International Trade Notes

Analyzing Trade with Supply and Demand

• International trade occurs across national borders.

• Basic principles of trade apply:

  • Trade makes people better off when preferences differ.

  • Trade increases productivity through specialization and the division of knowledge.

  • Trade increases productivity through comparative advantage.

• The difference between domestic demand and domestic supply is made up by imports.

Protectionism, Tariffs, and Quotas

• Protectionism: The economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers.

• Tariff: A tax on imports.

• Quota: Restrictions on the quantity of goods that can be imported.

• Example: Restricting the number of cars that could be imported to 50,000 per month is an example of a quota.

Tariffs

• Effects of a Tariff

  • Domestic suppliers respond to the higher price by increasing production.

  • Domestic consumers respond to the higher price by buying less.

  • Imports decrease.

  • Government revenue = tariff amount times the quantity of imports.

The Costs of Protectionism

• The U.S. government restricts sugar imports.

• As a result, U.S. consumers pay 50%–100% more than the world price.

• Assumptions:

  • The tariff is so high that it eliminates all sugar imports.

  • If we had complete free trade, all sugar would be imported.

• The total cost of the sugar tariff to U.S. citizens is calculated by adding wasted resources and lost gains from trade.

The Costs of Protectionism: Numerical Example

• Wasted resources: [(0.20 - 0.09) \times 20]/2 = $1.1 \text{ billion}

• Lost gains from trade = 0.22 \text{ billion}

• The total cost of the sugar tariff to U.S. citizens is: \$1.1 \text{ billion (wasted resources)} + \$0.22 \text{ billion (lost gains from trade)} = \$1.32 \text{ billion (total cost)}

• Together, the wasted resources and lost gains from trade represent the deadweight loss from trade restrictions.

• Domestic producers benefit from a tariff because it increases prices and producer surplus.

International Trade and Jobs

• When U.S. tariffs are reduced, the industry contracts and jobs are lost.

• Lower prices mean U.S. consumers spend more on other goods.

• Increased consumer spending leads to more jobs in other industries.

• Foreign producers use the U.S. currency to purchase U.S. goods, increasing exports.

• We pay for imports with exports.

• Trade moves jobs from import-competing industries to export industries.

• Trade restrictions save visible jobs, but they destroy jobs that are harder to see.

The Washing Machine Tariffs

• In January 2018, tariffs on washing machines began under the Trump administration.

• The tariffs decreased imports by 1.2 million units to approximately 2.6 million washing machines per year and raised prices of washers and dryers by 12%.

• About 1,800 new jobs were created in the washer and dryer industry at the expense of jobs lost in U.S. export industries.

• The total cost to consumers was approximately \$1.56 \text{ billion}
  per year or \$821,000 per job created.

The Economics and Politics of a Trade War

• Protectionism can lead to the possibility of a trade war.

• When U.S. tariffs bring foreign tariffs in retaliation, both U.S. consumers and U.S. producers are likely to suffer a net loss.

• In response to U.S. tariffs, China retaliated on products that it could buy elsewhere, such as soybeans and lobster.

• The Trump administration spent more than \$28 \text{ billion} to bail out impacted farmers, while the U.S. lobster industry experienced a 70% decline in exports.

• Trade wars are easy to lose.

The U.S. Politics of Protectionism

• The costs of protectionism are spread over millions of consumers, while the benefits flow to a small number of producers.

  • The cost to each consumer is small, but the gain to each producer is large.

• The United States has a comparative advantage in production by skilled workers.

  • Increased international trade increases the demand for skilled workers.

  • Increased protectionism increases the demand for unskilled or less skilled workers.

Arguments Against International Trade

• It’s wrong to trade with countries that use child labor.

• We need to keep certain industries at home for national security.

• We can increase U.S. well-being with strategic trade protectionism.

Arguments Against International Trade: Child Labor

• By making a country poorer, trade restrictions may increase the number of child workers.

• Studies show that more openness to trade increases income and reduces child labor.

• The real cause of child labor is poverty, not trade.

Arguments Against International Trade: Trade and National Security

• Protection may be justified if a good is vital for national security.

  • Example: Domestic vaccine industry

• This creates an incentive for every domestic producer to claim its product is vital for national security.

Arguments Against International Trade: Strategic Trade Protection

• It is possible for a country to use tariffs and quotas to get a larger share of the gains from trade.

• The government helps domestic firms act like a cartel when they sell to international buyers.

• This is done by limiting or taxing exports.

• This strategy can work only if international buyers have few substitutes for the domestic good.

Conclusion

• Demand and supply curves can be used to analyze trade and the costs of trade protectionism.

• Restrictions on trade:

  • Waste resources by transferring production from low-cost foreign producers to high-cost domestic producers

  • Prevent domestic consumers from exploiting gains from trade, creating deadweight loss

• Domestic producers can benefit from trade restrictions, but domestic consumers lose more than the producers gain.

• Trade restrictions sometimes persist because:

  • The benefits are concentrated on small groups who lobby for protection.

  • The costs are spread over millions of consumers and are small for each individual.

International trade occurs across national borders and serves as a vital component of the global economy. It is driven by various fundamental principles:

• Trade makes people better off when preferences differ: When individuals or nations have different needs or desires for goods and services, trade enables them to exchange what they have for what they want, thus enhancing overall satisfaction.

