Chapter 9: International Trade

Imports

A good produced abroad and sold domestically

Exports

A good produced domestically and sold abroad

Comparative advantage

When a good can be produced at a lower opportunity cost than another country

What are some examples of goods America imports?

Clothing, some cars, food, electronics, toys

What are some examples of American exports?

Capital intensive goods and services

World price

The price of a good that prevails in the international market for that good

If the world price is higher than the domestic price, what will happen?

The world price will become the new equilibrium and producers will benefit while consumers suffer.

If the world price is lower than the domestic price, what will happen?

The world price will become the new equilibrium and producers will suffer while consumers benefit. The producers from quantity supplied to the old equilibrium before the world price will go out of business.

Free trade

The absence of any form of government interference in the free flow of international trade

What are the costs of free trade?

Some producers will go out of business, so people will lose their jobs

What are the benefits of free trade?

More total surplus, more efficiency, specialization, lower prices sometimes, more jobs created sometimes

Protection

Any departure from free trade that is designed to give some protection to domestic industries from foreign competition

What are some benefits of protectionism?

Some jobs are saved

What are some costs of protectionism?

It hurts our export industries, higher prices, less total surplus, less specialization

What are the five types of trade protectionism?

Tariffs, import quotas, voluntary export restrictions (VERs), non-tariff barriers (NTBs), and unfair trade practices.

What are tariffs?

A tax on imports

Why does the deadweight loss occur from quantity supplied at the world price to quantity supplied of the world price plus tariff?

Overproduction

Why does the deadweight loss occur from quantity demanded at the world price plus tariff to quantity demanded of the world price?

Underproduction

What are four issues with tariffs?

reduced total surplus, expansion of inefficient industries, reduction in world trade, unintended consequences

What are import quotas?

A limit on quantities of specific items that can be imported in sometime period.

What are three similarities of import quotas and tariffs?

will reduce quantity of imports, will increase price of imports, will cause a dead weight loss

What are two differences of import quotas and tariffs?

more effective and increased prices but we do not get any money out of it

What are voluntary export restrictions (VERs)?

When another country puts import quotas on their own goods (ex: Japan restricting their exports)

What are non-tariff barriers (NTBs)?

Some kind of way you can make importing difficult

What are some examples of non-tariff barriers?

Getting a license, unreasonable product quality standards, long wait in customs

What are two unfair trade practices?

Dumping and export subsidies

What is dumping?

When a good is sold in a foreign country at a much lower price than if it were sold at home

why would a country dump a good on another country?

If there is a surplus of that good and/or to suffocate domestic industries in a country

What are export subsidies?

when foreign countries subsidize their own producers to help them undersell other producers in other countries

What are the five arguments for protection?

1. the jobs argument

2. The national security argument

3. The infant industry argument

4. The unfair competition argument

5. The protection as bargaining chip argument

Summarize the jobs argument.

Free trade destroys our domestic industries because our country can’t compete without outsourced cheap labor.

What are three counter arguments of the jobs argument?

1. If we protect these jobs, then our inefficient industries are expanding

2. Our exports will be retaliated against

3. For some countries, their only competitive advantage is cheap labor, so putting tariffs will strangle those developing countries

Summarize the national security argument.

It’s possible we may go to war. If we do, there are certain things we ought to have and we should protect industries that make goods needed and war and we shouldn’t sell military and aid to enemy countries.

What are two counterarguments of the national security?

1. Incentivizes war

2. Slippery slope, every industry claims they’re vital

Summarize the infant industry argument.

Some industries when they get started or we vulnerable, so we need to protect them from foreign competition.

What are the two counter arguments for the infant industry argument?

1. Every industry that starts with claimant needs protection

2. How do you know when the industry is grown up?

Summarize the unfair competition argument.

Other countries have tariffs on goods we sent to them and do unfair trade practices so we should do it too

What are two counter arguments for the unfair competition argument?

1. Leads to trade war

2. Makes things more expensive

Summarize the protection as bargaining chip argument.

If we threaten another country with tariffs, we can use this as a bargaining chip for them to take their trade barriers down

What is the single counter argument for protection as bargaining chip argument?

Can lead to trade war, you have to follow through on your threats

What is the main argument for free trade?

If countries have free trade based on comparative advantage, then this will allow the world economy to achieve more efficiency and a higher standard of living.

What are the eight benefits of free trade?

1. More variety

2. Lower prices

3. Better quality

4. Allows producers to lower costs

5. More growth

6. Gain jobs in export industries

7. More innovation

8. Countries can develop new comparative advantages over time

What does GATT stand for?

General Agreement on Tariffs and Trade

What is the general agreement on tariff and trade?

A multinational agreement created in 1947 after World War II that met in rounds to create multilateral negotiations that reduced trade barriers

What does WTO stand for?

The world trade organization

What is the world trade organization?

An international organization created in 1995 to oversee trade agreements created by the GATT and rule on trade disputes.

What is NAFTA/USMCA?

Free trade agreement between Mexico, USA and Canada

What is the European Union?

Began in 1950s and evolves over overtime. Includes multiple European nations and is like NAFTA but for the EU.