Global Markets in Action

4
CHAPTER CHECKLIST
When you have completed your
study of this chapter, you will be able to

1 Explain how markets work with international trade.

2 Identify the gains from international trade and its winners

and losers.

3 Explain the effects of international trade barriers.

4 Explain and evaluate arguments used to justify restricting

international trade.
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1. HOW GLOBAL MARKETS WORK

A. Introduction
International Trade is the exchange of goods and
services between countries. This type of trade gives rise
to a world economy, in which Price, Demand and
Supply, affect and are affected by global events.
Imports are the good and services that people and
firms in one country buy from firms in other countries.
Exports are the goods and services firms in one
country sell to people and firms in other countries.

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1. HOW GLOBAL MARKETS WORK

For example, the United States is the world’s biggest

international trader and accounts for 10 percent of world
exports and 12 percent of world imports.

In 2012, total U.S. exports were $2.2 trillion, which is

about 14 percent of the value of U.S. production.

In 2012, total U.S. imports were $2.8 trillion, which is

about 17 percent of the value of total U.S. expenditure.

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1. HOW GLOBAL MARKETS WORK

The United States trades internationally in goods and

services.
In 2012, U.S. exports of services were $0.6 trillion (30
percent of total exports) and U.S. imports of services
were $0.4 trillion (16 percent of total imports).
The largest U.S. exports of goods are airplanes.
The largest U.S. imports of goods are crude oil and
automobiles.
The largest U.S. exports of services are royalties,
license fees, banking, business consulting, and other
private services.
© 2015 Pearson
1. HOW GLOBAL MARKETS WORK

B. What Drives International Trade?

The fundamental force that generates trade between nations is
Comparative Advantage (is an economic law referring to the
ability of any given economic actor to produce goods and
services at a lower opportunity cost than other economic
actors).
The basis for comparative trade then is divergent opportunity
costs between countries.
National comparative advantage is the ability of a nation to
perform an activity or produce a good or service at a lower
opportunity cost than any other nation.

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1. HOW GLOBAL MARKETS WORK

For example, the opportunity cost of producing a T-shirt

is lower in China than in the United States, so China
has a comparative advantage in producing T-shirts.
The opportunity cost of producing an airplane is lower in
the United States than in China, so the United States
has a comparative advantage in producing airplanes.
Both countries can reap gains from trade by specializing
in the production of the good at which they have a
comparative advantage and then trading.

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2. INTERNATIONAL TRADE RESTRICTIONS

Governments restrict international trade to protect

domestic producers from competition.
The four sets of tools they use are
A. Tariffs
B. Import Quotas
C. Other Import Restrictions
D. Export Subsidies

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2. INTERNATIONAL TRADE RESTRICTIONS

A. Tariffs
A tariff is a tax imposed by a government on goods and
services imported from other countries that serves to
increase the price and make imports less desirable, or at
least less competitive, versus domestic goods and
services. Tariffs are generally introduced as a means of
restricting trade from particular countries or reducing the
importation of specific types of goods and services.

.
© 2015 Pearson
2. INTERNATIONAL TRADE RESTRICTIONS

For example, to discourage the purchase of Italian

leather handbags, the U.S. government could introduce
a tariff of 50% that drives the purchase price of those
bags so high that domestic alternatives are much more
affordable. The government’s hope is that the added
cost will make imported goods much less desirable.

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2. INTERNATIONAL TRADE RESTRICTIONS

B. Import Quotas
An import quota is a limit on the quantity of a good that
can be produced overseas and sold locally. It is a type
of protectionist trade restriction that sets a physical limit
on the quantity of a good that can be imported into a
country in a given period of time. Quotas, like other
trade restrictions, are used to benefit the producers of a
good in a local economy at the expense of all
consumers of the good in that economy.

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2. INTERNATIONAL TRADE RESTRICTIONS

- The primary goal of import quotas is to reduce

imports and increase local production of a good,
service, or activity, thus protect local production
by restricting foreign competition. As the quantity
of importing the good is restricted, the price of the
imported good increases, thus forcing local
consumers to purchase local products at higher
prices.

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2. INTERNATIONAL TRADE RESTRICTIONS

C. Other Import Barriers

Two sets of policies that influence imports are:
i. Health, safety, and regulation barriers
Thousands of detailed health, safety, and other regulations
restrict international trade.
For example, U.S. food imports are examined by the Food
and Drug Administration to determine whether the food is
“pure, wholesome, safe to eat, and produced under
sanitary conditions.”

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2. INTERNATIONAL TRADE RESTRICTIONS

ii. Voluntary export restraints

Are arrangements between exporting and importing
countries in which the exporting country (i.e. China)
agrees to limit the quantity of specific exports below a
certain level in order to avoid imposition of mandatory
restrictions by the importing country (i.e. USA).

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2. INTERNATIONAL TRADE RESTRICTIONS
D. Export Subsidies
- A Subsidy is a payment made by the government to a
producer.
- Export Subsidies: quantity restrictions imposed by the
government of one country on imports from other countries.
The primary goal of export subsidies is to reduce imports and
increase local production. Because the quantity of imports is
restricted, the price of imports increases, which thus
encourages local consumers to buy more local production.
Export subsidies are one of the main common foreign trade
policies designed to discourage imports and encourage
exports.

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3. THE CASE AGAINST PROTECTION

Despite the fact that free trade promotes prosperity for all
countries, trade is restricted.

Three Traditional Arguments for Protection

Three traditional arguments for restricting international
trade are
II. The National Security Argument
II. The Infant Industry Argument
III. The Dumping Argument

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3. THE CASE AGAINST PROTECTION

I. The National Security Argument

A country must protect industries that produce defence
equipment and armaments and those on which the
defence industries rely for their raw materials and other
intermediate inputs.

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3. THE CASE AGAINST PROTECTION

II. The Infant-Industry Argument

The infant-industry argument is that it is necessary
to protect a new industry from import competition to
enable it to grow into a mature industry that can
compete in world markets.
This argument is based on the concept of Dynamic
Competitive Advantage, which can arise from learning-
by-doing.
Learning-by-doing is a powerful engine of productivity
growth, but this fact does not justify protection.
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3. THE CASE AGAINST PROTECTION

III. The Dumping Argument

- Dumping occurs when a foreign firm sells its exports at
a lower price than its cost of production. One of the
reasons why a firm might engage in dumping is the
Predatory Pricing—when a firm sells below cost in the
hope of driving out competitors.

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3. THE CASE AGAINST PROTECTION

Conclusion

In spite of the benefits of international trade,

many nations put limits on trade for various
reasons. The main types of trade restrictions are
tariffs, licensing requirements, standards, and
subsidies.

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3. THE CASE AGAINST PROTECTION

Conclusion
The aim is to reduce imports and increase local
production of a good, service, or activity, thus
protect local production by restricting foreign
competition. As the quantity of importing the
good is restricted, the price of the imported good
increases, thus forcing local consumers to
purchase local products at higher prices.

© 2015 Pearson