Application: International Trade 9 Application: International Trade Economics P R I N C I P L E S O F N. Gregory Mankiw This relatively short chapter has a few main objectives: Welfare analysis of free trade in a good that a country exports, relative to no trade. Welfare analysis of free trade in a good that the country imports, relative to no trade. Welfare analysis of a tariff, relative to free trade in a good the country imports. The most common arguments for restricting imports, and the economist’s response to each. Premium PowerPoint Slides by Ron Cronovich

In this chapter, look for the answers to these questions: What determines how much of a good a country will import or export? 한 나라가 어떤 재화를 얼마나 수입하거나 수출할지를 결정하게 하는 것은 무엇인가? Who benefits from trade? Who does trade harm? Do the gains outweigh the losses? 누가 무역으로부터 이득을 얻는가? 무역으로부터 피해를 입는 것은 누구인가? 이익은 손실보다 많은가? If policymakers restrict imports, who benefits? Who is harmed? Do the gains from restricting imports outweigh the losses? 정책결정자가 수입을 제한하면 누가 이득이고 누가 손해인가? 수입제한의 이득은 손실보다 큰가? What are some common arguments for restricting trade? Do they have merit? 무역을 제한하자는 주장의 논거는 무엇인가? 영양가 있는 주장인가? 1

Introduction Recall from Chapter 3: A country has a comparative advantage in a good if it produces the good at lower opportunity cost than other countries. 어떤 한 재화를 다른 나라들보다 더 낮은 기회비용으로 생산할 수 있는 나라는 그 재화에 대해 비교우위를 가지고 있는 것이다. Countries can gain from trade if each exports the goods in which it has a comparative advantage. 각 나라가 비교우위를 가지고 있는 재화를 수출한다면 그 나라들은 무역으로부터 이득을 얻을 수 있다. Now we apply the tools of welfare economics to see where these gains come from and who gets them. 무역의 이득이 어디에서 오며 누가 그것을 갖게 되는지 알아보기 위하여 후생경제학의 도구를 적용해보자 APPLICATION: INTERNATIONAL TRADE 2

The World Price and Comparative Advantage 국제가격과 비교우위 PW = the world price of a good, the price that prevails in world markets PD = domestic price without trade If PD < PW, country has comparative advantage in the good under free trade, country exports the good If PD > PW, country does not have comparative advantage under free trade, country imports the good The notation PW and PD introduced here is not in the textbook. APPLICATION: INTERNATIONAL TRADE 3

The Small Economy Assumption작은 경제의 가정 A small economy is a price taker in world markets: Its actions have no effect on PW. 작은 경제는 세계시장에서 가격수용자이다 : 어떤 행동도 국제가격(Pw)에 영향을 미치지 못한다고 가정. Not always true – especially for the U.S. – but simplifies the analysis without changing its lessons. 항상 옳은 가정은 아니지만-특히 미국에게는- 함의를 손상하지 않고 분석을 단순화할 수 있는 장점이 있다. When a small economy engages in free trade, PW is the only relevant price: 작은 경제가 자유무역에 참가할 때에는 Pw가 유일하게 통용되는 가격이다. No seller would accept less than PW, since she could sell the good for PW in world markets. No buyer would pay more than PW, since he could buy the good for PW in world markets. APPLICATION: INTERNATIONAL TRADE 4

A Country That Exports Soybeans 콩수출국 Without trade, PD = $4 Q = 500 PW = $6 Under free trade, domestic consumers demand 300 domestic producers supply 750 exports = 450 P Q Soybeans D S exports $6 300 750 $4 500 Students may not be aware of the economic importance of soybeans. In fact, soybeans are big business in the U.S. In 2007, U.S. farmers produced 2.6 billion bushels of soybeans. The average price was $10.40/bushel, for a total of $26.8 billion. Soybeans provided 71% of the edible consumption of fats and oils in the U.S. The U.S. exported 1.0 billion bushels of soybeans, earning $12.9 billion from exports. This amounts to 37% of international trade in soybeans. The biggest purchasers of U.S. soybeans are: China ($4.1 billion), Mexico ($1.1 billion), Japan ($1.1 billion), and Europe ($1.0 billion). Source: American Soybean Association, http://www.soystats.com/2008 Before covering this slide, alert your students that, in just a moment, they will be asked to do some analysis very similar to the analysis shown on this and the following slide. In this case, PD < PW, so this country will export soybeans. The quantity of exports is simply the difference between the domestic quantity supplied and the domestic quantity demanded at the world price. APPLICATION: INTERNATIONAL TRADE 5

