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Chapter 19 - 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 1 CHAPTER 19 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 19 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 192 International Trade Policy 19 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 193 International Trade Policy 19 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% 194 International Trade Policy 19 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% 195 International Trade Policy 19 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 196 International Trade Policy 19 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 197 International Trade Policy 19 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 198 International Trade Policy 19 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 199 International Trade Policy 19 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 1910 International Trade Policy 19 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 1911 International Trade Policy 19 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 1912 International Trade Policy 19 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 1913 International Trade Policy 19 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 1914 International Trade Policy 19 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 1915 ... United States 19 3 International Trade Policy 19 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% 19 4 International Trade Policy... exports as any other country 19 13 International Trade Policy 19 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... are government-imposed procedural rules that limit imports Nationalistic appeals, such as “Buy American” can help to restrict international trade 19 10 International Trade Policy 19 Reasons for