ECO 204
HANDOUT 13
INTERNATIONAL TRADE

OVERVIEW
Despite exporting less than 11 percent of its output, the United States, as the world's largest producer, plays a major role in world trade. Most U.S. trade is with such other industrialized countries as Canada, its largest customer. The United States is a major exporter of capital goods and a major importer of petroleum. Most trade is based on the principle of comparative advantage--the idea that each nation will benefit most by specializing in the production of those goods for which it has the lowest opportunity costs and trading those goods for the specialties of other countries. International specialization and trade lead to greater outputs of each good and to a higher standard of living among the trading nations.
Trade barriers are sometimes employed to raise revenue or to protect or expand domestic production by limiting imports. Such barriers, however, lead to misallocation of resources and higher prices that domestic consumers must ultimately pay. The national-defense and infant-industry arguments are frequently used to justify trade barriers. Those arguments may be valid, but trade restrictions designed to increase employment or shelter domestic workers from cheaper foreign labor are rarely justified on economic grounds. Trade barriers often result from political pressure applied by groups that stand to gain from such action. Since the costs of such programs are not so easily seen as their apparent benefits, opposition to trade barriers is often difficult to organize. While average U.S. tariff rates have fallen from over 60 percent in 1930 to less than 3 percent today, protectionism remains a powerful force. Nontariff barriers have actually increased in recent years.
Outline

I.	Patterns of Trade (Please see my website; under "US International Statistics")


	A.	International Trade
		
		


	B.	Trade by the United States

		



II.	Reasons for Trade

	A.	Access to Different Goods and Resources
		



	B.	Absolute Advantage
		



	C.	Comparative Advantage
		



	D.	From Production Possibilities to trading Possibilities




		



III.	Limiting Trade






IV.	Artificial Barriers to Trade



	A.	Tariffs
		





	B.	Import Quotas
		


	Arguments Used to Justify Trade Barriers


	i.	Infant Industry
		






	ii.	Retaliation
		





	iii.	Increasing Employment
		





	iv.	Low Foreign Wages
ECO 204