A Country That Exports Soybeans Without trade, CS = A + B PS = C Total surplus = A + B + C With trade, CS = A PS = B + C + D Total surplus = A + B + C + D P Q Soybeans D S exports A $6 D B gains from trade $4 C Trade benefits soybean producers because they can sell at a higher price. Producer surplus rises by the area B + D. Trade makes domestic buyers worse off because they have to pay a higher price. Consumer surplus falls by the area B. The gains to producers are greater than the losses to consumers, so trade increases total welfare: total surplus rises by the amount D. APPLICATION: INTERNATIONAL TRADE 6

A C T I V E L E A R N I N G 1 Analysis of trade Without trade, PD = $3000, Q = 400 In world markets, PW = $1500 Under free trade, how many TVs will the country import or export? Identify CS, PS, and total surplus without trade, and with trade. P Q Plasma TVs D S $3000 400 The two preceding slides show students the analysis of trade when the country exports. The next step is to cover the analysis of trade when the country imports the good. Instead of lecturing on this material, I suggest you have students work on this exercise, which students to do this analysis themselves. It’s an activity that breaks up the lecture and gives students a chance to apply the techniques you’ve just presented. I suggest you have students work on it in pairs. Give them about 5 minutes, then go over the answers on the following two slides. While students are working, circulate around the room and offer to assist any students that ask for help. This will also give you a sense of how well students are understanding the material. If you prefer to lecture on the material instead, replace these slides with the two “hidden” slides that immediately follow the CHAPTER SUMMARY at the end of this file. You will then have to “unhide” those slides by unselecting “Hide Slide” from the “Slide Show” drop-down menu. $1500 200 600 7

A C T I V E L E A R N I N G 1 Answers Under free trade, domestic consumers demand 600 domestic producers supply 200 imports = 400 P Q Plasma TVs D S $3000 PD > PW, so this country will import plasma TV sets from abroad. The quantity of imports is simply the difference between the quantity demanded by domestic consumers and the quantity supplied by domestic firms at the world price. $1500 200 600 imports 8

A C T I V E L E A R N I N G 1 Answers Without trade, CS = A PS = B + C Total surplus = A + B + C With trade, CS = A + B + D PS = C Total surplus = A + B + C + D P Q Plasma TVs D S gains from trade A $3000 B D Trade benefits consumers in this case because it allows them to buy plasma TVs at lower prices, so more consumers can afford plasma TVs if imports are allowed. The gains to consumers appear on the graph as the area (B+D), which represents the increase in consumer surplus when the country allows trade. In this example, trade harms domestic producers because they now must sell their plasma TVs at a lower price. As a result, they produce a smaller quantity, earn less revenue, and likely let go of some of their workers. These losses are represented on the graph by the area B , which represents the fall in producer surplus resulting from trade. As the graph shows, the gains to consumers outweigh the losses to producers: total surplus increases by the amount D, which represents the gains from trade in plasma TV sets. $1500 C imports 9

Summary: The Welfare Effects of Trade rises falls exports PD < PW rises falls imports PD > PW direction of trade consumer surplus producer surplus total surplus Whether a good is imported or exported, trade creates winners and losers. But the gains exceed the losses. 재화가 수입되거나 혹은 수출되거나 간에, 무역은 승자와 패자를 낳는다. 그러나 이득은 손실보다 많다. APPLICATION: INTERNATIONAL TRADE 10