• Trade increases productivity through specialization and the division of knowledge: Countries exploit their strengths by specializing in the production of certain goods, allowing for more efficient use of resources and increased output.

• Trade increases productivity through comparative advantage: This principle suggests that even if one nation is less efficient in producing all goods compared to another, it can still gain from trade by specializing in the production of goods for which it has a relative efficiency.

• The difference between domestic demand and domestic supply is made up by imports: When domestic production does not meet consumer demand, imports fill the gap, allowing consumers access to a wider variety of goods.

Protectionism, Tariffs, and Quotas

• Protectionism: This economic policy actively restricts trade through quotas, tariffs, and other regulations that disadvantage foreign producers while favoring domestic industries. Protectionism can lead to higher prices for consumers and reduced choices in the marketplace.

• Tariff: A tariff is a tax imposed on imported goods, raising their prices and making domestic products more competitive.

• Quota: Quotas impose limits on the quantity of a good that can be imported, for example, restricting the import of cars to 50,000 units per month.

Tariffs

Effects of a Tariff

• Domestic suppliers benefit from tariffs due to increased prices, which enables them to expand production levels.

• Conversely, domestic consumers are negatively impacted; they face higher prices and may reduce their purchases.

• Tariffs lead to a decrease in imports, affecting international trade flows.

• Government revenue generated from tariffs is calculated as the tariff amount multiplied by the quantity of imports.

The Costs of Protectionism

The U.S. government restricts sugar imports, causing U.S. consumers to pay significantly higher prices—ranging from 50% to 100% above the world price. The assumptions in this case include that the tariff is sufficiently high to eliminate all sugar imports, implying that under free trade conditions, all sugar would be sourced from abroad.

The overall cost of the sugar tariff for U.S. citizens is determined by the combination of wasted resources and lost gains from trade, emphasizing the negative economic impact of such protective measures.

Numerical Example of Costs

• Wasted resources are calculated by the formula: [(0.20 - 0.09) \times 20]/2 = 1.1 ext{ billion dollars}

• Lost gains from trade equal 0.22 ext{ billion dollars}.

• The total cost of the sugar tariff to U.S. citizens adds both calculations, resulting in a total burden of 1.1 ext{ billion (wasted resources)} + 0.22 ext{ billion (lost gains from trade)} = 1.32 ext{ billion dollars (total cost)}.

These figures represent the deadweight loss associated with trade restrictions, highlighting the disparity between domestic producer gains and consumer losses.

International Trade and Jobs

As U.S. tariffs decrease, industries reliant on imports may contract, resulting in significant job losses. However, lower prices allow consumers to allocate their spending to other goods, potentially creating new jobs in various sectors.

Foreign producers, utilizing U.S. currency to purchase American goods, contribute to increased exports. This cycle showcases the dynamic nature of job movement, as trade reallocates jobs from import-competing sectors to those engaged in exports.

The Washing Machine Tariffs

In January 2018, the Trump administration instituted tariffs on washing machines which resulted in:

• A decrease in imports by 1.2 million units per year, reducing total imports to 2.6 million units annually.

• A price increase of 12% for washing machines and dryers.

• The creation of approximately 1,800 new jobs in the washer and dryer manufacturing sector; however, this came at the expense of job losses in U.S. export industries.

• Total costs to consumers approximated $1.56 billion per year, translating to about $821,000 per job created, illustrating the economic inefficiencies resulting from protectionist policies.

The Economics and Politics of a Trade War

Protectionism can trigger trade wars, which occur when countries escalate tariffs in retaliation. Such actions create net losses for both consumers and producers in the affected nations. In reaction to U.S. tariffs, China targeted exports such as soybeans and lobster, which they could source from other countries.

The U.S. government expended over $28 billion to compensate farmers affected by these retaliatory tariffs, while exports of U.S. lobster plummeted by 70%. The potential for economic losses underscores the volatility of trade conflicts, with trade wars often benefiting neither side.

The U.S. Politics of Protectionism

The burden of protectionism is distributed among millions of consumers while the advantages are consolidated among a small number of producers. While the cost per consumer is relatively low, the benefits accrued by producers can be substantial. The U.S. boasts a comparative advantage thanks to its skilled workforce, and increased international trade elevates the demand for these skilled positions. However, heightened protectionism often shifts demand towards unskilled labor, disproportionately affecting those in lower-skilled roles.

Arguments Against International Trade

• Child Labor: It raises ethical concerns when trade occurs with nations that practice child labor. Resistance to such trade aims to advocate for human rights.

• National Security: Some argue that specific industries must remain domestic for security reasons, such as pharmaceuticals and vaccines, which must be robustly available.

• Strategic Trade Protectionism: Nations may employ tariffs or quotas to capture larger benefits from trade, creating a scenario where domestic firms function similarly to cartels in international markets. However, this approach only succeeds when international buyers lack viable alternatives.

Conclusion

Demand and supply curves effectively analyze trade, shedding light on the costs associated with trade protectionism. Restrictions on trade can result in:

• Wasted resources by diverting production from low-cost international producers to higher-cost domestic manufacturers.

• Prevention of domestic consumers from optimizing potential benefits from trade, leading to deadweight loss.

• Domestic producers can benefit from trade barriers; however, the losses imposed on consumers far outweigh the gains seen by producers.

Trade restrictions persist largely because the benefits concentrate on small groups that can effectively lobby for protection, while the costs—though dispersed across millions—remain relatively minor for