CH9 International Trade

Microeconomics
International Trade (CH9)
Instructor: Xiaokuai Shao

shaoxiaokuai@bfsu.edu.cn
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International Trade (CH9) Microeconomics 1 / 25
International Trade
• How does international trade affect economic well-being?

• Who gains and who loses from free trade among countries, and how
do the gains compare to the losses?
• How do you evaluated the China-U.S. Trade War?
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“Competing Products” between Domestic and Foreign
• Search Engines
• Domestic supplier: Baidu
• Foreign suppliers: Google, Bing
• Products sold in
• Domestic supplier: JD, Taobao
• Foreign suppliers: Amazon, eBay
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The Equilibrium without Trade
Example
As our story begins, the Isolandian textile market is isolated from the rest of the world.
By government decree, no one in Isoland is allowed to import or export textiles, and the
penalty for violating the decree is so large that no one dares try.
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Example: Continued...
Now suppose that, in a political upset, Isoland elects a new president. The president
campaigned on a platform of “change” and promised the voters bold new ideas. Her
first act is to assemble a team of economists to evaluate Isolandian trade policy. She
asks them to report on three questions:
1 If the government allows Isolandians to import and export textiles, what will
happen to the price of textiles and the quantity of textiles sold in the domestic
textile market?
2 Who will gain from free trade in textiles and who will lose, and will the gains
exceed the losses?
3 Should a tariff (a tax on textile imports) be part of the new trade policy?
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The World Price and Comparative Advantage
• If the world price of textiles is higher than the domestic price, then
Isoland will export textiles once trade is permitted.
• Conversely, if the world price of textiles is lower than the domestic
price, then Isoland will import textiles.
• In essence, comparing the world price and the domestic price before
trade indicates whether Isoland has a comparative advantage in
producing textiles.
• The domestic price reflects the opportunity cost of textiles:
• If the domestic price is low, the cost of producing textiles in Isoland is
low, suggesting that Isoland has a comparative advantage in producing
textiles relative to the rest of the world.
• If the domestic price is high, then the cost of producing textiles in
Isoland is high, suggesting that foreign countries have a comparative
advantage in producing textiles.
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World Price > Domestic Price: Export
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World Price > Domestic Price: Export
If the world price is greater than the domestic price, then the country
exports the goods. Compared with autarky, international trade makes
• Domestic consumers bear a higher price: they are worse-off
• Before trade: A + B
• After trade: A
• Domestic producers enjoy a higher price: they are better-off
• Before trade: C
• After trade: C + B + D
• D is the value obtained from selling to foreigners.
• The gains from producer surplus exceed the losses incurred by
consumers
A gain from international trade: D.
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World Price < Domestic Price: Import
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World Price < Domestic Price: Import
If the world price is below than the domestic price, then the country
imports the goods. Compared with autarky, international trade makes
• Domestic consumers enjoy a lower price: they are better-off
• Before trade: A
• After trade: A + B + D
• D is the value obtained from buying from foreign countries at a lower
price.
• Domestic producers sell at a lower price: they are worse-off
• Before trade: B + C
• After trade: C
• The gains from consumer surplus exceed the losses incurred by
producers
A gain from international trade: D.
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The Gains and Losses of International Trade
• The gains and losses of an exporting country:
• When a country allows trade and becomes an exporter of a good, domestic
producers of the good are better off, and domestic consumers of the good
are worse off.
• Trade raises the economic well-being of a nation in the sense that the gains
of the winners exceed the losses of the losers.
• The gains and losses of an importing country
• When a country allows trade and becomes an importer of a good, domestic
consumers of the good are better off, and domestic producers of the good
are worse off.
• Trade raises the economic well-being of a nation in the sense that the gains
of the winners exceed the losses of the losers.
• In either case, however, the gains of the winners exceed the losses of the losers, so
the winners could compensate the losers and still be better off — trade can make
everyone better off.
• In practice, compensation for the losers from international trade is rare.
• Whenever a policy creates winners and losers, the stage
. . is
. set
. . . for
. . .a. political
. . . . . .battle.
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The Effects of a Tariff
Tariff: 关税
Tax on goods produced abroad and sold domestically
• The (import) tariff matters only if Isoland becomes a textile importer.

