International Trade ECO 6716 PowerPoint 1.0 Fall 2024 PDF

1  M ilton Friedman Start with a very general set of observations by M ilton Friedman: https://www.youtube.com/watch?v=3HkrEC0JNGs 2  Abs ol u te Advan tage A bsolute advantage: when a nation can produce more of a pr...

1  M ilton Friedman Start with a very general set of observations by M ilton Friedman: https://www.youtube.com/watch?v=3HkrEC0JNGs 2  Abs ol u te Advan tage A bsolute advantage: when a nation can produce more of a product than its trading partner during a given time period. Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 3  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 Illustrate the nations’ production possibilities Start with these initial production points: U.S. 3 0 co mputers/2 cars C hina 2 co mputers/1 0 cars 4  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 Let’s change Start Computers Cars production in the US: 30 computers US: 2 cars two countries: China: 2 computers China: 10 cars World: 32 computers World: 12 cars U.S. changes production from 30 computers/2 cars to: 45 computers/1 car Computers Cars China changes production US: 45 computers US: 1 car from 2 computers/10 cars to: China: 1 computer China: 15 cars 1 computer/15 cars World: 46 computers World: 16 cars 5  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 Trade 8 computers for 2 cars and see the GAI NS F R OM T R ADE : U.S. 3 7 co mputers/3 cars (versus 3 0 computers/ 2 cars) C hina 9 co mputers/1 3 cars (versus 2 computers/ 1 0 cars) 6 Comparative advantage: when a nation can produce the good at a lower opportunity cost than its trading partner. Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 OR Cars 40 20 ◦ N O T E: T h e U n ited S tates h as an abso lu te advan tage in both com puters and cars. 7  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 OR Cars 40 20 I l l u s trate th es e produ cti on pos s i bi l i ti es S t a r t wi t h i n i t i a l p r o d u c t i o n p o i n t s : U.S. 5 4 co mputers/4 cars C hina 2 co mputers/1 0 cars 8  Prod uc ti on i n 1 d ay U.S. 5 4 computers / 4 cars United States China Chi na 2 computers / 1 0 Comp ute rs 60 4 cars OR Let’s change Cars 40 20 production in the two countries: Computers US: 54 computers Cars US: 4 cars U.S. changes production China: 2 computers China: 10 cars fro m 54 co m puters/4 cars World: 56 computers World: 14 cars to 60 computers/0 cars Computers Cars C h in a c h an ges pro du c tio n US: 60 computers US: 0 cars fro m 2 co m pu ters/1 0 cars China: 0 computers China: 20 cars to 0 computers/20 cars World: 60 computers World: 20 cars 9 U.S. 5 4 computers / 4 cars Prod uc ti on i n 1 d ay Chi na 2 computers / 1 0 United States China cars Comp ute rs 60 4 OR Cars 40 20 U.S. 6 0 computers / 0 cars Chi na 0 computers / 2 0 cars Trade 4 US co m puters fo r C hinese 8 cars and again see the G A IN S FRO M TRA D E: U.S. 5 6 co mputers/8 cars (versus 5 4 computers/ 4 cars) C hina 4 co mputers/1 2 cars (versus 2 computers/ 1 0 cars) 10  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 OR Cars 40 20 In China, what is the opportunity cost—what is given up—to produce a computer? A car? – C o mputer: (1 /4 ) × 2 0 = 5.0 cars per co mputer – C ar: (1 /2 0 ) × 4 = 0.20 computers per car In the United States, what is the opportunity cost of a computer? A car? – Computer: (1/60) × 40 = 0.67 car per computer – C ar: (1 /4 0 ) × 60 = 1.50 computers per car 11  Bottom line on opportunity cost, comparative advantage, and trade: The country with the lowest opportunity cost of producing a good Has a comparative advantage in producing the good Exports the good 12  Demand and Supply Stupid Parrot Joke Notes Optional 13 Competitive Market De ma nd a nd De ma nd C ur v e ◦ Price ◦ Law of Demand – A rise in the price of the good decreases the quantity demanded; a fall in the price of the good increases the quantity demanded. 14 Ot he r F a c t o r s Income ◦ Normal good: An increase in income increases the demand for a normal good. ◦ Inferior good: A decrease in income increases the demand for an inferior good. 15 S hi f t i n De ma nd C ur v e v e r s us Mo v e me nt Al o ng De ma nd C ur v e Change in demand Change in the quantity demanded 16 F a c t o r s T ha t S hi f t t he De ma nd C ur v e Prices of Related Goods ◦ Substitutes (in consumption): A rise in the price of a substitute increases the demand for the good. ◦ Complements (in consumption): A rise in the price of a complement decreases the demand for the good. Number of Demanders ◦ An increase in the number of demanders increases the demand for the good; a decrease in the number decreases the demand for the good. 17 F a c t o r s T ha t S hi f t t he De ma nd C ur v e Preferences ◦ Liking a product more increases the demand for the good; liking a product less decreases the demand for the good. Expected future price ◦ Higher expected future price increases the current demand for the good; lower future expected price decreases the current demand for the good. 18 Summary: 5 Factors That Shift the Demand Curve Income ◦ Normal Good ◦ Inferior Good Prices of Related Goods ◦ Substitutes (in consumption) ◦ Complements (in consumption) Number of Demanders Preferences Expected future price 19 S uppl y a nd S uppl y Cur ve Price ◦ Law of Supply A rise in the price of the good increases the quantity supplied; a fall in the price of the good decreases the quantity supplied. 