Application: International Trade

Transcription

1 eventh Edition rinciples of Economics N. Gregory Mankiw HTER 9 pplication: International Trade Modified by Joseph Tao yi Wang Wojciech Gerson ( ) In this chapter, look for the answers to these questions What determines how much of a good a country will import or export? Who benefits from trade? Who does trade harm? o the gains outweigh the losses? If policymakers restrict, who benefits? Who is harmed? o the gains from restricting outweigh the losses? What are some common arguments for restricting trade? o they have merit? Introduction Recall from hapter 3: country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. ountries can gain from trade if each exports the goods in which it has a comparative advantage. Now we apply the tools of welfare economics to see where these gains come from and who gets them. The World rice and omparative dvantage W = the world price of a good, the price that prevails in world markets = domestic price without trade If < W, country has comparative advantage in the good under free trade, country exports the good If > W, country does not have comparative advantage under free trade, country the good 2 3 The mall Economy ssumption small economy (like Taiwan) is a price taker in world markets: Its actions have no effect on W. Not always true especially for U.. and hina but simplifies the analysis without changing its lessons. When a small economy engages in free trade, W is the only relevant price: No seller would accept less than W, since she could sell the good for W in world markets. No buyer would pay more than W, since he could buy the good for W in world markets. ountry That Exports oybeans = $4 = 500 W = $6 domestic consumers demand 300 domestic producers supply 750 exports = 450 $6 $4 300 oybeans exports

2 oybean Trade: Fact heet U.. produced 3 billion bushels of soybeans Equal to amount of international trade in soybeans rovided 70% U edible consumption of fats & oils verage price = $9.25/bushel Total size of U soybean market = $27.3 billion U.. exported 1.2 billion bushels (40% inter. Trade) The biggest purchasers of U.. soybeans are: hina ($7.2 billion), Mexico ($1.7 billion), Japan ($1.3 billion), and Europe ($1.6 billion). ountry That Exports oybeans = + = = + + With trade, = = + + = $6 $4 oybeans exports gains from trade 66 7 TIVE LERNING 1 nalysis of trade = $30,000, = 400 In world markets, W = $15,000 $30,000 how many TVs will the country $15,000 import or export? Identify,, and total surplus without trade, and with trade. 200 lasma TVs TIVE LERNING 1 nswers domestic consumers demand 600 domestic producers supply 200 = 400 $30,000 $15, lasma TVs 600 TIVE LERNING 1 nswers = = + = + + $30,000 With trade, = + + $15,000 = = lasma TVs gains from trade ummary: The Welfare Effects of Trade direction of trade consumer surplus producer surplus total surplus < W exports falls > W falls Whether a good is imported or exported, trade creates winners and losers. ut the gains exceed the losses. 11 2

3 Other enefits of International Trade onsumers enjoy increased variety of goods. roducers sell to a larger market, may achieve lower costs by producing on a larger scale. ompetition from abroad may reduce market power of domestic firms, which would increase total welfare. Trade enhances the flow of ideas, facilitates the spread of technology around the world. 12 Then Why ll the Opposition to Trade? Recall one of the Ten rinciples from hapter 1: Trade can make everyone better off. The winners from trade could compensate the losers and still be better off. Yet, such compensation rarely occurs. The losses are often highly concentrated among a small group of people, who feel them acutely. The gains are often spread thinly over many people, who may not see how trade benefits them. Hence, the losers have more incentive to organize and lobby for restrictions on trade. 13 Tariff: n Example of a Trade Restriction Tariff: a tax on Example: otton shirts W = $200 Tariff: T = $100/shirt onsumers must pay $300 for an imported shirt. o, domestic producers can charge $300 per shirt. In general, the price facing domestic buyers & sellers equals ( W + T ). nalysis of a Tariff on otton hirts W = $200 Free trade: buyers demand 80 sellers supply 25 = 55 T = $100/shirt price to $300 buyers demand 70 sellers supply 40 = 30 $300 $ otton shirts nalysis of a Tariff on otton hirts Free trade otton = + + deadweight shirts + + E + F loss = + F = G = E + F + G Tariff = + $300 = + G E F $200 Revenue = E G = E + G nalysis of a Tariff on otton hirts = deadweight loss from the overproduction of shirts F = deadweight loss from the underconsumption of shirts $300 $200 G 25 otton deadweight shirts loss = + F 40 E F

