Chapter 33 International trade

1. Chapter 33International trade David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

2. Import and Export /GDP in Turkey (%)

3. The Exports and Imports in the World.

4. The components of the World’s exports (2000-2010)

5. World Exports by Commodity Groups, 2010

6. Exports and Imports in Turkey (2000-2011)

7. Turkey’s Exports by Region

8. The Turkey’s Exports and Imports by Country in 2010 (Percentage of Total Trade)

9. Exports to the GDP (%)

10. Some important issues Raw materials prices Less-developed countries (LDCs) have claimed exploitation by industrial countries e.g. by buying raw materials cheaply & selling manufactures dear Manufactured exports from LDCs some LDCs have had success in exporting manufactures leading to complaints that jobs are under threat in the industrial countries Trade disputes between industrial countries In some countries, established producers of certain goods are being undercut by efficient modern producers especially from Japan & East Asia should such exports be restricted?

11. Comparative advantage Trade offers benefits when there are international differences in the opportunity cost of goods. Opportunity cost of a good the quantity of other goods sacrificed to make one more unit of that good The law of comparative advantage states that countries should specialise in producing and exporting the goods that they produce at a lower relative cost than other countries.

12. The source of comparative advantage An important difference between countries is in factor endowments which will be reflected in different relative factor prices e.g. if the UK has relatively abundant capital but relatively scarce labour as compared with India, then the UK would tend to specialise in capital-intensive goods, and India would tend to specialise in labour-intensive products Comparative advantage may also reflect a relative advantage in technology

13. Gainers and losers Countries may gain from specialisation and trade but not all countries may gain equally Commercial policy is government policy that influences international trade through taxes or subsidies e.g. tariffs or through direct restrictions on imports and exports.

14. The economic effects of a tariff SS Price Pw+ T Pw DD Qs Qd' Qd Qs' Quantity DD and SS show the domestic demand and supply for a good. If the world price is Pw, and there is free trade, domestic firms supply Qs domestic demand is Qd and the difference is imported. A tariff can stimulate domestic supply and restrict imports. At a domestic price Pw + T, where T is the size of the tariff. Domestic demand falls to Qd', domestic supply rises to Qs' and imports fall.

15. The welfare costs of a tariff The government raises revenue – i.e. there is a transfer to the government Pw+ T Pw and there is a transfer in the form of extra profits to producers. Qs Qd' Qd Qs' There is a social cost from production inefficiency, given that the good could be imported at Pw, and a loss of consumer surplus. The tariff leads both to transfers and net social losses. SS Price DD Quantity

16. Tariffs The deadweight burden of a tariff suggests that society suffers from this method of restricting trade. This is the case for free trade. Tariffs have fallen substantially under the GATT General Agreement on Tariffs and Trade

17. The case for tariffs – good arguments Optimal tariff a first-best argument only valid where the importing country is large enough to affect the world price. This policy fulfils the principle of targeting which says that the most efficient way to attain a given objective is to use a policy that influences that activity directly. Policies that attain the objective, but also influence other activities are second-best, because they distort those other activities.

18. The case for tariffs – second-best arguments Way of life an attempt to preserve ‘traditional’ ways a production subsidy would be better Suppressing luxuries an attempt to curb consumption patterns of the rich in a poor society better achieved by a consumption tax Infant industries an attempt to nurture new activities via learning by doing a temporary production subsidy probably better Revenue tariffs raise government revenue but there are better ways Cheap foreign labour a non-argument – denies benefits of comparative advantage

19. Other commercial policies Although tariff rates have fallen under GATT, there has been a proliferation of other trade restrictions quotas non-tariff barriers administrative regulations that discriminate against foreign goods export subsidies