1. A few facts on international trade:
a. About 11% of the total output (GDP) of the United States is accounted for by exports of goods and services. While exports and imports account for a larger share of GDP in other nations, the size of the U.S. economy means that it has the largest c combined volume of imports and exports in the world.
b. The United States has a trade deficit in goods, a trade surplus in services, and a trade deficit in goods and services.
c. The major exports of the United States are chemicals, consumer durables, agricultural products, semi-conductors, and computers. The major imports are petroleum, automobiles, household appliances, computers, and metals. Most of the U.S. trade occurs with other industrially advanced nations and members of OPEC. Canada is the largest trading partner for the United States.
2. The economic basis for trade is based on several circumstances. Specialization and trade among nations is advantageous because the world’s resources are not evenly distributed and efficient production of different commodities requires different technologies and combinations of resources. Also, products differ in quality and other attributes, so people might prefer imported to domestic goods in some cases. Some nations have cost advantages in producing labor-intensive goods such as complex electronics that require much skilled work time. Other nations have advantages in producing land-intensive goods such as agricultural products that require abundant natural resources. Still other nations have cost advantages in producing capital-intensive goods such as chemicals or machinery because they have large amounts of physical capital available.
3. The basic argument for free trade among nations is that it leads to a better allocation of resources and a higher standard of living in the world. Several side benefits from trade are that it increases competition and deters monopoly, and offers consumers a wider array of choices. It also links the interests of nations, and can reduce the threat of hostilities or war.
4. Supply and demand analysis of exports and imports can be used to explain how the equilibrium price and quantity for a product (aluminum, for example) are determined when there is trade between two nations (the U.S. and Canada, for example).
a. For the U.S., there will be domestic supply and demand as well as export supply and import demand for aluminum.
(1) The price and quantity of aluminum are determined by the intersection of the domestic demand and supply curves in a world without trade (all closed economies)
(2) In a world with trade (open economies), the export supply curve for the United States shows the amount of aluminum that U.S. producers will export at each world price above the domestic equilibrium price. U.S. exports will increase when the world price rises relative to the domestic price.
(3) The import demand curve for the United States shows the amount of aluminum that U.S. citizens will import at each world price below the domestic equilibrium price. U.S. imports will increase when world prices fall relative to the domestic price.
b. For Canada, there will be a domestic supply and demand as well as export supply and import demand for aluminum. The description of these supply and demand curves is similar to the account of those of the United States previously described.
c. The equilibrium world price and equilibrium world levels of exports and imports can be determined with further supply and demand analysis. The export supply curves of the two nations can be plotted on one graph. The import demand curves of both nations can be plotted on the same graph. Equilibrium will be achieved when one nation’s import demand curve intersects another nation’s export supply curve.
5. Nations limit international trade by erecting trade barriers. Tariffs, import quotas, a variety of nontariff barriers, and voluntary export restrictions are the principal barriers to trade.
a. The imposition of a tariff on a good imported from abroad has both direct and indirect effects on an economy.
(1) The tariff increases the domestic price of the good, reduces its domestic consumption, expands its domestic production, decreases its foreign production, and transfers income from domestic consumers to government.
(2) It also reduces the income of foreign producers and the ability of foreign nations to purchases goods and services in the nation imposing the tariff, causes the contraction of relatively efficient industries in that nation, decreases world trade, and lowers the real output of goods and services.
b. The imposition of a quota on an imported product has the same direct and indirect effects as a tariff has on that product, with the exception that a tariff generates revenue for government use whereas an import quota transfers that revenue to foreign producers.
c. Special-interest groups benefit from protection and persuade their nations to erect trade barriers, but the costs to consumers of this protection exceed the benefits to the economy.
6. The arguments for protectionism are many, but often of questionable validity.
a. The military self-sufficiency argument can be challenged be cause it is difficult to determine which industry is “vital” to national defense and must be protected; it would be more efficient economically to provide a direct subsidy to military producers rather than impost a tariff
b. Using tariff barriers to permit diversification for stability in the economy is not necessary for advanced economies such as the United States, and there may be great economic costs to diversification in developing nations.
c. It is alleged that infant industries need protection until they are sufficiently large to compete, but the argument may not apply in developed economies: It is difficult to select which industries will prosper; protectionism tends to persist long after it is needed; and direct subsidies may be more economically efficient. For advanced nations, a variant of this argument is strategic trade policy. It justifies barriers that protect the investment in high risk, growth industries for a nation, but the policies often lead to retaliation and similar policies from other trading nations.
d. Sometimes protection is sought against the dumping of foreign goods on U.S. markets at prices either below the cost of production or below the prices commonly charged in the home nation. Dumping is a legitimate concern and is restricted under U.S. trade law, but to use dumping as an excuse for widespread tariff protection is unjustified, and the number of documented cases is few. If foreign companies are more efficient (low-cost) producers, what may appear to be dumping may actually be comparative advantage at work.
e. Trade barriers do not necessarily increase domestic employment because:
(1) Imports may eliminate some jobs, but create others, so imports may change only the composition of employment, not the overall level of employment.
(2) The exports of one nation become the imports of another so tariff barriers can be viewed as “beggar thy neighbor” policies
(3) Other nations are likely to retaliate against the imposition of trade barriers, and as a result it will reduce domestic output and employment (that is what happened to the United States when it passed the Smoot-Hawley Tariff Act of 1930 that raised tariffs to a very high level); and
(4) In the long run, barriers create a less efficient allocation of resources by shielding protected domestic industries from the rigors of competition
f. Protection is sometimes sought because of the cheap foreign labor argument that low-cost labor in other nations will undercut the wages of workers in the United States. There are several counterpoints to this argument. First, there are mutual gains from trade between rich and poor nations and they lower the cost of production for products. Second, it should be realized that nations gain from trade based on comparative advantage, and by specializing at what each nation does best, the productivity of workers and thus their wages and living standards rise Third, there is an incorrect focus on labor costs per hour rather than labor cost per unit of production. Labor costs or wages per hour can be higher in one nation than in another because of the higher productivity of workers (and it results in lower labor cost per unit of production)
7. The World Trade Organization (WTO) is an international agency with about 155 participating nations that is responsible for overseeing trade agreements among nations that were established as part of the 1993 Uruguay Round of trade negotiations. The WTO also provides a forum for more trade liberalization negotiations under the Doha Round that was begun in Doha, Qatar, in 2001. These negotiations focus on additional reductions in tariffs and quotas and cutbacks in domestic subsidies for agricultural products.
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