGURE 17-8
The Economic Effects of a Protective Tariff or an
Import Quota
Sd
Price
Sd + Q
Pd
Pt
Pw
Dd
0
LO4
a
b
q c d
Quantity
© 2016 McGraw‐Hill Education Limited
17-35
Trade Barriers and Export
17.4 Subsidies
Net Costs of Tariffs and Quotas
• Consumer costs
•
price of imported product goes up
•
some consumers shift purchases from imports to higher-priced
domestic goods
•
prices of domestic goods rise
• Gains to protected industries and workers come at the
expense of much greater losses for the entire economy.
LO4
© 2016 McGraw‐Hill Education Limited
17-36
17.5
The Case for Protection:
A Critical Review
• Military Self-Sufficiency Argument
• Diversification for Stability Argument
• Infant Industry Argument
Counter-arguments:
•
•
•
LO5
which industries?
how long?
other methods which are better
© 2016 McGraw‐Hill Education Limited
17-37
17.5
The Case for Protection:
A Critical Review
• Protection Against Dumping Argument
•
•
Driving Out Competitors
Price Discrimination
• Increased Domestic Employment Argument
•
•
•
•
Job creation from imports
Fallacy of composition
Possibility of retaliation
Long-run feedbacks
• Cheap Foreign Labour Argument
•
•
LO5
What actually matters is labour costs per unit, not per hour
Differences in productivity typically mean that labour costs per
unit are often nearly identical despite huge differences in labour
costs per hour
© 2016 McGraw‐Hill Education Limited
17-38
17.5
The Case for Protection:
A Critical Review
Summing Up
• The arguments for protection are not convincing.
• There is compelling historical evidence that free
trade has led to prosperity and protectionism has
led to the opposite.
LO5
© 2016 McGraw‐Hill Education Limited
17-39
17.6
Multilateral Trade Agreements
and Free-Trade Zones
• High tariffs a contributing cause of the Great
Depression
• Reciprocal Trade Agreements
•
LO6
Most-favoured-nation clauses
© 2016 McGraw‐Hill Education Limited
17-40
17.6
Multilateral Trade Agreements
and Free-Trade Zones
General Agreement on Tariffs and Trade (GATT)
• First signed in 1947
•
equal, non-discriminatory trade treatment for all
member nations
•
reduction of tariffs by multilateral negotiation
•
elimination of import quotas
• Eight rounds of negotiations
•
LO6
Uruguay Round took effect in 1995
© 2016 McGraw‐Hill Education Limited
17-41
17.6
Multilateral Trade Agreements
and Free-Trade Zones
World Trade Organization (WTO)
• Successor to the GATT
• 155 member organization
• Oversees trade agreements
• Rules on trade disputes
• Forum for further rounds of negotiations
•
LO6
Doha Round launched in 2001
© 2016 McGraw‐Hill Education Limited
17-42
17.6
Multilateral Trade Agreements
and Free-Trade Zones
World Trade Organization (WTO)
• Trade liberalizations implemented by 2005:
LO6
•
tariff reductions
•
new rules for trade in services
•
reductions in agricultural subsidies
•
new protections for intellectual property
•
phasing out quotas on textiles, apparel, and replacing
them with tariffs
© 2016 McGraw‐Hill Education Limited
17-43
17.6
Multilateral Trade Agreements
and Free-Trade Zones
World Trade Organization (WTO)
• GATT and WTO have been positive forces for
liberalized trade
• WTO is highly controversial
LO6
© 2016 McGraw‐Hill Education Limited
17-44
17.6
Multilateral Trade Agreements
and Free-Trade Zones
The European Union (EU)
• Free-trade zones, trade blocs
• EU initiated in 1958 as the Common Market
• Expanded to 27 countries in 2007, then to 28 nations in 2013
• Nearly all internal tariffs & import quotas abolished
• Common system of tariffs on non-EU goods
• Liberalized movements of capital and labour within the EU
• Common internal economic policies
• Euro-zone
LO6
© 2016 McGraw‐Hill Education Limited
17-45
17.6
Multilateral Trade Agreements
and Free-Trade Zones
North American Free Trade Agreement (NAFTA)
• Canada, Mexico, United States formed a trade bloc in 1993.
• Concerns about job losses not realized.
• Standard of living has been enhanced in all three countries.
• In 2008, Canada signed a free-trade agreement with
Colombia.
LO6
© 2016 McGraw‐Hill Education Limited
17-46
17.6
Multilateral Trade Agreements
and Free-Trade Zones
Recognizing Those Hurt by Free Trade
• OFFSHORING OF JOBS
 Job losses because of international trade and globalization of
factor markets
Offshoring reflects growing specialization and international trade in
services or “tasks.”
Offshoring may encourage domestic investment and the expansion of
firms in Canada by reducing their production costs and keeping them
competitive worldwide
Offshoring also increases the demand for complementary jobs in Canada
LO6
© 2016 McGraw‐Hill Education Limited
17-47
The LAST
WORD
Petition of the Candlemakers, 1845
French economist Frédéric Bastiat (1801–1850) devastated
the proponents of protectionism by satirically extending
their reasoning to its logical and absurd conclusions.
• Petition of candlemakers asking for protection from natural
light producers such as the sun
• Tongue-in-cheek argument supporting the idea of free trade
© 2016 McGraw‐Hill Education Limited
17-48
Chapter Summary
LO17.1
LO17.2
LO17.3
LO17.4
LO17.5
LO17.6
List and discuss several key facts about Canada’s
international trade.
Define comparative advantage, and demonstrate how
specialization and trade add to a nation’s output.
Describe how differences between world prices prompt
exports and imports.
Analyze the economic effects of tariffs and quotas.
Analyze the validity of the most frequently presented
arguments for protectionism.
Identify and explain the objectives of GATT, WTO, EU,
Euro Zone, and NAFTA, and discuss offshoring and those
hurt by free trade.
© 2016 McGraw‐Hill Education Limited
17-49