International Trade & Decision making

Presidential Debates talked about how to revive our domestic production and create jobs.  Here are examples of  three industries where the US domestic producers are losing, or outsourcing by moving productions overseas. 

(1)   Shrimp industry:  about ninety percent of US shrimp consumption is imported from overseas.   The domestic producers made complaints that are standard when a US producer faces foreign competition, and the US Department of Commerce has approved protective tariffs against shrimp imports.  As a result, American consumers now will not be able to benefit from the lower cost of production from the low-cost shrimp producers from Asia or Latin America.

(2)   The US imposed tariffs about 27 percent on lumber from Canada. You would think this would hurt Canadian lumber producers, and it did.  But it also forced them to be more efficient, while the US lumbers produce at relatively inefficient mills. The result is that more US lumber mills have closed than Canadian ones.

(3)   The Auto manufacturing states in the upper Midwest region such as Michigan, Wisconsin, and Ohio have turned into crucial battlegrounds during the election campaign.  The US government accused China for unfairly subsidizing its car components industry, and then the US imposed tariff on car-parts imported from China.  China retaliated with imposing import tariffs on other goods that it imports from the US.  This dispute is currently being reviewed by WTO.

 

If you were an economic adviser to a Presidential Candidate, what would be your advice regarding trade, import tariff or quota, and how to revive the domestic production?  In giving your answers, please refer to the above industries. 

 

.  As a guideline, each of the 10 points will be derived from the following:

 

1. Post your answer (350 words) to the posted DQ responding to the matter asked, instead of repeating the question or not attending to the question. Substantive answers include making comments using concepts found in the assigned reading materials or offering examples from your experience. Hence merely providing a brief “yes, I agree” or “no, I do not agree” postings are not adequate posts

2. Write in correct grammar; any errors will translate to a deduction in points.

3. Check for the spelling; any errors will deduct points.

4. Your responses must be substantive that include your own thoughts, supported with research (at least two external sources other than textbook, and you must quote these sources).

5. Offer a creative solutions in addition to the obvious socio-economic impacts of each topic, such as environment, politic, or other issues.  

6. Offer a future recommendation or alternative options for the future with regard to the topic in question.

How

comparative advantage

leads to mutually beneficial international trade

The

sources of international comparative advantage

Who gains and who loses

from international trade, and

why the gains exceed the losses

How

tariffs

and

import quotas

cause inefficiency and reduce total surplus

Why

governments often engage in trade protection and how

international trade agreements

counteract this

To

First

Active

Learning

To

Video

What you will learn in this chapter

1

INTERNATIONAL TRADE

International trade improves the welfare of Chinese smart phone producers as well as American consumers.

Back to Table of contents

Image: Imaginechina/Corbis
2

INTERNATIONAL TRADE…
…is more important for the U.S. than it used to be and is more important for some countries than others…

Back to Table of contents

PRODUCTION POSSIBILITIES AND COMPARATIVE ADVANTAGE REVISITED
(Click here to skip this review section based on material found in Chapter 2)
Trade follows the Ricardian model.
(We assume that countries will specialize in goods they can produce more cheaply than other countries.)
Autarky: a situation in which a country does not trade with other countries.

Back to Table of contents

COMPARATIVE ADVANTAGE AND GAINS FROM TRADE
100
0
100,000
100
0
25,000
50,0000
(a) U.S. production possibilities

U.S. production and consumption
without trade

U.S.
PPF
China’s
PPF
Quantity of
trucks
Quantity of
trucks
Quantity of phones
Quantity of phones
(b) China’s production possibilities
China’s production and consumption
without trade
50,000
50

Since each country has a different opportunity cost, it makes sense to specialize and trade.
200

Back to Table of contents

More trucks will be produced than before with the same resources
(from 75,000 (50,000+25,000) to 100,000 trucks and from 150 (50 + 100) to 300 phones).
Since the United States has the comparative advantage in trucks, it will specialize in trucks.
And China has the comparative advantage in phones, so it will specialize in phones.
COMPARATIVE ADVANTAGE AND GAINS FROM TRADE
100
0
100,000
100
0
25,000
50,0000
(a) U.S. production possibilities

