International Trade • Outline • How open is the U.S. economy? • Patterns and Trends in International Trade • Gains from International • International Trade Restrictions
This is a simple measure of the relative importance of the foreign sector An index of openness • Let • O denote the index of openness • X is exports • M is imports • GDP is gross domestic product Thus, we have:
What do we trade with other nations? Source: Bureau of Economic Analysis
Who are our major trading partners? Source: Bureau of Economic Analysis
Exports and Imports of the United States, 1965-2001 Billions of 1998 dollars www.economagic.com
Exports and Imports of the United States, 1997-2001 Billions of 1998 dollars www.economagic.com
Comparative Advantage Recall that a county has a comparative advantage in the production of a good of service if it can produce a unit at lower opportunity cost than its trading partners
Notice that by specializing and trading according to comparative advantage, both China and the U.S. reach a point outside their respective domestic PPFs.
Trade Restrictions The term “protectionism” refers to anymeasure that has the effect of reducing the quantity of imported goods or services. Commercial policy: Government policy that influences international trade flows.
Types of Trade Restrictions • Trade embargos: Prohibitions on the importation (or exportation) of goods and services. Examples: 1973 Oil embargo, trade embargo with Iraq, embargo on imported sugar from Cuba. • Tariffs: Taxes imposed on imported goods. • Quotas: Limits on the quantity or value of goods or services that can be imported or exported. Examples: The textile quota, the sugar quota, export quota on raw timber. • Subsidies: payments by government to exporters. These stimulate trade by allowing the exporter to charge a lower price.
Government procurement: Most nations require their governments to buy from domestic producers. Example: the 1933 “Buy American” Act applicable to federal agencies. • Non-tariff trade barriers: Other policies that have the effect of reducing the flow of imports or exports. Example: Health and safety standards, import licensing, product design standards, bureaucratic red tape. Protectionism, part 2 The Japanese trade ministry (MITI) decided that snow skis made in the U.S. were not safe enough for Japanese ski enthusiasts Other examples: European ban on hormone treated beef and genetically-modified soybeans
Arguments for protectionism President Bush’s trade representative Robert Zoeller says “I want fair trade.” • Save domestic jobs • Dumping • Government revenue creation. • National security • Infant industries
Industry Cost to ConsumersPer Job Saved Autos $105,000 Color TVs 420,000 Motorcycles 150,000 Athletic Footwear 30,000 Apparel 37,000 Specialty Steel 1,000,000 Glassware 200,000 Sugar 60,000 Ball Bearings 90,000 Costs of protecting U.S. jobs from foreign competition Source: Coughlin, et al. (1988) and Hufbauer, et al. 1986.
Tariffs as a percentage of total government revenue Source: World Bank