20 Supply and Supply Curve Ot he r F a c t o r s ◦ Cost: A d ecrease in cost increases the sup p ly. 21 S hi f t i n S up p l y C ur v e v e r s us Mo v e me nt Al o ng S uppl y Cur ve Change in supply Change in the quantity supplied 22 F a c t o r s T ha t S hi f t t he S uppl y Cur v e Technology ◦ Advance in technology increases the supply of the good. N umber of suppliers ◦ Increase in the number of suppliers increases the supply of the good; decrease in number of suppliers decreases the supply of the good. State of nature ◦ Good state of nature increases the supply of the affected goods; bad state of nature decreases the supply of the affected goods. 23 Ot he r F a c t o r s Expected future price ◦ Higher expected future price decreases the current supply of the good; lower expected future price increases the current supply of the good. 24 Summary: 5 Factors That Shift the Supply Curve Cost Technology Number of suppliers State of nature Expected future price 25 Equi l i br i um 26  AS I DE: Do n’ t t a k e no t e s! The 4-step method 1. Draw a demand and supply diagram 2. Identify which curve shifts 3. Determine the direction of the shift 4. Draw the new curve OK, no w ba c k t o T AKI NG NOT ES ! 27 S ur pl use s } C o ns ume r S ur p l us : The difference between the maximum price a consumer is willing to pay and the price actually paid, summed over the quantity consumed. 28 S ur pl use s } P r oduc e r S ur pl us: The difference between the price a producer actually received and the minimum price the producer is willing to charge, summed over the quantity produced. 29 S ur pl use s Total Surplus 30  Exports ◦ Consumers W ors e off; con s u m er s u rp lu s d ecrea s es ◦ Producers Better off; p r od u cer s u r p lu s in cr ea s es ◦ Society Better off; tota l s u r p lu s in cr ea s es 31  I mp o r t s ◦ C onsum ers Better off; con s u m er s u r p lu s in cr ea s es ◦ Pro d ucers W ors e off; p rod u cer s u rp lu s d ecrea s es ◦ So cie ty Better off; tota l s u r p lu s in cr ea s es 32  Import s ◦ A symmetries – Gains fro m trade are no t equally distributed no r equally visible – Import loss is highly visible – Impo rt gain is literally invisible 33 Balance of trade deficit 2016: $502 b illion 2019: $617 b illion 2023: $773 b illion 34 } Type s of Pr ot e ct i on ◦ Tariff: Ta x im p osed on a n im p orted good ◦ Quota: Q u a n tita tive lim it on th e q u a n tity of a good th a t m a y b e im p orted. (A “V olu n ta ry Exp ort Restra in t” or “V ER” is a q u ota in wh ich th e exp or tin g cou n tr y “volu n ta r ily ” a gr ees to lim it th e q u a n tity of its exp or ts.) ◦ Other: H ea lth a n d s a fety req u irem en ts ; tech n ica l s ta n d a rd s ; costly cu stom s p roced u res; etc. 35 Balance of trade deficit and tariffs Big impact from tariffs? Balance of trade deficit Any impact from tariffs? 2016: $502 b illion 2019: $617 b illion 2023: $773 b illion 36  2023Services 2016 Goods and Goods and Services U.S. Imports: $480BU.S. Imports: $448B U.S. Exports: $169BU.S. Exports: $195B U.S. Deficit: $311BU.S. Deficit: $253B 2023 Goods: 2016 Goods: U.S. Imports: $427B U.S. Imports: $463B U.S. Exports: $148B U.S. Exports: $116B U.S. Deficit: $279B U.S. Deficit: $347B 2023 Services: 2016 Services: U.S. Imports: $20B U.S. Imports: $17B U.S. Exports: $46B U.S. Exports: $53B U.S. Surplus: $26B U.S. Surplus: $36B Why an impact here but not in total? 