Macroeconomics Chapter 17

Chapter 17: Macroeconomics International Trade

Prepared by: Jason Dean, King's University College

Sixteenth Canadian Edition © 2022 McGraw Hill Ltd.

Learning Objectives

LO17.1: List several key facts about Canada’s international trade, including its historical context and current trends.LO17.2: Define comparative advantage and explain how specialization and trade enhance a nation’s overall output and efficiency.LO17.3: Explain why disparities between world prices and domestic prices result in the dynamics of exports and imports, incorporating market forces and consumer behavior.LO17.4: Analyze the economic effects of tariffs and quotas, focusing on market equilibrium and consumer impact.LO17.5: Critique the most frequently presented arguments for protectionism, considering the long-term implications for economic growth.LO17.6: Explain the objectives of the World Trade Organization (WTO), European Union (EU), and Canada-United States-Mexico Agreement (CUSMA), and discuss offshoring dynamics and the groups adversely affected by free trade.

Key Trade Facts about Canada (LO17.1)

• Canada has historically been an open economy, continually engaging in substantial international trade activities that have significantly shaped its economic landscape from its early reliance on fur trade to modern global interactions.

• In 2019, exports constituted 32% of Canada's GDP, while imports accounted for 33%, demonstrating a close economic interdependence with global markets, which has evolved in response to shifts in global demand and production capabilities.

• A trade deficit occurs when imports exceed exports; notably, Canada experienced a trade deficit of $9 billion in goods in 2019. However, in 2020's first quarter, Canada achieved a trade surplus with excess exports over imports amounting to $28 million, indicating fluctuations in trade balance due to changing market conditions and policy responses.

• Principal Exports include crude and refined petroleum, automobiles, precious metals, forestry products like lumber, and various agricultural products (wheat, canola) that are vital to Canada's export economy.

• Principal Imports comprise petroleum, automobiles, metals (steel and aluminum), consumer goods (including household appliances), and technology (computers and other electronics) which underpin domestic consumption and production processes.

• Key Trading Partner: The USA remains Canada's primary trading partner, responsible for 75% of exports and 65% of imports as of 2020, underscoring the importance of this bilateral relationship to Canadian economic stability.

Trade Relationships

• Canada has a trade deficit with China, largely influenced by the high volume of imports predominantly in electronics and consumer good sectors, while maintaining a surplus in its trade with the USA due to strong export demand for Canadian natural resources, manufactured goods, and agricultural products.

• In 2018, Canada ranked thirteenth globally in terms of export volume, reflecting its competitiveness on the international stage, with China and the USA leading at first and second positions respectively, based on their enormous export figures (China's exports reached $2.7 trillion in 2017).

• Other Asian economies, including South Korea, Taiwan, and Singapore, actively participate in international trade, contributing significantly to the global supply chain dynamics that influence market trends and consumer access globally.

Importance of Trade Statistics

• Canada ranks sixth in the world for the percentage of exports relative to GDP, highlighting its reliance on international markets for economic growth, reinforcing the need for sustainable trade practices.

• A comprehensive analysis of exports and imports by country reveals the USA's dominant role in trade with Canada, reinforcing the significance of this bilateral relationship for Canada's economy, and indicating potential vulnerabilities to trade policy shifts.

Why Nations Trade (LO17.2)

Reasons for Trade:

• The uneven distribution of resources across countries necessitates trade for efficient resource allocation, as different nations possess unique natural resources and industrial capabilities.

• Production efficiency is achieved through the use of specialized technologies and processes, which enhance productivity by enabling countries to focus on sectors where they have significant advantages.

• Differentiated products in terms of quality, attributes, and branding offer consumers diverse choices, thus stimulating trade and fostering competitive markets where innovation is vital.

• Mutual Benefits of Trade: By trading, countries can access a greater variety of goods at lower prices, fostering economic growth and improving living standards for their populations, which can lead to higher overall consumption levels.

Comparative Advantage

• Absolute Advantage: Refers to a country's ability to produce more of a good than other countries with the same resources, such as the technological edge of certain countries in manufacturing sectors.

• Comparative Advantage: Occurs when a country can produce a good at a lower opportunity cost than others, leading to efficient specialization in that good. This principle underpins the rationale for international trade, as it allows countries to export goods they can produce efficiently while importing those that would be more costly for them to produce, thus optimizing global resource allocation.

Specialization and Production Possibilities

• Production Possibilities Curves (PPC): Used to demonstrate the production outputs for two different nations (e.g., Canada and Brazil), showcasing how specialization can shift production possibilities to a more efficient frontier.

• Nations should specialize on goods where they have the lowest opportunity cost, effectively leveraging their resources for maximum yield and market impact.

Gains from Trade

• Trade increases overall production and efficiency through specialization; countries benefit by trading goods produced at lower costs, thereby enhancing global wealth, improving resource allocation, and expanding consumer access to varied products.

Tariffs and Quotas (LO17.4)

Tariffs:

• Tariffs can serve dual purposes: they can generate revenue for the government and protect domestic industries from foreign competition. Their implementation affects consumption patterns, production levels, imports, and public revenue accumulation, which are critical for federal budget planning.

Quotas:

• Quotas establish limits on the volume of imports, which can raise domestic prices due to reduced supply in the market, benefiting local producers while straining consumers with higher prices without providing government revenue. This creates a marketplace where domestic products may dominate at the cost of consumer choice and overall economic efficiency.

Arguments Against Protectionism (LO17.5)

Military Self-Sufficiency:

• The argument for military self-sufficiency is challenged by the necessity for efficiency; protected markets often become complacent and stagnant in innovation, thus weakening national defense in the long term.

Infant Industry Argument:

• The questionable benefits of nurturing these industries are highlighted by the potential for such measures to lead to long-term dependence on protection rather than fostering true competitive capabilities.

Employment Concerns:

• Trade protectionism can lead to retaliation, distorting long-term market conditions and negatively affecting employment rates, as retaliatory tariffs from trading partners can lead to reduced export markets for key industries.

Trade Agreements and Organizations (LO17.6)

WTO:

• The World Trade Organization plays a critical role in overseeing global trade agreements and resolving disputes among member nations, promoting fair trade practices and facilitating negotiations to reduce trade barriers and enhance global economic cooperation.

EU:

• The European Union was initiated as the Common Market in 1958 and has engaged in extensive internal trade liberalization, facilitating free movement of goods, services, capital, and labor among member states, thus creating a significant economic bloc that influences global trade dynamics.

CUSMA:

• The Canada-United States-Mexico Agreement (CUSMA), an updated version of NAFTA, promotes labor rights, environmental standards, and efficient trade practices among the three nations to foster economic growth and sustainability, directly affecting millions of jobs and cross-border supply chains.

Offshoring and Global Development

• Offshoring reshapes domestic job landscapes, often leading to job losses, but it can also stimulate local industries through increased competitiveness on a global scale. Corporations may shift production to countries with lower labor costs, raising concerns about domestic employment but also enhancing overall market accessibility.

• The COVID-19 pandemic exposed vulnerabilities within global supply chains, particularly highlighting the overreliance on specific countries, such as China, for critical goods. This has prompted nations to rethink their dependency on foreign production and consider strategies to boost domestic manufacturing capacities.

Chapter Summary

In this chapter, we reviewed key concepts in international trade, including the definition of comparative advantage, the economic consequences of tariffs and quotas, the underlying motivations for trade, and the dynamics introduced by trade agreements and international organizations that shape the global economic framework.