20 LECTURE APPLICATION OF MARKET EFFICIENCY: TRADE Gains from exporting (done) Gains from importing. Common Arguments Against Trade Mankiw: Chapter 9
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Should US import cheaper lumber from Canada? - restricting imports has raised prices
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IMPORTING MARKET : STEEL Staus-quo: No trade:
Equilibrium: price 20 ($/ton) quantity 100 (m. ton/month).
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Benefit from consuming:
(m$/month)
Benefit from profits:
(m$/month)
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New Situation: Trade opens-up ROW steel price: 15 ($/ton) A. Comparative Advantage Analysis US: psteel = 20 ($/ton). Hence MC = 20 ($/ton). Opportunity cost of steel = 20 "other things". ROW: psteel = 15 ($/ton). Hence MC = 15 ($/ton). Opportunity cost of steel = 15 "other things". ROW has lower opportunity cost of steel - comparative advantage in steel. Predictions of comparative advantage analysis: ROW specializes in steel, US specializes in "other things" With trade: world price 15-20 ($/ton) Well-being increases.
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Now: another way of reaching same results plus: - quantify gains - how distribution of well-being changes
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B. Direct Price Analysis
At price 15 ($/ton), ROW sells "unlimited" steel. New supply curve horizontal, S'. Equilibrium price: 15 ($/ton). Imports steel : 125 - 50 = 75 (m tons). Exports "other things": 75x15 = 1125 (m units).
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Jobs lost in steel.....jobs gained in "other things". Well-being: No trade: Benefit from steel bought: Benefit from profits: Total benefit:
E F+G E+F+G
With trade: Benefit from steel bought: Benefit from profits: Total benefit:
E+F+H G E+F+G+H
"The pie got bigger" Overall increase in well-being: H (the gains from trade).
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Recap: Why does trade make the pie bigger? Trade is a cheaper method of making steel:
Previously:
New LECTURE process:
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"The slices have changed": Steel users gain: F + H. Steel shareholders loose: F. also: temporary cost to workers who must change jobs
No trade
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Trade
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Who lobbies to prevent trade: - firms (on behalf of shareholders)
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SUMMARY Whether exporting or importing, trade makes "the pie of well-being" bigger. But some people get a smaller slice. If other countries refuse to lower trade barriers - don't wait to get benefits - lower our barriers unilaterally.
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COMMON ARGUMENTS AGAINST FREE TRADE The debate: Gephardt: Visclosky:
trade has cost 10,000 steel jobs trade increases well-being ("the economy is thriving"); limiting imports raises steel prices.
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Jobs destroyed: Yes - but jobs created in export sector.
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Give workers help in transition.
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2.
National Security Need industries in case of war. Yes - but use carefully as difficult to remove.
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Infant Industry Steel might be high cost now - but if allowed to stay in business - will learn to be low cost. "Learning by doing". e.g. US carmakers need "turnaround time to get the domestic industry back on its feet." Airbus Japan semiconductors. Yes, but - "temporary" protection is politically difficult to remove (e.g steel). - difficult to pick winners. - industries which are protected tend not to innovate (e.g. steel). - if industry will be a winner, owners are willing to sustain short term losses to get long-term profits e.g. Internet companies.
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4.
Unfair competition:
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Unfair to whom that French and German taxpayers are subsidizing Airbus and giving us cheap aircraft.
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