Chapter 10, International trade policy. After reading this chapter, you should be able to: Summarize some important data of trade, explain policies countries use to restrict trade, summarize the reasons for trade restrictions and why economists generally oppose trade restrictions, explain how free trade associations both help and hinder international trade.
Introduction: Thinking Like an Economist CHAPTER 2 CHAPTER 10 International Trade Policy Manufacturing and commercial monopolies owe their origin not to a tendency imminent in a capitalist economy but to governmental interventionist policy directed against free trade — Ludwig von Mises McGrawHill/Irwin Copyright © 2013 by The McGrawHill Companies, Inc. All rights reserved International Trade Policy 10 Chapter Goals Ø Ø Ø Ø Summarize some important data of trade Explain policies countries use to restrict trade Summarize the reasons for trade restrictions and why economists generally oppose trade restrictions Explain how free trade associations both help and hinder international trade 102 International Trade Policy 10 The Nature and Patterns of Trade Differences in the importance of trade Total Output ($) Netherlands Export Ratio (%) Import Ratio (%) 844 78 71 Germany 3,695 47 41 Canada 1,706 29 31 Italy 2,180 27 29 France 2,825 26 28 United Kingdom 2,462 30 33 Japan 6,078 15 14 15,094 13 16 United States 103 International Trade Policy 10 U.S Exports by Region, 2012 OPEC 4% Canada 19% Central and South America 11% Other 10% Mexico 13% Pacific Rim 25% European Union 18% 104 International Trade Policy 10 U.S Imports by Region, 2012 Canada 15% Mexico 11% European Union 17% OPEC 9% Central and South America 8% Other 9% Pacific Rim 31% 105 International Trade Policy 10 The Changing Nature of Trade Ø Ø Ø Ø As technological changes in telecommunications reduce costs, foreign countries will be able to provide more services The nature of trade is continually changing, both in terms of the countries with which the U.S trades and the goods and services traded Customer service calls for U.S companies are now more frequently answered in India This trade in services is often called outsourcing 106 International Trade Policy 10 The Changing Nature of Trade Is Chinese and Indian outsourcing different from previous outsourcing? Ø Ø Ø Using overseas suppliers is not a new development in trade The difference is the potential size of outsourcing to India and China with combined populations of 2.5 billion people Because technology is growing in these countries, the U.S economy must develop new technologies to remain competitive 107 International Trade Policy 10 Balance of Trade Ø Trade deficit = exports < imports Ø Trade surplus = exports > imports Ø Ø The U.S has a significant trade deficit of approximately $820 billion which is 5.5% of GDP The U.S is financing its trade deficit by selling off financial assets, stocks and bonds, and real assets, corporations and real estate 108 International Trade Policy 10 Debtor and Creditor Nations Ø Ø Ø Ø Running a deficit isn’t necessarily bad The U.S is currently financing its trade deficit by selling off assets The U.S has not always had a trade deficit; following WWII, it had trade surpluses The U.S has gone from being a large creditor nation to being the world’s biggest debtor; international considerations have been forced on the nation 109 International Trade Policy 10 Varieties of Trade Restrictions Ø Ø Ø Ø Ø Ø Tariffs are taxes governments place on internationally traded goods (generally imports) Quotas are quantity limits placed on imports Voluntary restraint agreements are when countries voluntarily restrict their exports An embargo is a total restriction on the import or export of a good Regulatory trade restrictions are government-imposed procedural rules that limit imports Nationalistic appeals, such as “Buy American” can help to restrict international trade 1010 International Trade Policy 10 Reasons for Trade Restrictions Ø Ø Ø Ø Unequal internal distribution of the gains from trade Haggling by companies over the gains from trade Haggling by countries over trade restrictions Specialized production • Learning by doing and economies of scale Ø Macroeconomic costs of trade Ø National security Ø International politics Ø Increased revenue brought in by tariffs 1011 International Trade Policy 10 Why Economists Generally Oppose Trade Restrictions Ø Ø Ø Ø From a global perspective, free trade increases total output International trade provides competition for domestic companies Restrictions based on national security are often abused or evaded Trade restrictions are addictive 1012 International Trade Policy 10 Institutions Supporting Free Trade Ø Ø The World Trade Organization (WTO) has over 150 members Free trade associations are groups of countries that allow free trade among its members and put up common barriers against all other countries’ goods • Ø e.g the European Union (EU) and the North American Free Trade Association (NAFTA) Countries strengthen trading relationships with mostfavored nation status – those countries will be charged as low a tariff on exports as any other country 1013 International Trade Policy 10 Chapter Summary Ø Ø Ø Ø The nature of trade is continually changing The U.S is importing more and more high-tech goods and services from India and China and other East Asian countries Outsourcing is a type of trade Outsourcing is a larger phenomenon today compared to 30 years ago because China and India are so large Trade restrictions include tariffs and quotas, embargoes, voluntary restraint agreements, regulatory trade restrictions, and nationalistic appeals 1014 International Trade Policy 10 Chapter Summary Ø Ø Ø Ø Reasons that countries impose trade restrictions include unequal internal distribution of the gains from trade and haggling by countries over trade restrictions Economists generally oppose trade restrictions because of their understanding of the advantages of free trade The World Trade Organization is an international organization committed to reducing trade barriers Free trade associations, such as the European Union, help trade by reducing barriers to trade among member nations 1015 ... United States 10 3 International Trade Policy 10 U.S Exports by Region, 2012 OPEC 4% Canada 19% Central and South America 11% Other 10% Mexico 13% Pacific Rim 25% European Union 18% 10 4 International Trade Policy... are government-imposed procedural rules that limit imports Nationalistic appeals, such as “Buy American” can help to restrict international trade 10 10 International Trade Policy 10 Reasons for... exports as any other country 10 13 International Trade Policy 10 Chapter Summary Ø Ø Ø Ø The nature of trade is continually changing The U.S is importing more and more high-tech goods and services