Is Using Trade Policy to Help U.S. Industries a Good Idea?

2. Is Using Trade Policy to Help U.S. Industries a Good Idea? Learning Objectives Restrictions on trade may preserve jobs in particular industries, but only at the cost of reducing jobs in other industries.

3. Learning Objective 8.1 The United States in the International Economy TariffA tax imposed by a government on imports. ImportsGoods and services bought domestically but produced in other countries. ExportsGoods and services produced domestically but sold to other countries.

4. Learning Objective 8.1 The United States in the International Economy The Importance of Trade to the U.S. Economy FIGURE 8-1 International Trade is of Increasing Importance to the United States

5. Learning Objective 8.1 The United States in the International Economy U.S. International Trade in a World Context FIGURE 8-2 The Eight Leading Exporting Countries

6. Learning Objective 8.1 The United States in the International Economy U.S. International Trade in a World Context FIGURE 8-3 International Trade as a Percentage of GDP

7. Learning Objective 8.1 MakingtheConnection • How Expanding International Trade Has Helped Boeing Rapid growth of international trade spurred demand for the 747 because it has larger cargo capacity than other planes.

8. Learning Objective 8.2 Comparative Advantage in International Trade A Brief Review of Comparative Advantage Comparative advantage The ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors. Opportunity Cost The highest valued alternative that must be given up to engage in an activity. Comparative Advantage in International Trade Table 8-1 An Example of Japanese Workers Being More Productive Than American Workers

9. Learning Objective 8.2 Comparative Advantage in International Trade Comparative Advantage in International Trade Absolute advantage The ability to produce more of a good or service than competitors when using the same amount of resources. Table 8-2 The Opportunity Costs of Producing Cell Phones and Digital Music Players

10. Learning Objective 8.3 How Countries Gain from International Trade Autarky A situation in which a country does not trade with other countries. Table 8-3 Production without Trade Increasing Consumption through Trade Terms of trade The ratio at which a country can trade its exports for imports from other countries.

11. Learning Objective 8.3 How Countries Gain from International Trade Increasing Consumption through Trade Table 8-4 The Gains from Trade for Japan and the United States

12. Learning Objective 8.3 8-3 Solved Problem The Gains from Trade

13. Learning Objective 8.3 How Countries Gain from International Trade Why Don’t We See Complete Specialization? • Not all goods and services are traded internationally. • Production of most goods involves increasing opportunity costs. • Tastes for products differ. Does Anyone Lose as a Result of International Trade? Don’t Let This Happen to YOU!Remember That Trade Creates Both Winners and Losers

14. Learning Objective 8.3 How Countries Gain from International Trade Where Does Comparative Advantage Come From? • Climate and natural resources. • Relative abundance of labor and capital. • Technology. • External economies. External economies Reductions in a firm’s costs that result from an increase in the size of an industry.

15. Learning Objective 8.3 MakingtheConnection • Why Is Dalton, Georgia, the Carpet- Making Capital of the World? Because Catherine Evans Whitener started making bedspreads by hand in Dalton, Georgia, 100 years ago, a multibillion-dollar carpet industry is now located there.

16. Learning Objective 8.3 How Countries Gain from International Trade Comparative Advantage Over Time: The Rise and Fall—and Rise—of the U.S. Consumer Electronics Industry Once a country has lost its comparative advantage in producing a good, its income will be higher and its economy will be more efficient if it switches from producing the good to importing it.

17. Learning Objective 8.4 Government Policies That Restrict International Trade Free trade Trade between countries that is without government restrictions. Figure 8-4 The U.S. Market for Ethanol under Autarky

18. Learning Objective 8.4 Government Policies That Restrict International Trade Figure 8-5 The Effect of Imports on the U.S. Ethanol Market

19. Learning Objective 8.4 Government Policies That Restrict International Trade Tariffs Figure 8-6 The Effects of a Tariff on Ethanol

20. Learning Objective 8.4 Government Policies That Restrict International Trade Quotas and Voluntary Export Restraints Quota A numeric limit imposed by a government on the quantity of a good that can be imported into the country. Voluntary export restraint (VER) An agreement negotiated between two countries that places a numeric limit on the quantity of a good that can be imported by one country from the other country.

21. Learning Objective 8.4 Government Policies That Restrict International Trade Quotas and VoluntaryExport Restraints Figure 8-7 The Economic Effect of the U.S. Sugar Quota

22. Learning Objective 8.4 Government Policies That Restrict International Trade Measuring the Economic Effect of the Sugar Quota We can use the concepts of consumer surplus, producer surplus, and deadweight loss to measure the economic impact of the sugar quota.