Other Benefits of International Trade 국제무역의 다른 편익 Consumers enjoy increased variety of goods. 소비자들은 다양해진 재화를 즐길 수 있다. Producers sell to a larger market, may achieve lower costs by producing on a larger scale. 생산자들은 더 큰 시장에서 판매하므로 더 큰 규모로 생산함으로써 비용의 절감을 이룰 수 있다. Competition from abroad may reduce market power of domestic firms, which would increase total welfare. 해외로부터의 경쟁은 국내기업들의 시장지배력을 축소시켜 총 후생을 증가시킨다. Trade enhances the flow of ideas, facilitates the spread of technology around the world. 무역은 새로운 아이디어와 기술의 전파를 돕는다. APPLICATION: INTERNATIONAL TRADE 11

Then Why All the Opposition to Trade?무역에 대한 반대론은 왜? Recall one of the Ten Principles from Chapter 1: Trade can make everyone better off. The winners from trade could compensate the losers and still be better off. 무역의 승자가 패자에게 보상하더라도 여전히 남는다. Yet, such compensation rarely occurs. 그러나 이러한 보상은 거의 일어나지 않는다. The losses are often highly concentrated among a small group of people, who feel them acutely. 무역의 손실은 종종 국민 중 일부 소그룹에 집중되며, 이들은 이를 첨예하게 느끼게 된다. The gains are often spread thinly over many people, who may not see how trade benefits them. 반면 이득은 종종 많은 사람들에게 넓고 얇게 퍼지며, 이들은 무역이 자신에게 이익을 주는지도 알지 못한다. Hence, the losers have more incentive to organize and lobby for restrictions on trade. 패자가 무역제한에 대한 유인이 더 크다. In December 2005, thousands of protestors gathered outside the meeting place of the World Trade Organization talks in Hong Kong. Some protests turned violent, and police made 900 arrests. Mankiw addresses the issue of opposition to trade very nicely in the “Ask the Author” video for Chapter 3. The “Ask the Author” videos are available at the textbook website. You may need a username and password; you can get them from your Cengage/South-Western sales rep. There is one “Ask the Author” video clip per chapter. Each video is about 2 minutes. In each, Mankiw addresses a question submitted by a student. I encourage you to check out these videos and consider showing some of them in your class. The videos for Chapter 3 and Chapter 9 both go very nicely with the material in this PowerPoint. APPLICATION: INTERNATIONAL TRADE 12

Tariff: An Example of a Trade Restriction 관세 : 무역제한의 한 예 Tariff: a tax on imports Example: Cotton shirts PW = $20 Tariff: T = $10/shirt Consumers must pay $30 for an imported shirt. So, domestic producers can charge $30 per shirt. 소비자들은 수입한 셔츠 한 벌에 30$을 지불해야한다. 그러므로 국내 생산자들은 셔츠당 30$의 가격을 매길 수 있다. In general, the price facing domestic buyers & sellers equals (PW + T ). 일반적으로 국내 구매자와 판매자에게 가격은 (국제가격+관세)와 같다. APPLICATION: INTERNATIONAL TRADE 13

Analysis of a Tariff on Cotton Shirts P Q PW = $20 Free trade: buyers demand 80 sellers supply 25 imports = 55 T = $10/shirt price rises to $30 buyers demand 70 sellers supply 40 imports = 30 Cotton shirts D S $30 40 70 $20 25 Imports 80 imports APPLICATION: INTERNATIONAL TRADE 14

Analysis of a Tariff on Cotton Shirts Free trade CS = A + B + C + D + E + F PS = G Total surplus = A + B + C + D + E + F + G Tariff CS = A + B PS = C + G Revenue = E(관세수입) Total surplus = A + B + C + E + G P Q deadweight loss = D + F Cotton shirts D S A B $30 The tariff benefits domestic producers by allowing them to sell for a higher price. Producer surplus increases by C. The tariff makes consumers worse off because they have to pay a higher price. Consumer surplus falls by C + D + E + F. The tariff generates revenue for the government equal to E. The losses from the tariff exceed the gains, so total welfare falls. The tariff reduces total surplus by (D + F). 40 70 C E D F $20 25 80 G APPLICATION: INTERNATIONAL TRADE 15