U.S. production and consumption
without trade

U.S.
PPF
China’s
PPF
Quantity of
trucks
Quantity of
trucks
Quantity of phones
Quantity of phones
(b) China’s production possibilities
China’s production and consumption
without trade
50,000
50

200

Back to Table of contents

COMPARATIVE ADVANTAGE AND GAINS FROM TRADE
Both countries will be happy to export their goods for any price ABOVE their cost of production and import for any price BELOW their cost of production.
The United States will send trucks to China in return for phones…
…and China will send phones to the United States in return for trucks.
Both are happy with 1 truck trading for 2,000 phones.
100
0
100,000
100
0
25,000
50,0000
(a) U.S. production possibilities

U.S. production and consumption
without trade

U.S.
PPF
China’s
PPF
Quantity of
trucks
Quantity of
trucks
Quantity of phones
Quantity of phones
(b) China’s production possibilities
China’s production and consumption
without trade
50,000
50

200
62,500
75
U.S. consumption
with trade
China’s consumption
with trade
37,500
125

Back to Table of contents

Don’t confuse absolute and comparative advantage.
Just because the United States can produce more of both goods doesn’t mean we’re better off without trade.
Pay attention to opportunity costs:
If it’s cheaper for China to produce phones than it is for the United States, the United States will want to import phones from China.

Back to Table of contents

8

PRODUCTIVITY AND WAGES AROUND THE WORLD
The real explanation for low wages in poor countries is low overall productivity.

Back to Table of contents

Image: Penn world tables
9

SOURCES OF COMPARATIVE ADVANTAGE
Differences in climate
(Bananas grow better here.)

Back to Table of contents

SOURCES OF COMPARATIVE ADVANTAGE
Differences in factor endowments
(Canada can produce paper more cheaply because it’s heavily forested.)
Factor abundance: the supply of a factor of production relative to other factors.
How many forests does a country have compared to machines or people?
Factor intensity: a measure of the quantity of a factor used in comparison with other factors.
How much labor is used compared to natural resources or machines?

Back to Table of contents

THE HECKSCHER-OHLIN MODEL
Bertil Ohlin
Eli Filip Heckscher

“A country that has an abundant supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor.”

Back to Table of contents

THE HECKSCHER-OHLIN MODEL IN ACTION
Who produces (labor-intensive) clothing? Countries with lots of labor.
China and Bangladesh produce much of the world’s clothing.

Back to Table of contents

SOURCES OF COMPARATIVE ADVANTAGE
Differences in technology
Sometimes a country has developed a particular technology that explains its comparative advantage.
Swiss watches, for example

Back to Table of contents

Increasing returns to scale also play a role in trade:
If an industry gets more efficient as it grows, then there will be a few large producers…
and production may take place in only a few countries.

Back to Table of contents

HOW HONG KONG LOST ITS SHIRTS
Hong Kong lost its comparative advantage in garments.
Why?
It got better at other things too, which meant it was now giving up MORE to produce garments.
To Next

Active Learning

Back to Table of contents

Image: Jennifer Thermes/Getty Images
16

SUPPLY, DEMAND, AND INTERNATIONAL TRADE
We can use the demand and supply model to determine:
the effects of free trade on:
domestic equilibrium price and quantity.
imports.
the effects of trade barriers on:
domestic equilibrium price and quantity.
imports.

