TRADING WITH THE WORLD

1. 16 TRADING WITH THE WORLD CHAPTER “You’re going to hear a giant sucking sound of jobs being pulled out of this country.” Ross Perot Presidential Candidate 1992, 1996

2. Patterns and Trends in International Trade • Imports are the good and services that we buy from people in other countries. • Exports are the goods and services we sell to people in other countries.

3. Patterns and Trends in International Trade • Trends in the Volume of Trade • In 1960, the United States exported 3.5 percent of its total output and imported 4 percent of the total amount that Americans spent on goods and services. • In 2006, the United States exported 10 percent of its total output and imported 15 percent of the total amount that Americans spent on goods and services.

4. Patterns and Trends in International Trade • Net Exports and International Borrowing • The value of exports minus imports is called net exports. • In 2006, U.S. net exports were –$780 billion. • When a country imports more than it exports, it must borrow from foreigners or sell some of its assets to foreigners. • When a country exports more than it imports, it lends to foreigners or buy some of their assets.

5. The Gains from International Trade • Comparative advantage is the fundamental force that generates trade between nations. • A country has a comparative advantage in producing a good if it can produce that good at a lower opportunity cost than any other country. • The basis for comparative trade is differentials in opportunity costs between countries (and individuals). • Nations (and individuals) can increase the consumption of goods and services when they allocate resources to the production of those goods and services for which they have a comparative advantage.

6. The Gains from International Trade • Gains for Both Countries • Both countries gain by consuming output combinations outside their respective production possibilities frontier. • Trade does not create a winner and a loser. • Both countries gain.

7. International Trade Restrictions • Governments restrict international trade to protect domestic producers from competition by using two main tools: • A tariff is a tax that is imposed by the importing country when an imported good crosses its international boundary. • A nontariff barrier is any action other than a tariff that restricts international trade. • A quota is a quantitative restriction on the import of a particular good, which specifies the maximum amount of the good that may be imported in a given period of time.

8. The Case Against Protection • Despite the fact that free trade promotes prosperity for all countries, trade is restricted. • It is often argued that international trade restrictions: • Save jobs • Allow us to compete with cheap foreign labor • Penalize nations with lax environmental standards • None of these arguments bear scrutiny.

9. The Case Against Protection • Saves Jobs • The idea that buying foreign goods costs domestic jobs is wrong. • Free trade destroys some jobs and creates other better jobs. • Free trade also increases foreign incomes and enables foreigners to buy more domestic production. • Protection to save particular jobs is very costly.

10. The Case Against Protection • Allows us to Compete with Cheap Foreign Labor • The idea that a high-wage country cannot compete with a low-wage country is wrong. • Low-wage labor is less productive than high-wage labor. • And wages and productivity tell us nothing about the source of gains from trade, which is comparative advantage. • Penalizes Lax Environmental Standards • The idea that protection is good for the environment is wrong. • A clean environment is a “normal” good. • Free trade increases incomes and poor countries have significantly lower environmental standards than rich countries.

11. Why Is International Trade Restricted? • Tariff Revenue • It is costly for governments to collect taxes on income and domestic sales. • It is cheaper for governments to collect taxes on international transactions because international trade is carefully monitored. • This source of revenue is especially attractive to governments in developing nations.

12. Why Is International Trade Restricted? • Rent Seeking • Rent seeking is lobbying and other political activities that seek to capture the gains from trade. • Despite the fact that protection is inefficient, governments respond to the demands of those who gain from protection and ignore the demands of those who gain from free trade because protection brings concentrated gains and diffused losses.