Chapter 6 International Trade United states puts trade barriers to keep the price of sugar high for American sugar producers International trade has been one of the two most important economic relationships among countries Protectionism rests on the principle of making things relatively scarce Economists are virtually unanimous in concluding that international trade brings important benefits to national economies and that barriers to trade hurt economic growth and well being Reducing trade barriers trade liberalization is good for a nations economy Trade liberalization crates both winners and losers National political institutions affect the extent to which interest groups that stand to lose from world trade will prevail over those that stand to gain The politics of international trade also involves the strategic interaction among national governments What s so good about trade Actors engage in foreign trade to realize the benefits of specialization The division of labor permits diverse segments of society to focus on different economic activities in ways that benefit society as a whole Specialization increased productivity and productivity fueled economic growth Specialization requires large markets therefore restricting market size slowed economic growth The division of labor depends on the market size Bigger market more specialization Comparative advantage core concept of the economics of trade The ability of a country or firm to produce a particular good or service more efficiently than other goods or services such that its resource are most efficiently employed in this activity The comparison is to the efficiency of other economic activities the actor might undertake not to the efficiency of other countries or firms They should do what they do best Nations gain most by specializing in producing and exporting what it produces most efficiently By doing so it can earn as much as possibly in order to pay for imports of the best products of other countries Absolute Advantage The ability of a country or firm to produce more of a particular good or service than other countries or firms using the same amount of effort and resources The ability to do something better than others It is not necessary for a country to have an absolute advantage in producing something for it to be profitable to produce and export it all that is necessary is a comparative advantage Comparative advantage work bets under free trade Trade protections raises the price of imports and reduces the efficiency of domestic Trade protection is harmful to the economy as a whole productions Government policies that keep out imports force the country to produce goods that are not to its comparative advantage to produce Economic logic insists that imports are the gains the trade and exports are its costs A country imports goods that it cannot make very well itself which allows the nation to focus its productive energies on making and exporting the goods it produces best Protection only serves to raise costs to consumers Why do countries trade what they do Comparative advantage is not simply a result of effort FOR EXAMPLE the productivity of a farmer depends primarily on the characteristics of the land not how hard the farmer works Heckscher Ohlin trade theory Make use of things your country is endowed the basic economic characteristics of a country in terms of its factor endowments the material and human resources it possess These factors include Land an essential input into agricultural production Labor typically understood to refer to undifferentiated and unskilled labor Capital for investment which refers to both the machinery and equipment with which goods are produced and to the financial assets necessary to employ this machinery and equipment Human capital which refers to skilled labor so called because the labor has been enhanced by investment in training and education The Heckscher Ohlin trade theory states these endowments determine national comparative advantage and what countries produce export The industrial countries are rich in capital and skilled labor and they export manufactured goods that make intensive use of these endowments Most developing countries are rich in land raw materials or unskilled labor and they export agricultural products minerals or labor intensive manufactures Countries that invest heavily in one anothers economy tend to trade heavily with one another Noneconomic reasons which influence trade 1 Trade between hostile nations is riskier than trade between friendly nations business avoid engaging in trade that may very well be disrupted by the outbreak of hostilities 2 Governments often pursue close economic ties with their allies in order to cement the alliance and help friendly nations Trade restrictions are the rule Not the exception Protectionism The imposition of barriers to restrict imports The use of specific measures to shield domestic producers from imports Commonly used protectionist devices include tariffs quantitative restrictions and other nontariff barriers Trade barriers any government limitation on the international exchange of a good Examples of tariff barriers tariffs quantitative restrictions quotas import licenses requirements that governments only buy domestically produced goods Health and safety standards that discriminate against foreign goods Historically the most common barrier is a tariff Tariff a tax on imports levied at the border and paid by the importer A tariff raises the price of the import directly so the consumer of that imported good has to pay more for it Quantitative restriction or quota quantitative limits placed on the import of particular goods Limits the quantity of a foreign good that can be sold domestically Because the reduced quantity typically causes an increase in its domestic prices a quantitative restriction has an effect of a tariff in that it makes its domestic price more expensive to its domestic consumer Nontariff barriers to trade regulations targeted at foreign goods or requirements that governments purchase from national producers Examples of nontariff barriers Restrictions on number of items that can be imported Regulations that favor domestic over imported products discriminate against foreign goods or services In colonial times we used mercantilist system as trade barriers Kept foreign goods out and reserved their colonial markets for themselves Trade liberalization policies that involved fewer restrictions on trade World
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