Back to Table of contents

CONSUMER AND PRODUCER SURPLUS IN AUTARKY

Price of phones
Quantity of phones
Consumer surplus
Producer surplus
A
QA
PA
Domestic supply
Domestic demand

Back to Table of contents

THE DOMESTIC MARKET WITH IMPORTS

Price of phones
QA
Quantity of phones
A
PW
PA

Imports

Domestic quantity supplied with trade

Domestic quantity demanded with trade
QS
QD
Domestic supply
Domestic demand
Autarky price
World price

Back to Table of contents

Suppose this country opens to trade and that the world price is equal to D. Then we know that they will:
import the number of bicycles between points R and S.
import the number of bicycles between points P and S.
export the number of bicycles between points P and R.
export the number of bicycles between points P and T.

To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

THE EFFECTS OF IMPORTS ON SURPLUS

QA
A
PW

PA

W
X
Y
QS
QD
Price of phones
Quantity of phones
Domestic supply
Domestic demand

– X
X + Z
+ Z

Gain
Loss
Changes in surplus
Consumer surplus
Producer surplus
Change in total surplus
Z
Imports

Allowing imports increases total surplus.

Back to Table of contents

THE DOMESTIC MARKET WITH EXPORTS

Price of
phones
QA
Quantity of
phones

A
PA
PW

Autarky price

World price
Exports

Domestic quantity demanded with trade

Domestic quantity supplied with trade
QD
QS
Domestic supply
Domestic demand

Back to Table of contents

Suppose this country opens to trade and the world price is equal to B. Then we know that they will:
import the quantity of bicycles between points M and W.
import the quantity of bicycles between points W and T.
export the quantity of bicycles between points M and W.
export the quantity of bicycles between points W and T.

To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

THE EFFECTS OF EXPORTS ON SURPLUS

QA

A
PA
PW
Exports
W
X
Y
Z
QD
QS
Price of phones
Quantity of
phones
Domestic supply
Domestic demand

–
X
X
+
Z
+ Z

Gain
Loss
Changes in surplus
Consumer surplus
Producer surplus
Change in total surplus
Allowing exports increases total surplus.

Back to Table of contents

INTERNATIONAL TRADE AND WAGES
Broader effects of international trade: income distribution
Terms:
Exporting industries produce goods and services that are sold abroad.
Import-competing industries produce goods and services that are also imported.

Back to Table of contents

INTERNATIONAL TRADE AND WAGES
Does the combination of:
growing imports of labor-intensive products from newly industrializing economies and
the export of high-technology goods
cause a widening wage gap between highly educated and less well educated U.S. workers?
Many economists think so.

Back to Table of contents

THE EFFECTS OF TRADE PROTECTION
Policies that limit imports are known as trade protection or simply as protection.
A tariff is a tax levied on imports.

Back to Table of contents

27

THE EFFECTS OF A TARIFF
A tariff has two effects:
↑ domestic production, ↓ domestic consumption.
The good is now produced by the higher-cost country.
Less is consumed → lower gains from trade.
Measuring the losses and wasted resources
Can we measure the value of wasted resources? Yes!

Back to Table of contents

28

THE EFFECT OF A TARIFF

PT
PW

World price
Tariff
QST

Imports after tariff

Price with tariff

Imports before tariff
QD
QDT
QS
Price of
phones
Quantity of
phones
Domestic supply
Domestic demand
The tariff pushes up the price, which reduces quantity demanded and increases domestic quantity supplied.

Back to Table of contents

A TARIFF REDUCES TOTAL SURPLUS
+A
+C
–(A + B + C + D)

Government revenue

–(
B
+
D
)
Gain
Loss
Changes in surplus
Consumer surplus
Producer surplus
Change in total surplus

A
C
B
D

PT
PW

QST

QD
QDT
QS
Price of phones
Quantity of phones
Domestic supply
Domestic demand
Tariff
Imports after tariff
Imports before tariff
The tariff reduces consumer surplus,
increases producer surplus,
and creates deadweight loss.
creates new government revenue,

Back to Table of contents

If this country is an autarky, which is the area that corresponds to consumer surplus? Which area corresponds to producer surplus?
Consumer surplus = ACQ; producer surplus = CQIF.
Consumer surplus = ADS; producer surplus = DPE.
Consumer surplus = ACQ; producer surplus = CQE.
Consumer surplus = BMNC; producer surplus = CNOD.