Analysis of a Tariff on Cotton Shirts P Q D = deadweight loss from the overproduction of shirts 셔츠의 과잉생산으로 인한 순손실 F = deadweight loss from the under-consumption of shirts 셔츠의 과소소비로 인한 순손실 deadweight loss = D + F Cotton shirts D S A B $30 A tariff is a tax. Like the taxes we studied in the preceding chapter, the tariff causes a deadweight loss because it distorts incentives. Here, the tariff causes the economy to devote more resources to a good that could be produced at lower opportunity cost in other countries. This causes a deadweight loss, represented on the graph by the area D. Also, the tariff gives consumers an incentive to purchase a smaller quantity. The result is a deadweight loss (area F on graph). 40 70 C E D F $20 25 80 G APPLICATION: INTERNATIONAL TRADE 16

Import Quotas: 수입쿼터 Another Way to Restrict Trade 무역제한의 다른 방법 An import quota is a quantitative limit on imports of a good. 수입쿼터는 어떤 제화의 수입에 부과된 양적 한계이다. Mostly has the same effects as a tariff: 대부분 관세와 동일한 효과 Raises price, reduces quantity of imports. Reduces buyers’ welfare. Increases sellers’ welfare. A tariff creates revenue for the govt. A quota creates profits for the foreign producers of the imported goods, who can sell them at higher price. 관세는 정부의 조세수입을 창출한다. (반면) 쿼터는 수입재의 해외생산자에게 비싼 가격으로 팔 수 있게 해줌으로써 이윤을 창출해준다. Or, govt could auction licenses to import to capture this profit as revenue. Usually it does not. 정부가 이 이윤을 차지하기 위하여 수입권을 경매에 부칠 수도 있지만 보통은 그렇게 하지 않는다. APPLICATION: INTERNATIONAL TRADE 17

Arguments for Restricting Trade무역제한에 대한 옹호의 논거들 Arguments for Restricting Trade무역제한에 대한 옹호의 논거들 1. The jobs argument 일자리 논리 Trade destroys jobs in industries that compete with imports. Economists’ response: Look at the data to see whether rising imports cause rising unemployment… APPLICATION: INTERNATIONAL TRADE 18

U.S. Imports & Unemployment, Decade averages, 1956-2005 U.S. Imports & Unemployment, Decade averages, 1956-2005 16% Imports (% of GDP) 14% 12% 10% 8% Unemployment (% of labor force) 6% 4% By using decade averages, the short-term noise and fluctuations average out, which makes the long-term trends easier to see. In most periods, rising imports are accompanied by falling, not rising, unemployment. Note: This data does not appear in the textbook. I include it here because I think it is effective. But it is not supported in the Test Bank or Study Guide, so please feel free to omit this and the preceding slide if you wish. Data source: FRED database, St Louis Federal Reserve, http://research.stlouisfed.org/fred2/ and my calculations. (I constructed imports as a percentage of GDP from quarterly, nominal, seasonally adjusted data. Then I computed simple averages of the two series over each of the decades shown in the graph.) 2% 0% 1956 -65 1966 -75 1976 -85 1986 -95 1996 -2005 APPLICATION: INTERNATIONAL TRADE 19

Arguments for Restricting Trade 1. The jobs argument Trade destroys jobs in the industries that compete against imports. Economists’ response: Total unemployment does not rise as imports rise, because job losses from imports are offset by job gains in export industries. 수입이 증가한다고 총 실업이 증가하지는 않는다. 왜냐하면 수입으로 인한 일자리의 축소는 수출산업에서의 일자리 확대에 의해 상쇄되기 때문이다. Even if all goods could be produced more cheaply abroad, the country need only have a comparative advantage to have a viable export industry and to gain from trade. 설사 모든 재화가 외국에서 더 싸게 생산될 수 있다고 하더라도, 그 나라가 수출산업을 갖고 무역의 이득을 얻기 위해서는 단지 비교우위만 가지면 된다. APPLICATION: INTERNATIONAL TRADE 20