• Under free trade, the domestic price equals the world price.
• A tariff raises the price of imported textiles above the world price by
the amount of the tariff.
• Thus, the price of textiles—both imported and domestic—rises by the
amount of the tariff and is, therefore, closer to the price that would
prevail without trade.
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Tariff and Deadweight Loss
Compared with no tariff with international trade, imposing an import tariff
with international trade results in:
• A tariff causes a deadweight loss because a tariff is a type of tax.
• First, when the tariff raises the domestic price of textiles above the
world price, it encourages domestic producers to increase production
(from Q1S to Q2S ).
• The amount Q2S − Q1S is produced with a higher cost (compared with
importing the quantity from foreigners)
• Overproduction (Area D)
• Second, when the tariff raises the price that domestic textile
consumers have to pay, it encourages them to reduce consumption of
textiles (from Q1D to Q2D )
• The amount Q1D − Q2D could have been consumed creating values for
consumers without import tariff.
• Underconsumption (Area F)
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A Summary
• Compared with “autarky,” international trade increases (domestic)

total surplus, regardless of whether the domestic country is
• An exporter, or
• An importer
Compared with free international trade, imposing tariffs, or interventions
on international trade decreases (domestic) total surplus.
• A restriction on free international trade moves the equilibrium closer
to the equilibrium under autarky.
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Other Benefits of International Trade
Beyond the value created by the market itself (as shown by the above
demand-supply diagrams), there are some other benefits from international
trade.
• Increased variety of goods: satisfying people’s tastes for diversity.
• Lower costs through economies of scale: sometimes the per-unit
production costs will be lower with a greater amount of total quantity
produced.
• Increased competition: A company shielded from foreign competitors
is more likely to have market power.
• Enhanced flow of ideas.
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Import Quotas
Import quota: 进口配额

Limit on the quantity of a good that can be imported.
An extreme case: if “import quota” is 0, then the equilibrium reduces to the “artarky.”
• Pw < P0 : import.
• Without import quotas: buys Qd in
total where Qd − Qs is the amount
imported (and Qs from domestic
sellers).
• If import quota is set to be 0
(autarky): buys Q0 from domestic
sellers.
• Deadweight loss of import quota:
B + C.
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Import Quotas: General Case
• Without import quotas,

people trade at the world
price Pw , and import Qd − Qs
• Now, the domestic
government imposes an
import quota Q′d − Q′s , i.e.,
the legal maximum amount
that is allowed to be
imported.
• Then, people trade at the a
higher price P∗ .
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• CS is decreased:
−A − B − D − C
• Domestic PS is increased: by
+A
• Different from tariff, the
domestic government does
not get D.
• Deadweight loss of the
domestic country is
B+C+D
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Example: the Sugar Quota
• Domestic supply: QS = −8.95 + 0.99P
• Domestic demand: Q D = 31.2 − 0.27P
• World price: Pw = 17, evaluated at which, QS = 7.88 (domestic supply) and
Q D = 26.61
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• Without interventions, the imported quantity is Q D − QS = 26.61 − 7.88 = 18.73.
• Assume that the domestic government imposes limits imports to 6.1.
• Evaluated at Q′D − Q′S = 6.1, the new price can be calculated by
6.1 = (31.2 − 0.27P) − (−8.95 + 0.99P) ⇒ P = 27.02, and Q′S = 17.8, Q′D = 23.9.
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• ∆CS = − A − B − D − C,
• Domestic ∆PS = + A; Foreign ∆PS = + D
• Deadweight Loss (domestic) B + D + C, where
B + D + C = 0.5 ∗ ( Q′D − Q′S + Q D − QS )( P − Pw ).
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The Arguments for Restricting Trade
• The Jobs Argument

• Opponents of free trade often argue that trade with other countries
destroys domestic jobs.
• Should the Winners from Free Trade Compensate the Losers?
• National Security
• Economists acknowledge that protecting key industries may be
appropriate when there are legitimate concerns over national security.
• Yet they fear that this argument may be used too quickly by producers
eager to gain at consumers’ expense. Companies have an incentive to
exaggerate their role in national defense to obtain protection from
foreign competition.
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• The Infant-Industry Argument
• New industries sometimes argue for temporary trade restrictions to help
them get started.
• Once a powerful industry is protected from foreign competition, the
“temporary”policy is sometimes hard to remove.
• History shows that start-up firms often incur temporary losses and
succeed in the long run, even without protection from competition.
• The Unfair-Competition Argument
• Would it, in fact, hurt home-country to buy textiles from another
country at a subsidized price?
• Domestic producers would suffer, but domestic consumers would
benefit from the low price.
• It is the taxpayers of the foreign country who bear the burden. The
home country can benefit from the opportunity to buy imports at a
subsidized price.
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Free Trade v.s. Protectionism
• Classical Economics (e.g., Adam Smith) v.s. Historical School (e.g.,

Friedrich List)
• Friedrich List (1789-1846):
• “The National System of Political Economy” (1841)
• “National economics”
• Economic stages
• “Infant industry”
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Microeconomics

International Trade (CH9)

Instructor: Xiaokuai Shao

• How does international trade affect economic well-being?

• The (import) tariff matters only if Isoland becomes a textile importer.

• Compared with “autarky,” international trade increases (domestic)

Import quota: 进口配额

• Without import quotas,

• The Jobs Argument

• Classical Economics (e.g., Adam Smith) v.s. Historical School (e.g.,

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