To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

THE EFFECTS OF AN IMPORT QUOTA
Import quota: legal limit on the quantity of a good that can be imported.
Effect?
Same as tariff, except instead of government revenue, “quota rents” will go to quota license holders (usually foreigners).

Back to Table of contents

TRADE PROTECTION IN THE UNITED STATES
Until recently, clothing and textiles were strongly protected from import competition.
Now: the United States has very low tariffs, which increased the benefit of trade (or, as in the graph, reduced the lost “welfare”).

Back to Table of contents

ARGUMENTS FOR TRADE PROTECTION
National Security
In times of national crisis or war the United States must be able to rely on key domestic industries:
Oil
Steel
Defense
Food
Protection is required even during peacetime to ensure their availability.

Back to Table of contents

34

ARGUMENTS FOR TRADE PROTECTION
Trade and domestic employment
Globalization will force some firms to lay off workers.
Even so, increased trade usually increases jobs in other industries (exporters).
But: for workers who lose their jobs, switching industries can be difficult and time-consuming.

Back to Table of contents

35

At TEDIndia, TED favorite Hans Rosling gives another lively and humorous talk here and graphs global economic growth since 1858. He also predicts the exact date that India and China will outstrip the United States. (15:50 minutes)

Back to Table of contents

36

ARGUMENTS FOR TRADE PROTECTION
The infant industry argument:
Infant industry: New industries need a temporary period of protection to develop.
Critique:
Hard for government to predict the best emerging technologies.
Difficult to become competitive when protected from competition.
Many times politics determine which industries are granted protection.

Back to Table of contents

37

Which argument against trade is the strongest in your opinion?
Trade reduces the number of jobs in the United States and should therefore be limited.
It’s wrong to trade with countries that use child labor.
We need to keep some industries for reasons of national security.
We need to protect certain industries while they develop.
To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

INTERNATIONAL TRADE AGREEMENTS AND
THE WORLD TRADE ORGANIZATION
Countries care about each others’ trade policies…
International trade agreements: treaties in which a country promises to reduce import tariffs in return for a promise by the other country to do the same.
NAFTA (North American Free Trade Agreement): a trade agreement between the United States, Canada, and Mexico.
EU (European Union): a customs union among 27 European nations.
Global trade agreements
WTO (World Trade Organization): oversees international trade agreements and rules on disputes between countries over those agreements.

Back to Table of contents

NEW CHALLENGES TO GLOBALIZATION
Globalization and inequality: Outsourcing
Offshore outsourcing: hiring people in another country to perform various tasks.
Sweatshop labor fallacy: It’s easy to get outraged about the low wages paid to the person who made your shirt, harder to appreciate how much worse off that person would be if denied the opportunity to sell goods in rich countries’ markets.

Back to Table of contents

A tariff results in a higher:
I. consumer surplus.
II. producer surplus.
III. government revenue.

I and II only
II and III only
I and III only
I, II, and III

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

How

comparative advantage

leads to mutually beneficial international trade

The

sources of international comparative advantage

Who gains and who loses

from international trade, and

why the gains exceed the losses

How

tariffs

and

import quotas

cause inefficiency and reduce total surplus

Why

governments often engage in trade protection and how

international trade agreements

counteract this

To

First

Active

Learning

To

Video

What you will learn in this chapter

1

INTERNATIONAL TRADE

International trade improves the welfare of Chinese smart phone producers as well as American consumers.

Back to Table of contents

Image: Imaginechina/Corbis
2

INTERNATIONAL TRADE…
…is more important for the U.S. than it used to be and is more important for some countries than others…

Back to Table of contents

PRODUCTION POSSIBILITIES AND COMPARATIVE ADVANTAGE REVISITED
(Click here to skip this review section based on material found in Chapter 2)
Trade follows the Ricardian model.
(We assume that countries will specialize in goods they can produce more cheaply than other countries.)
Autarky: a situation in which a country does not trade with other countries.

