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Announcements: Tuesday Chiquita case this week Value of 1/100 chance of death from

last week’s notecards: $1000 or less: 9 1-99K: 5 (typical range) 100-200K: 13 200K-1Million: 19 1M-10M: 25 More: 49

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Announcements: Thursday Baron, “Political Analysis for

Business,” drug articles, Value of life from last week’s

notecards

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G302Week 9

International Trade

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Why does U.S. Steel care about the government?

Formed in 1901 by merging most of the steel companies in the U.S.

In 2000 paid $495 million for a Slovak steel company, and agreed to invest $700 million more

Steel prices fell in 1998-99. Half of the 30 American steel companies are bankrupt

Pension problem—600,000 retired workers

What can be done?

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What you will learn today The benefits of international trade The effect of tariffs and quotas How international trade

organizations work

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Is there market failure in international trade, so we need the government to protect our industries?

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What’s Good About Imports?

Voluntary exchange makes both parties better off---within nations or between them

Each country can specialize in what it does best

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Krugman’s parody I

We need a new economic paradigm because today America is part of a truly global economy (1)

To maintain its standard of living, America now has to learn to compete in an ever tougher global marketplace. (2)

That’s why high productivity and product quality have become essential. (3)

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Krugman’s parody II

We need to move the American economy into the high-value sectors (4)

that will generate jobs (5) for the future. And the only way we can be

competitive in the new global economy is if we forge a new partnership between government and business. (6)

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What Countries Export to the United States?

Canada $198 billion Japan $131 billion Mexico $110 billion China $82 billion Germany $55 billion

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What Countries Import from the United States?

Canada $166 billion Mexico $87 billion Japan $57 billion UK $38 billion Germany $27 billion

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Domestic and Foreign Supply

P

Q Q Q

P PP

SUS Sforeign

STotal

Demand

5

12

4 4

12

10

12

P=12, Q=10

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What happens if US producers reduce their costs slightly?

P

Q Q Q

P PP

SUS Sforeign

STotal

Demand

5

12

4 4

12

10

12

(a) P falls, QUS rises

(b) P falls, QUS falls (c) P stays the same, QUS rises (d) P stays the same, QUS falls (e) P rises, QUS rises

6

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A Tariff of $2/unitP

Q Q Q

P PP

SUS Sforeign

STotal

Demand

5

12

4 4

12

10

12

5

14 14

5 8

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The red curves are the new supply curves

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A Tariff of $2: Winners and Losers

Q

P

STotal

Demand

4 105 8

A

B EDC

The price rises from $12to _____Sales drop from 10 to__US businesses sell ___instead of 4.Imports fall from 6 to __

US PS rises by ___Foreign PS is unchanged.Tax revenue rises by ___CS falls by __________DWL is _____

12

14

$148

5

3

B

DB+C+D+E

C+E

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A Quota of 3 for Imports

P

512

4

12 12

4

S

S

SP P P

Q Q Q

US

FOREIGN

TOTAL50 00

Demand

14

3 7 108

An import quota of 3 makes the foreign supply curve turn vertical at Q=3. Thus, imports do not add more than 3 to thetotal supply curve

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A Quota of 3: Winners and Losers

4

12

SP

Q50

Demand

14

7 108

A

B C D E

The price rises from 12 to ___ Sales fall from 10 to __ Imports fall from 6 to __

U.S. PS rises from Ato _______Foreign PS rises from0 to ____

U.S. CS falls by ______________ is deadweight loss.

148

3

A+B+D

C

B+C+D+E

E

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Which is a better way to reduce imports, quotas or tariffs?

Tariffs have the advantage that they transfer surplus from consumers to the government instead of to foreign businesses

1. Did the sign-in sheet get around? 2. If you answered a question, bring up a notecard for me.

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The Smoot-Hawley Tariff of 1930 Tariffs on 20,000 goods Average tariff > 50% 26+ nations retaliated US exports fell from $5.2 billion to

$1.7 billion Helped create the Great

Depression

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The General Agreement on

Trade and Tariffs (GATT) Began in 1944 with 23 members. 1947-1990, avg. tariff fell from 40% to 5% Principles:

Reciprocity (If I cut my tariff, so do you) Non-discrimination (all countries pay the same

tariff if they export to us) Transparency (Non-tariff barriers tariffs)

Lacked “teeth”; could not enforce decisions

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The World Trade Organization Created in 1995 Can make binding decisions Countries that win a case at

the WTO can retaliate against offender

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U.S. Steel Tariffs The International Trade Commission

recommended putting tariffs on imported steel

President Bush did impose tariffs in 2002

The EU has filed a complaint at the WTO

American steel consumers and shippers are upset