Arguments for Restricting Trade 2. The national security argument 안보논리 An industry vital to national security should be protected from foreign competition, to prevent dependence on imports that could be disrupted during wartime. 안보에 중요한 산업의 경우 전시에 중단될 수도 있는 수입에 의존하는 상황을 막기 위해 해외 경쟁으로부터 보호되어야 한다. Economists’ response: Fine, as long as we base policy on true security needs. But producers may exaggerate their own importance to national security to obtain protection from foreign competition. 진정한 안보의 필요에 관한 정책이라면 좋다. 그러나 생산자들은 해외 경쟁으로부터의 보호를 이끌어내기 위해 안보에 대한 자신들의 중요성을 과장하는 경향이 있다. APPLICATION: INTERNATIONAL TRADE 21

Arguments for Restricting Trade 3. The infant-industry argument 유치산업보호 논리 A new industry argues for temporary protection until it is mature and can compete with foreign firms. 신생산업은 자신이 성숙해서 해외기업과 경쟁할 수 있을 때까지 일정기간의 보호가 필요하다고 주장한다. Economists’ response: Difficult for govt to determine which industries will eventually be able to compete and whether benefits of establishing these industries exceed cost to consumers of restricting imports. 어떤 산업들이 결과적으로 경쟁력을 가질 것인가, 그리고 이 산업들이 확고하게 살아남아서 주는 편익이 수입을 제한함으로써 소비자가 부담해야 하는 비용보다 더 클 것인가를 정부가 판단하기 어렵다. Besides, if a firm will be profitable in the long run, it should be willing to incur temporary losses. 또한 만약 어떤 기업이 장기적으로 수익성이 있다면 그 기업이 일시적인 손실을 기꺼이 감내해야 한다. APPLICATION: INTERNATIONAL TRADE 22

Arguments for Restricting Trade 4. The unfair-competition argument 불공정 경쟁 논리 Producers argue their competitors in another country have an unfair advantage, e.g. due to govt subsidies. 생산자들은 다른 나라에 있는 경쟁자들이 정부보조금과 같은 불공정한 어드벤티지를 누리고 있다고 주장한다. Economists’ response: Great! Then we can import extra-cheap products subsidized by the other country’s taxpayers. The gains to our consumers will exceed the losses to our producers. 잘됐네! 그렇다면 우리는 다른 나라의 납세자들이 보조한 특별히 싼 생산물들을 수입할 수 있겠군. 우리 소비자들의 이득이 우리 생산자들의 손실보다 더 클거야. APPLICATION: INTERNATIONAL TRADE 23

Arguments for Restricting Trade 5. The protection-as-bargaining-chip argument 협상전략으로서의 보호무역 논리 Example: The U.S. can threaten to limit imports of French wine unless France lifts their quotas on American beef. 예컨대 미국은 만약 프랑스가 미국 쇠고기에 대한 쿼터를 상향시키지 않으면 프랑스 와인 수입을 제한하겠다고 위협할 수 있다. Economists’ response: Suppose France refuses. Then the U.S. must choose between two bad options: 프랑스가 거절하면 미국은 다음의 나쁜 두 옵션 중에서 선택해야 A) Restrict imports from France, which reduces welfare in the U.S. 프랑스 (와인) 수입을 제한함. 이는 미국의 후생을 축소시킴 B) Don’t restrict imports, which reduces U.S. credibility. 수입을 제한하지 않음. 이는 미국의 신뢰도를 추락시킴 Of course, this argument and response are meant to apply more generally than in the specific example described. But most non-economics majors more easily learn a general concept if they start with a specific, graspable example than with the general concept itself. APPLICATION: INTERNATIONAL TRADE 24

Trade Agreements 무역협정 A country can liberalize trade with A country can liberalize trade with unilateral reductions in trade restrictions multilateral agreements with other nations Examples of trade agreements: North American Free Trade Agreement (NAFTA), 1993 General Agreement on Tariffs and Trade (GATT), ongoing World Trade Organization (WTO), est. 1995, enforces trade agreements, resolves disputes The WTO website (http://www.wto.org) has useful information. Especially worthwhile for students is the section “Common misunderstandings about the WTO.” APPLICATION: INTERNATIONAL TRADE 25