Back to Table of contents

COMPARATIVE ADVANTAGE AND GAINS FROM TRADE
100
0
100,000
100
0
25,000
50,0000
(a) U.S. production possibilities

U.S. production and consumption
without trade

U.S.
PPF
China’s
PPF
Quantity of
trucks
Quantity of
trucks
Quantity of phones
Quantity of phones
(b) China’s production possibilities
China’s production and consumption
without trade
50,000
50

Since each country has a different opportunity cost, it makes sense to specialize and trade.
200

Back to Table of contents

More trucks will be produced than before with the same resources
(from 75,000 (50,000+25,000) to 100,000 trucks and from 150 (50 + 100) to 300 phones).
Since the United States has the comparative advantage in trucks, it will specialize in trucks.
And China has the comparative advantage in phones, so it will specialize in phones.
COMPARATIVE ADVANTAGE AND GAINS FROM TRADE
100
0
100,000
100
0
25,000
50,0000
(a) U.S. production possibilities

U.S. production and consumption
without trade

U.S.
PPF
China’s
PPF
Quantity of
trucks
Quantity of
trucks
Quantity of phones
Quantity of phones
(b) China’s production possibilities
China’s production and consumption
without trade
50,000
50

200

Back to Table of contents

COMPARATIVE ADVANTAGE AND GAINS FROM TRADE
Both countries will be happy to export their goods for any price ABOVE their cost of production and import for any price BELOW their cost of production.
The United States will send trucks to China in return for phones…
…and China will send phones to the United States in return for trucks.
Both are happy with 1 truck trading for 2,000 phones.
100
0
100,000
100
0
25,000
50,0000
(a) U.S. production possibilities

U.S. production and consumption
without trade

U.S.
PPF
China’s
PPF
Quantity of
trucks
Quantity of
trucks
Quantity of phones
Quantity of phones
(b) China’s production possibilities
China’s production and consumption
without trade
50,000
50

200
62,500
75
U.S. consumption
with trade
China’s consumption
with trade
37,500
125

Back to Table of contents

Don’t confuse absolute and comparative advantage.
Just because the United States can produce more of both goods doesn’t mean we’re better off without trade.
Pay attention to opportunity costs:
If it’s cheaper for China to produce phones than it is for the United States, the United States will want to import phones from China.

Back to Table of contents

8

PRODUCTIVITY AND WAGES AROUND THE WORLD
The real explanation for low wages in poor countries is low overall productivity.

Back to Table of contents

Image: Penn world tables
9

SOURCES OF COMPARATIVE ADVANTAGE
Differences in climate
(Bananas grow better here.)

Back to Table of contents

SOURCES OF COMPARATIVE ADVANTAGE
Differences in factor endowments
(Canada can produce paper more cheaply because it’s heavily forested.)
Factor abundance: the supply of a factor of production relative to other factors.
How many forests does a country have compared to machines or people?
Factor intensity: a measure of the quantity of a factor used in comparison with other factors.
How much labor is used compared to natural resources or machines?

Back to Table of contents

THE HECKSCHER-OHLIN MODEL
Bertil Ohlin
Eli Filip Heckscher

“A country that has an abundant supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor.”

Back to Table of contents

THE HECKSCHER-OHLIN MODEL IN ACTION
Who produces (labor-intensive) clothing? Countries with lots of labor.
China and Bangladesh produce much of the world’s clothing.

Back to Table of contents

SOURCES OF COMPARATIVE ADVANTAGE
Differences in technology
Sometimes a country has developed a particular technology that explains its comparative advantage.
Swiss watches, for example

Back to Table of contents

Increasing returns to scale also play a role in trade:
If an industry gets more efficient as it grows, then there will be a few large producers…
and production may take place in only a few countries.