23. Learning Objective 8.4 8-4 Solved Problem Measuring the EconomicEffect of a Quota

24. Learning Objective 8.4 Government Policies That Restrict International Trade The High Cost of Preserving Jobs with Tariffs and Quotas Table 8-5 Preserving U.S. Jobs with Tariffs and Quotas Is Expensive

25. Learning Objective 8.4 Government Policies That Restrict International Trade The High Cost of Preserving Jobs with Tariffs and Quotas Table 8-6 Preserving Japanese Jobs with Tariffs and Quotas Is Also Expensive

26. Learning Objective 8.4 Government Policies That Restrict International Trade Gains from Unilateral Elimination of Tariffs and Quotas Some politicians argue that eliminating U.S. tariffs and quotas would help the U.S. economy only if other countries eliminated their tariffs and quotas in exchange. Other Barriers to Trade In addition to tariffs and quotas, governments sometimes erect other barriers to trade.

27. Learning Objective 8.5 The Argument over Trade Policies and Globalization World Trade Organization (WTO) An international organization that oversees international trade agreements. Why Do Some People Oppose the World Trade Organization? Globalization The process of countries becoming more open to foreign trade and investment. Anti-Globalization Some people believe that free trade and foreign investment destroy the distinctive cultures of many countries. Many governments have resisted globalization proposals.

28. Learning Objective 8.5 MakingtheConnection • The Unintended Consequences of Banning Goods Made with Child Labor Would eliminating child labor in developing countries be a good thing?

29. Learning Objective 8.5 The Argument over Trade Policies and Globalization Why Do Some People Oppose the World Trade Organization? “Old-Fashioned” Protectionism Protectionism The use of trade barriers to shield domestic firms from foreign competition. Protectionism is usually justified on the basis of one of the following arguments: • Saving jobs. • Protecting high wages. • Protecting infant industries. • Protecting national security.

30. Learning Objective 8.5 MakingtheConnection • Has NAFTA Helped or Hurt the U.S. Economy? Despite resistance to NAFTA, time proved that the U.S. economy gained jobs.

31. Learning Objective 8.5 The Argument over Trade Policies and Globalization Dumping Dumping Selling a product for a price below its cost of production. Positive versus Normative Analysis (Once Again) Positive analysis concerns what is. Normative analysis concerns what ought to be.

32. Learning Objective 8.5 The Argument over Trade Policies and Globalization Positive versus Normative Analysis (Once Again) • The success of industries in getting the government to erect barriers to foreign competition depends partly on some members of the public knowing full well the costs of trade barriers but supporting them anyway. However, two other factors are also at work: • The costs tariffs and quotas impose on consumers are large in total but relatively small per person. • The jobs lost to foreign competition are easy to identify, but the jobs created by foreign trade are less easy to identify.

33. The United States and South Korea Reach a Trade Deal LOOK An Inside U.S. and South Korea Agree to Sweeping Trade Deal

34. K e y T e r m s Absolute advantage Autarky Comparative advantage Dumping Exports External economies Free trade Globalization Imports Opportunity cost Protectionism Quota Tariff Terms of trade Voluntary export restraint (VER) World Trade Organization (WTO)

35. Appendix Multinational enterprise A firm that conducts operations in more than one country. • Multinational Firms Table 8-5 Top 25 MultinationalCorporations, 2007

36. Appendix • Multinational Firms Table 8-5 Top 25 MultinationalCorporations, 2007 (continued)

37. Appendix A Brief History of Multinational Enterprises • Multinational Firms Foreign direct investment The purchase or building by a domestic firm of a facility in a foreign country. Foreign portfolio investment The purchase by an individual or a firm of stocks or bonds issued in another country.

38. Appendix Strategic Factors in Moving from Domestic to Foreign Markets • Multinational Firms Firms might expect to increase their profits through overseas operations for five main reasons: • To avoid tariffs or the threat of tariffs. • To gain access to raw materials. • To gain access to low-cost labor. • To minimize exchange-rate risk. • To respond to industry competition.

39. Appendix MakingtheConnection • Have Multinational Corporations Reduced Employment and Lowered Wages in the United States? Many U.S. jobs require technical training.

40. Appendix Challenges to U.S. Firms in Foreign Markets • Multinational Firms Expanding into foreign markets can often be quite difficult and the additional costs incurred may end up being greater than the additional revenue gained. Competitive Advantages of U.S. Firms Some U.S. firms have successful foreign operations because of the strength of their brand names. A U.S. firm’s global competitive advantage changes over time.