Comprehensive Study Guide: International Trade, Comparative Advantage, and Protectionism

Comparative Advantage in Services: The Case of the United States. Comparative advantage is defined as the ability of an individual or group to carry out a particular economic activity more efficiently than another activity. . The United States possesses a comparative advantage in the production of tourist services. Named examples include Disney and New York City. . International consumers demonstrate a high willingness to pay for these services, which incentivizes Disney to ensure they have the occupancy, seats, rides, and rooms necessary to meet demand. . Economic Connection to Jobs: An increase in the quantity supplied ($Q_s$) in an industry where a country has a comparative advantage leads to job creation. If a firm produces more goods or services, they must hire more people to meet that demand. # Historical Context and the Opening of Trade: Vietnam. The Vietnam War officially began around $1968$ and lasted until approximately $1973$. . US involvement began as a trickle under President Kennedy, who was killed in $1963$. . Public perception post-war was heavily influenced by the belief that Vietnam was secretly holding American Prisoner of War (POW) individuals. This was reinforced by "missing in action" films, such as those starring Chuck Norris. . US Trade Embargo: Due to the diplomatic fallout and the POW issue, the United States refused to trade with Vietnam for a long duration, lasting until approximately $2005$ or $2006$. . The Role of John McCain: Senator John McCain, a former pilot and POW who was tortured in Vietnam, became an expert on the subject. despite being offered propaganda-based release (because his father was an admiral), McCain refused to leave until other POWs who had been there longer were released. . In the early $2000s$, McCain argued that there were no remaining POWs and that the US should move past the history and open trade. # Economic Effects of Opening Trade on Domestic Markets. Vietnam has a comparative advantage in the production of textiles and clothing. . Prior to international trade, Vietnamese consumers competed only with other domestic consumers for goods. . Post-Trade Dynamics: When trade opened with the United States, Vietnamese consumers had to compete with American consumers who possessed significant purchasing power. . Price Impact: This international competition creates a bidding war, raising the domestic price ($P$) for goods in Vietnam. The domestic quantity demanded ($Q_d$) will fall as the price increases. . Export Mechanics: Sellers in the producing country will increase production to the point where the world price meets the supply curve. The gap between the higher quantity supplied and the lower domestic quantity demanded constitutes the country's exports. . Mathematical Example: If quantity supplied is $10$ and domestic quantity demanded is $4$, the total exports would be $6$ units. # Net Benefits and Consumer vs. Seller Surplus. In the geometry of international trade graphs, open trade creates winners and losers, but the winners win more than the losers lose. . Exporting Country: Sellers gain producer surplus by selling at a higher price and a higher quantity. While domestic consumers lose some surplus due to higher prices, the overall gain to the sellers includes an additional triangle of "net benefit" for society. . Consumption Beyond Frontiers: Trade allows a country to consume beyond its Production Possibilities Frontier (PPF). This represents an added bonus above what the society can produce in isolation. . Reasons for Favoring Exports: Countries generally favor exporting because it increases production and creates jobs. This relates to the ancient doctrine of mercantilism, which suggested that national wealth was accumulated by exporting more than importing. # The Economics of Importing and Consumer Surplus. If a country does not have a comparative advantage, the world price ($P_w$) will be lower than the domestic price. . Consumer Response: At a lower price, the quantity demanded ($Q_d$) goes up, while the domestic quantity supplied ($Q_s$) falls. The excess demand is satisfied by imports from abroad. . Consumer Surplus ("Cha-ching"): This is the difference between what a consumer is willing to pay and what they actually pay. . Example: If a consumer is willing to pay $5$ dollars for an iced coffee but pays only $4$ dollars, they enjoy $1$ dollar of consumer surplus. . Personal Example: The speaker plans to buy an Apple Watch Ultra three for approximately $839$ dollars. By traveling from Maryland to Delaware, they avoid the $6\%$ sales tax, saving approximately $48$ to $50$ dollars. If the watch were on sale for an additional $10\%$ ($80$ dollars), that further increases the consumer surplus. . Market Impact of Imports: While consumers benefit from lower prices, domestic producers are hurt as the domestic quantity supplied decreases, leading to job losses in those specific industries (e.g., the textile industry in North and South Carolina). # Arguments Against Free Trade. The Jobs Argument: Opponents argue trade destroys domestic jobs. Economists counter that while some sectors lose jobs, others (like Disney or financial services) gain them. . The Infant Industry Argument: New industries request temporary trade restrictions to develop comparative advantage. Economists often find these protections stay in place even after the industry fails to become competitive. . The National Defense Argument: Certain industries must be protected to ensure national security. . Semiconductor Case Study: During COVID (starting around $2020$), a lack of domestic semiconductors (mostly imported from China) caused car and electronic prices to skyrocket. Used car prices rose because new cars could not be produced without microchips. The US is now subsidizing a domestic semiconductor industry for security reasons. . Oil Case Study: Saudi Arabia has a comparative advantage in oil because they have lower opportunity costs; they give up desert land, whereas the US gives up valuable environmental land (like in Pennsylvania for fracking). . Geopolitics of Oil: Domestic production is often argued as necessary for national defense so that the US is not beholden to foreign powers like Iran, which can choke off the oil supply. # Trade Protectionism: Tariffs and Quotas. Tariffs: A tax on imported goods. This raises the world price toward the domestic price. . Effects of Tariffs: They reduce the volume of imports, increase government revenue (Product of the tariff amount times quantity imported), increase producer surplus for domestic sellers, but create Deadweight Loss (DWL). . Deadweight Loss: These are triangles of inefficiency where neither the consumer, the seller, nor the government benefits; it is a net loss to society. . Quotas: Limits on the quantity of goods that can be imported. Economists prefer tariffs over quotas because quotas do not generate government revenue. . Rent Seeking: This refers to lobbyists spending money to influence politicians to implement tariffs. Lobbyists essentially take a commission or "slice of the pie" from the gains transferred to domestic sellers. # Questions & Discussion. Student/Audience Interaction concerning the price of coffee: A student identified the price of an iced coffee as being between $4$ and $5$ dollars. The instructor used this to explain hidden willingness to pay and consumer surplus. . Discussion on Job Loss Emotions: The instructor asked if anyone knew someone unemployed. It was noted that being unemployed "sucks" and is emotionally taxing, which makes the job loss argument against trade very persuasive to the public through images of closed factories, even if the net economic benefit of trade is positive. . Discussion on US Presidents and Oil: The instructor discussed the political switching of the Keystone Pipeline (reinitiated by Trump in $2017$, stopped by Biden, potentially reinitiated) and oil exploration in Alaska. It was noted that gas prices remain high ($4.19$ a gallon) despite some of these measures, and the Strategic Petroleum Reserves have been used to influence prices during elections.