Back to Table of contents

HOW HONG KONG LOST ITS SHIRTS
Hong Kong lost its comparative advantage in garments.
Why?
It got better at other things too, which meant it was now giving up MORE to produce garments.
To Next

Active Learning

Back to Table of contents

Image: Jennifer Thermes/Getty Images
16

SUPPLY, DEMAND, AND INTERNATIONAL TRADE
We can use the demand and supply model to determine:
the effects of free trade on:
domestic equilibrium price and quantity.
imports.
the effects of trade barriers on:
domestic equilibrium price and quantity.
imports.

Back to Table of contents

CONSUMER AND PRODUCER SURPLUS IN AUTARKY

Price of phones
Quantity of phones
Consumer surplus
Producer surplus
A
QA
PA
Domestic supply
Domestic demand

Back to Table of contents

THE DOMESTIC MARKET WITH IMPORTS

Price of phones
QA
Quantity of phones
A
PW
PA

Imports

Domestic quantity supplied with trade

Domestic quantity demanded with trade
QS
QD
Domestic supply
Domestic demand
Autarky price
World price

Back to Table of contents

Suppose this country opens to trade and that the world price is equal to D. Then we know that they will:
import the number of bicycles between points R and S.
import the number of bicycles between points P and S.
export the number of bicycles between points P and R.
export the number of bicycles between points P and T.

To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

THE EFFECTS OF IMPORTS ON SURPLUS

QA
A
PW

PA

W
X
Y
QS
QD
Price of phones
Quantity of phones
Domestic supply
Domestic demand

– X
X + Z
+ Z

Gain
Loss
Changes in surplus
Consumer surplus
Producer surplus
Change in total surplus
Z
Imports

Allowing imports increases total surplus.

Back to Table of contents

THE DOMESTIC MARKET WITH EXPORTS

Price of
phones
QA
Quantity of
phones

A
PA
PW

Autarky price

World price
Exports

Domestic quantity demanded with trade

Domestic quantity supplied with trade
QD
QS
Domestic supply
Domestic demand

Back to Table of contents

Suppose this country opens to trade and the world price is equal to B. Then we know that they will:
import the quantity of bicycles between points M and W.
import the quantity of bicycles between points W and T.
export the quantity of bicycles between points M and W.
export the quantity of bicycles between points W and T.

To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

THE EFFECTS OF EXPORTS ON SURPLUS

QA

A
PA
PW
Exports
W
X
Y
Z
QD
QS
Price of phones
Quantity of
phones
Domestic supply
Domestic demand

–
X
X
+
Z
+ Z

Gain
Loss
Changes in surplus
Consumer surplus
Producer surplus
Change in total surplus
Allowing exports increases total surplus.

Back to Table of contents

INTERNATIONAL TRADE AND WAGES
Broader effects of international trade: income distribution
Terms:
Exporting industries produce goods and services that are sold abroad.
Import-competing industries produce goods and services that are also imported.

Back to Table of contents

INTERNATIONAL TRADE AND WAGES
Does the combination of:
growing imports of labor-intensive products from newly industrializing economies and
the export of high-technology goods
cause a widening wage gap between highly educated and less well educated U.S. workers?
Many economists think so.

Back to Table of contents

THE EFFECTS OF TRADE PROTECTION
Policies that limit imports are known as trade protection or simply as protection.
A tariff is a tax levied on imports.

Back to Table of contents

27

THE EFFECTS OF A TARIFF
A tariff has two effects:
↑ domestic production, ↓ domestic consumption.
The good is now produced by the higher-cost country.
Less is consumed → lower gains from trade.
Measuring the losses and wasted resources
Can we measure the value of wasted resources? Yes!

Back to Table of contents

28

THE EFFECT OF A TARIFF

PT
PW

World price
Tariff
QST

Imports after tariff

Price with tariff

Imports before tariff
QD
QDT
QS
Price of
phones
Quantity of
phones
Domestic supply
Domestic demand
The tariff pushes up the price, which reduces quantity demanded and increases domestic quantity supplied.