37  China Vietnam Goods and Services Goods and Services U.S. Imports: $480B U.S. Imports: $43B U.S. Exports: $169B 2016 U.S. Exports: $12B U.S. Deficit: $311B U.S. Deficit: $31B Goods and Services Goods and Services U.S. Imports: $448B U.S. Imports: $116B U.S. Exports: $195B 2023 U.S. Exports: $13B U.S. Deficit: $253B U.S. Deficit: $103B 38 Ef f ect of a ta r i f f : 39 } T a r i f f s umma r y : ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Government Better off; gains revenue ◦ Society Worse off; total surplus decreases ◦ A symmetry (again) 40 F r i e d ma n a nd a n AF L / C I O U ni o n o f f i c i a l http://www.youtube.com/watch?v=zk3ruapRQZk } F r i e d ma n a l s o t a l k e d a b o ut t w o o t he r a f f e c t e d ma r k e t s : ◦ O ther domestic industries Worse off ◦ O ther exporting industries Worse off ◦ A symmetry (again) 41  Mi l t o n F r i e d ma n i n 1 9 7 8 https://www.youtube.com/watch?v=j0pl_FXt0eM P r e s i d e n t T r u mp , 2 0 1 8 https://www.youtube.com/watch?v=fE1aWSpsDmg Effects, 2019 https://www.youtube.com/watch?v=Eky60iHXfOM&ab_chan nel=CNBC P r e side n t B ide n , 2 0 2 4 https://www.yo utube.co m /watch?v=0 o uV jaH tPX g 42 Ef f e c t o f a Quo t a : 43 } Quota summary: ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Someone Better off; gains quota rent ◦ Society Worse off; total surplus decreases 44 Compete with Low-Cost Labor (aka Save Jobs) ◦ Protection is necessary to enable the industry to compete with low-cost foreign labor. By protecting the industry, jobs are saved. ◦ Labor is low-cost when it is low-productive. ◦ The cost of saving jobs is incredibly high. 45 Infant Industry Argument ◦ The industry needs to be protected when it is starting because its costs are high. As time passes, the industry’s costs fall so that it has a competitive advantage against other nations’ mature industries. ◦ The problem is that if the industry will successfully be able to compete against foreign firms, then private entrepreneurs will see a profit opportunity and fund the firms. Protection is not necessary. ◦ If the industry cannot successfully compete, then entrepreneurs will not fund the firms. Once again protection is not necessary. 46 N a t i o na l S e c ur i t y Ar g ume nt ◦ Th e in d u stry n eed s to b e p rotected b eca u se it is n ecessa ry to n a tion a l secu rity. ◦ Th er e is m erit in th is a rgu m en t b u t for a lim ited n u m b er of in d u stries. ◦ Th is a rgu m en t is u sed to excess. 47 Hua we i ◦ H u a wei is a h u ge, C h in es e p rod u cer of telecom eq u ip m en t, in clu d in g 5G eq u ip m en t. ◦ Th ere is con cern in th e Un ited Sta tes th a t H u a wei eq u ip m en t ca n b e u s ed to s p y u p on com m u n ica tion s. ◦ I have a “Case Study” of Huawei but … 48 R e t a l i a t i o n Ar g ume nt ◦ Pro tectio n is justified as retaliatio n fo r unfair trade policies. ◦ The basic claim here is that if another country pursues “unfair trade po licies,” such as a tariff, then im po sing pro tectio n can be used to fo rce the other country to negotiate. ◦ This assertio n m ight be justifiable if it wo rks. B ut whether it works or not seems hard to determine. ◦ There is the po tential fo r gain but that po tential must be balanced against the certainty of losses. 49 } T a r i f f s umma r y : ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Government Better off; gains revenue ◦ Society Worse off; total surplus decreases 50 } Quota summary: ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Importers Better off; gain quota rent ◦ Society Worse off; total surplus decreases 51 Sugar ◦ Tariff Rate Quota limits imports to about 20% of total U.S. production ◦ (The “tariff rate quota” allows some sugar in at a low rate but for amounts exceeding the limit, the tariff rises to 150% of the price of sugar) ◦ https://www.youtube.com/watch?v=uHAxpvkLNKQ – Collin Peterson Chair of Agricultural Committee $63,500 – Kat Cammack Member Agricultural Committee $39,550 – Frank Lucas Member Agricultural Committee $34,250 – Sanford Bishop Member Agricultural Committee $34,000 ◦ https://www.youtube.com/watch?v=gYTRUL8aDfg&t=8s 52 Sugar } What are the market impacts of this protection? ◦ U.S. price of raw sugar in 2023: 41¢ per pound ◦ World price of raw sugar in 2020: 24¢ per pound 53  Sugar—who gains? Domino Sugar C&H Sugar Florida Crystals Redpath Sugar Alfonso Fanjul and Jose (Pepe) Fanjul American Sugar Refining 54 } Wha t a r e t he i mp a c t s i n o ur mo d e l o f a t a r i f f ? ◦ C o n su m er su rplu s: $3.3 billion - $5.4 billion lost ◦ Pro du cer su rplu s: $0.6 billion - $3.5 billion gain ◦ D eadw eigh t lo ss: $2.3 billion (averaging the above estimates) } Wha t a r e t he “ p r a c t i c a l ” i mp a c t s ? ◦ Jo bs saved: 3,600 ◦ C o st per jo b to c o n su m ers: $1,208,000 ◦ C o st per jo b to so c iety : $639,000 ◦ A verage w age: $50,000 55 Washing machines Prices rise by about 10% Jobs saved: 1,800 Cost per job to consumers: $800,000 56 Aggregate Effects of Tariffs: Percentage of traded products targeted: 12.7% Average U.S. tariff before trade war on targeted products: 2.6% Average U.S. tariff after trade war on targeted products: 16.6% Losses to U.S. consumers and firms that buy imports: ─$51.0B Gains to U.S. import-competing firms and tariff revenue: $43.8B Net effect: ─$7.2B 57