CHAPTER SUMMARY A country will export a good if the world price of the good is higher than the domestic price without trade. Trade raises producer surplus, reduces consumer surplus, and raises total surplus. A country will import a good if the world price is lower than the domestic price without trade. Trade lowers producer surplus but raises consumer and total surplus. A tariff benefits producers and generates revenue for the govt, but the losses to consumers exceed these gains. 26

CHAPTER SUMMARY Common arguments for restricting trade include: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Some of these arguments have merit in some cases, but economists believe free trade is usually the better policy. 27

A Country That Imports Plasma TVs Without trade, PD = $3000 Q = 400 PW = $1500 Under free trade, domestic consumers demand 600 domestic producers supply 200 imports = 400 P Q Plasma TVs D S $3000 400 This and the following slide cover the same material in Active Learning Exercise 1. I provide these slides in case you wish to lecture on this material instead of having students work the exercise. To do this, simply delete the three orange and yellow slides titled “Active Learning 1” and replace them with this and the following slide. Then, “unhide” these slides by unselecting “Hide Slide” from the “Slide Show” drop-down menu. In this case, PD > PW, so this country will import plasma TV sets from abroad. The quantity of imports is simply the difference between the quantity demanded by domestic consumers and the quantity supplied by domestic firms at the world price. $1500 200 600 imports APPLICATION: INTERNATIONAL TRADE 28

A Country That Imports Plasma TVs Without trade, CS = A PS = B + C Total surplus = A + B + C With trade, CS = A + B + D PS = C Total surplus = A + B + C + D P Q Plasma TVs D S gains from trade A $3000 B D Trade benefits consumers in this case, because it allows them to buy plasma TVs at lower prices, so more consumers can afford plasma TVs if imports are allowed. The gains to consumers appear on the graph as the area (B+D), which represents the increase in consumer surplus when the country allows trade. In this example, trade harms domestic producers, because they now must sell their plasma TVs at a lower price. As a result, they produce a smaller quantity, earn less revenue, and likely let go of some of their workers. These losses are represented on the graph by the area B , which represents the fall in producer surplus resulting from trade. As the graph shows, the gains to consumers outweigh the losses to producers, as total surplus increases by the amount D, which represents the gains from trade in plasma TV sets. $1500 C imports APPLICATION: INTERNATIONAL TRADE 29

In the News: Textile Imports from China On 12/31/2004, U.S. quotas on apparel & textile products expired. During Jan 2005: U.S. imports of these products from China increased over 70%. Loss of 12,000 jobs in U.S. textile industry. The U.S. textile industry & labor unions fought for new trade restrictions. The National Retail Federation opposed any restrictions. This slide was in the previous edition of these PowerPoints, and a corresponding In The News box was in the previous edition of the textbook. It was removed from the current edition. Yet, it remains a good real-world application of the material in this chapter, so I have not completely deleted it, I just moved it to the end of the file and “hid” the slide (so it will not display in Slideshow mode). If you wish to include it, “unhide” this slide (from the Slide Show menu) and move this slide it to just after the slide titled “import quotas: another way to restrict trade.” If you do so, consider the following approach: Show the first bit of text, which states the expiration of the quotas. Then ask students to take a few moments and write down all of the different groups that would be affected by the expiration of the quotas. Ask which of these groups would be most likely to fight for reinstatement of the quotas. Better yet, have them work in pairs. After a couple minutes, ask for volunteers to share their answers. The typical responses would be: U.S. textile producers and workers would be hurt, and would fight for new restrictions. U.S. consumers would benefit. Other possible responses: The U.S. retail sector (e.g. Gap stores) would benefit, and would oppose new restrictions. Senators and Congressmembers from states with significant textile production would likely argue for new restrictions on imports from China. The statistics on this slide came from: “Free of Quota, China Textiles Flood the U.S.” New York Times, 3/10/2005, pp.A1 and C6. A condensed version of this excellent article appeared in an “In the News” box of the previous edition of the textbook. You should still be able to get the entire article from the archives at nytimes.com. November 2005: Bush administration agreed to limit growth in imports from China. APPLICATION: INTERNATIONAL TRADE 30