4 Import uotas: nother Way to Restrict Trade Import quota: a quantitative limit on of a good. Mostly has the same effects as a tariff: Raises price, reduces quantity of. Reduces buyers welfare. Increases sellers welfare. tariff creates revenue for the govt. quota creates profits for the foreign producers of the imported goods, who can sell them at higher price. Or, govt could auction licenses to import to capture this profit as revenue. Usually it does not. 18 In the News: Textile Imports from hina On 12/31/2004, U.. quotas on apparel & textile products expired. uring Jan 2005: The U.. textile industry of these & labor products unions from fought hina for new increased trade restrictions. over 70%. The Loss National of 12,000 Retail jobs Federation in U.. textile opposed industry. any restrictions. testing/hutterstock.com November 2005: ush administration agreed to limit growth in from hina. 19 rguments for Restricting Trade 1. The jobs argument Trade destroys jobs in industries that compete with. Total unemployment does not rise as rise, because job losses from are offset by job gains in export industries % 14% 12% 10% 8% 6% 4% 2% 0% U.. Imports & Unemployment, ecade averages, Imports (% of G) Unemployment (% of labor force) rguments for Restricting Trade 2. The national security argument n industry vital to national security should be protected from foreign competition, to prevent dependence on that could be disrupted during wartime. Fine, if trade restrictions based on true security needs. ut producers may exaggerate their own importance to national security to obtain protection from foreign competition. 22 rguments for Restricting Trade 3. The infant-industry argument new industry argues for temporary protection until it is mature and can compete with foreign firms. ifficult for govt to determine which industries will eventually be able to compete and whether benefits of establishing these industries exceed cost to consumers of restricting. esides, if a firm will be profitable in the long run, it should be willing to incur temporary losses. 23 4

5 rguments for Restricting Trade 4. The unfair-competition argument roducers argue their competitors in another country have an unfair advantage, e.g. due to govt subsidies. We should welcome of low-cost products subsidized by the other country s taxpayers. The gains to our consumers will exceed the losses to our producers. 24 rguments for Restricting Trade 5. The protection-as-bargaining-chip argument Example: The U.. can threaten to limit of French wine unless France lifts their quotas on merican beef. uppose France refuses. Then the U.. must choose between two bad options: ) Restrict from France, which reduces welfare in the U.. ) on t restrict, which reduces U.. credibility. 25 Trade greements country can liberalize trade with unilateral reductions in trade restrictions multilateral agreements with other nations Examples of trade agreements: North merican Free Trade greement (NFT), 1993 General greement on Tariffs and Trade (GTT), ongoing World Trade Organization (WTO), est. 1995, enforces trade agreements, resolves disputes EF: pecial FT between Taiwan and hina 26 ummary country will export a good if the world price of the good is higher than the domestic price without trade. Trade raises producer surplus, reduces consumer surplus, and raises total surplus. country will import a good if the world price is lower than the domestic price without trade. Trade lowers producer surplus but raises consumer and total surplus. tariff benefits producers and generates revenue for the govt, but the losses to consumers exceed these gains. ummary ommon arguments for restricting trade include: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. ome of these arguments have merit in some cases, but economists believe free trade is usually the better policy. pplication: International Trade Imports benefit consumers Exports benefit producers Trade benefit the entire economy hould Taiwan sign FT or EF with other countries? Homework: Mankiw, h. 9, roblem 3, 7, 8, 9, 10,

6 ountry That Imports lasma TVs = $3000 = 400 W = $1500 domestic $3000 consumers demand 600 $1500 domestic producers supply 200 = lasma TVs ountry That Imports lasma TVs = = + = + + With trade, $3000 = + + $1500 = = lasma TVs gains from trade