Back to Table of contents

A TARIFF REDUCES TOTAL SURPLUS
+A
+C
–(A + B + C + D)

Government revenue

–(
B
+
D
)
Gain
Loss
Changes in surplus
Consumer surplus
Producer surplus
Change in total surplus

A
C
B
D

PT
PW

QST

QD
QDT
QS
Price of phones
Quantity of phones
Domestic supply
Domestic demand
Tariff
Imports after tariff
Imports before tariff
The tariff reduces consumer surplus,
increases producer surplus,
and creates deadweight loss.
creates new government revenue,

Back to Table of contents

If this country is an autarky, which is the area that corresponds to consumer surplus? Which area corresponds to producer surplus?
Consumer surplus = ACQ; producer surplus = CQIF.
Consumer surplus = ADS; producer surplus = DPE.
Consumer surplus = ACQ; producer surplus = CQE.
Consumer surplus = BMNC; producer surplus = CNOD.

To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

THE EFFECTS OF AN IMPORT QUOTA
Import quota: legal limit on the quantity of a good that can be imported.
Effect?
Same as tariff, except instead of government revenue, “quota rents” will go to quota license holders (usually foreigners).

Back to Table of contents

TRADE PROTECTION IN THE UNITED STATES
Until recently, clothing and textiles were strongly protected from import competition.
Now: the United States has very low tariffs, which increased the benefit of trade (or, as in the graph, reduced the lost “welfare”).

Back to Table of contents

ARGUMENTS FOR TRADE PROTECTION
National Security
In times of national crisis or war the United States must be able to rely on key domestic industries:
Oil
Steel
Defense
Food
Protection is required even during peacetime to ensure their availability.

Back to Table of contents

34

ARGUMENTS FOR TRADE PROTECTION
Trade and domestic employment
Globalization will force some firms to lay off workers.
Even so, increased trade usually increases jobs in other industries (exporters).
But: for workers who lose their jobs, switching industries can be difficult and time-consuming.

Back to Table of contents

35

At TEDIndia, TED favorite Hans Rosling gives another lively and humorous talk here and graphs global economic growth since 1858. He also predicts the exact date that India and China will outstrip the United States. (15:50 minutes)

Back to Table of contents

36

ARGUMENTS FOR TRADE PROTECTION
The infant industry argument:
Infant industry: New industries need a temporary period of protection to develop.
Critique:
Hard for government to predict the best emerging technologies.
Difficult to become competitive when protected from competition.
Many times politics determine which industries are granted protection.

Back to Table of contents

37

Which argument against trade is the strongest in your opinion?
Trade reduces the number of jobs in the United States and should therefore be limited.
It’s wrong to trade with countries that use child labor.
We need to keep some industries for reasons of national security.
We need to protect certain industries while they develop.
To Next

Active Learning

LEARN BY DOING: PRACTICE QUESTION

Back to Table of contents

INTERNATIONAL TRADE AGREEMENTS AND
THE WORLD TRADE ORGANIZATION
Countries care about each others’ trade policies…
International trade agreements: treaties in which a country promises to reduce import tariffs in return for a promise by the other country to do the same.
NAFTA (North American Free Trade Agreement): a trade agreement between the United States, Canada, and Mexico.
EU (European Union): a customs union among 27 European nations.
Global trade agreements
WTO (World Trade Organization): oversees international trade agreements and rules on disputes between countries over those agreements.

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NEW CHALLENGES TO GLOBALIZATION
Globalization and inequality: Outsourcing
Offshore outsourcing: hiring people in another country to perform various tasks.
Sweatshop labor fallacy: It’s easy to get outraged about the low wages paid to the person who made your shirt, harder to appreciate how much worse off that person would be if denied the opportunity to sell goods in rich countries’ markets.

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A tariff results in a higher:
I. consumer surplus.
II. producer surplus.
III. government revenue.

I and II only
II and III only
I and III only
I, II, and III

LEARN BY DOING: PRACTICE QUESTION

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