© 2018 Pearson

Who wins and who loses

from globalization?
© 2018 Pearson
Global Markets in Action
8
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.
© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

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.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

International Trade Today

In 2015, global exports and imports were $23 trillion
combined (not supported by World Bank whose values are
higher), which is 31 percent of the value of global production.
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 2015, total U.S. exports were $2.3 trillion, which is about 13
percent of the value of U.S. production.
In 2015, total U.S. imports were $2.8 trillion, which is about 16
percent of the value of total U.S. expenditure.

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8.1 HOW GLOBAL MARKETS WORK

The United States trades internationally in goods and

services.
In 2015, U.S. exports of services were $0.5 trillion*
(33 percent of total exports) and U.S. imports of services were
$0.5 trillion (16 percent of total imports).
The largest U.S. exports of goods are airplanes.
The largest U.S. imports of goods are computers, industrial
machinery and automobiles and parts.
The largest U.S. exports of services are banking, business
consulting, and education services.
* Up to $ 0.8 trillion in 2017

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International Trade

 International Trade Today

In 2016, global exports and imports of goods and services were about $40 trillion,
which was nearly 60% of global GDP (28% for the U.S., 37% for China; 83% for the
EU).

© 2018 Pearson
International Trade

 The United States is the world’s biggest single country

international trader and accounts for 10 percent of world
exports and 12 percent of world imports
The European Union accounted for 55% and 57%, respectively.
China: 2% and 1.7%, resp.

 In 2016, total U.S. exports were $2.2 trillion and imports were
$2.7 trillion for a deficit of $500 billion.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

What Drives International Trade?

The fundamental force that generates trade between
nations is comparative advantage.
The basis for comparative trade 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.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

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.
Both countries are better off.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

What Drives International Trade?

Politics
Cultivation of customers
And, of course, price

© 2018 Pearson
© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

Why the United States Imports T-Shirts

Figure 8.1(a) shows that
with no international trade,
1. U.S. demand and U.S.
supply determine
2. The U.S. price at $8 a
T-shirt and
3. U.S. firms produce at 40
million T-shirts a year
and U.S. consumers buy
40 million T-shirts a year.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

The demand for and supply

of T-shirts in the world
determine the world price at
$5.
The world price is less than
$8, so the rest of the world
has a comparative advantage
in producing T-shirts.
Figure 8.1(b) shows that with
international trade,
4. The price in the U.S. falls
to $5 a T-shirt.
© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

With international trade,

5. Americans increase the
quantity they buy to 60
million T-shirts a year.
6. U.S. garment makers
decrease the quantity
they produce to 20
million T-shirts a year.
7. The United States
imports 40 million
T-shirts a year.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

Why the United States Exports Airplanes

Figure 8.2(a) shows that
with no international trade,
1. Equilibrium in the U.S.
airplane market.
2. The U.S. price is $100
million per airplane.
3. U.S. aircraft makers
produce 400 airplanes
a year and U.S. airlines
buy 400 a year.
© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

The world market for

airplanes determines the
world price of an airplane
at $150 million.
The world price is higher
than $100 million, so the
United States has a
comparative advantage in
producing airplanes.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

Figure 8.2(b) shows that

with international trade,
4. The price of an
airplane in the United
States rises to $150
million.

© 2018 Pearson
8.1 HOW GLOBAL MARKETS WORK

With international trade,

5. U.S. aircraft makers
increase the quantity
they produce to 700
airplanes a year.
6. U.S. airlines decrease
the quantity they buy
to 200 airplanes a
year.
7. The United States
exports 500 airplanes
a year.
© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

International trade lowers the price of an imported good

and raises the price of an exported good.
Buyers of imported goods benefit from lower prices and
sellers of exported goods benefit from higher prices.
But some people complain about international
competition: not everyone gains.
Who wins and who loses from free international trade?
We measure the gains and losses by examining the
effects of international trade on consumer surplus,
producer surplus, and total surplus.

© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

Gains and Losses from Imports

1. With no international
trade, the price of a T-
shirt in the United States
is $8 and 40 million T-
shirts a year are bought
and sold.
2. Consumer surplus is the
area of the green
triangle.
3. Producer surplus is the
area of the blue triangle.
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8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

With international trade,

the price of a T-shirt falls
to the world price of $5.
4. Consumer surplus
expands from area A
to the area A + B + D.
5. Producer surplus
shrinks to the area C.
Area B is transferred from
producers to consumers.

© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

6. Area D is an increase
in total surplus.
Area D is the net U.S.
gains from international
trade.

© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

Consumers gain because

they pay less, buy more
T-shirts, and receive a
larger consumer surplus.
Producers lose because
they receive a lower price,
produce fewer T-shirts,
and receive a smaller
producer surplus.
Consumers’ gain exceeds
producers’ loss, so total
surplus increases.

© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

Gains and Losses from Exports

1. With no international
trade, the price of an
airplane in the United
States is $100 million
and 400 airplanes a year
are bought and sold.
2. Consumer surplus is the
area of the green
triangle.
3. Producer surplus is the
area of the blue triangle.
© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

With international trade,

the price of an airplane
rises to the world price of
$150 million.
4. Consumer surplus
shrinks to the area A.
5. Producer surplus
expands from area C
to the area B + C + D.

© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

The area B is transferred

from consumers to
producers.
6. Area D is an increase
in total surplus.
Area D is the net U.S.
gains from international
trade.

© 2018 Pearson
8.2 WINNERS, LOSERS, AND NET GAINS FROM TRADE

Consumers lose because

they pay a higher price,
buy fewer airplanes, and
receive a smaller
consumer surplus.
Producers gain because
they receive a higher price,
produce more airplanes,
and receive a larger
producer surplus.
Producers’ gain exceeds
consumers’ loss, so total
surplus increases.
© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Governments restrict international trade to protect

domestic producers from competition.
The four sets of tools they use are
• Tariffs
• Import quotas
• Other import restrictions
• Export subsidies

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Tariffs
A tariff is a tax on a good that is imposed by the
importing country when an imported good crosses its
international boundary.
For example, the government of India imposes a
100 percent tariff on wine imported from California.
So when an Indian wine merchant imports a $10 bottle
of Californian wine, he pays the Indian government $10
import duty.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

The Effects of a Tariff

With free international trade, the world price of a T-shirt
is $5 and the United States imports 40 million T-shirts a
year.
Imagine that the United States imposes a tariff of $2 on
each T-shirt imported.
The price of a T-shirt in the United States rises by $2.
Figure 8.5 shows the effect of the tariff on the market for
T-shirts in the United States.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Figure 8.5(a) shows the

market before the
government imposes the
tariff.
The price of a T-shirt is
the world price of $5.
1. The United States
imports 40 million T-
shirts.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Figure 8.5(b) shows the

market with the tariff.
2. The tariff of $2 raises
the price in the U.S.
market to $7.
3. U.S. imports decrease
to 10 million a year.
4. U.S. government
collects the tax
revenue of $20 million
a year.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Winners, Losers, and the Social Loss from a Tariff

When the U.S. government imposes a tariff on imported
T-shirts:
• U.S. producers of T-shirts gain.
• U.S. consumers of T-shirts lose.
• U.S. consumers lose more than U.S. producers gain.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

U.S. Producers of T-shirts Gain

U.S. garment makers can now sell T-shirts for a higher
price (the world price plus the tariff), so they produce
more T-shirts.
But the marginal cost of producing a T-shirt is less than
the higher price, so the producer surplus increases.
The increased producer surplus is the gain to U.S.
garment makers from the tariff.

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8.3 INTERNATIONAL TRADE RESTRICTIONS

U.S. Consumers of T-shirts Lose

U.S. buyers of T-shirts now pay a higher price (the world
price plus the tariff), so they buy fewer T-shirts.
The combination of a higher price and a smaller quantity
bought decreases consumer surplus.
The loss of consumer surplus is the loss to U.S.
consumers from the tariff.

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8.3 INTERNATIONAL TRADE RESTRICTIONS

U.S. Consumers Lose More than U.S. Producers Gain

Consumer surplus decreases and producer surplus
increases.
But which changes by more?
Figure 8.6 illustrates the change in total surplus.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Figure 8.6(a) shows the

total surplus with free
international trade.
The world price is $5 a T-
shirt.
1. Imports
2. Consumer surplus
3. Producer surplus
4. Gains from free trade
Total surplus is maximized.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

5. The $2 tariff is added

to the world price and
increases the U.S.
price of a T-shirt to $7.
The quantity of T-shirts
produced in the United
States increases and the
quantity bought by U.S.
consumers decreases.
6. Imports decrease.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

7. Consumer surplus
shrinks to the green
area.
8. Producer surplus
expands to the blue
area.
Area B is a transfer
from consumer surplus to
producer surplus.

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8.3 INTERNATIONAL TRADE RESTRICTIONS

Tariff revenue equals

the imports of T-shirts
multiplied by the tariff.
9. The tariff revenue
is area C.
10.The sum of the two
areas labelled D is the
loss of total surplus—a
deadweight loss.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Import Quotas
An import quota is a quantitative restriction on the
import of a good that limits the maximum quantity of a
good that may be imported in a given period.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

The Effects of an Import Quota

With free international trade, the world price of a T-shirt
is $5 and the United States imports 40 million T-shirts a
year.
Imagine that the United States imposes a quota of
10 million on imported T-shirts.
Figure 8.7 shows the effect of the quota on the market
for T-shirts in the United States.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Figure 8.7(a) shows the

market before the
government imposes the
quota.
The price of a T-shirt is
the world price of $5.
1. The United States
imports 40 million T-
shirts.

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8.3 INTERNATIONAL TRADE RESTRICTIONS

Figure 8.5(b) shows the

market with the quota.
2. With an import quota
of 10 million T-shirts,
the supply of T-shirts
in the United States
becomes S + quota.
3. The price of a T-shirt
rises to $7.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

With the higher price,

Americans decrease the
number of T-shirts they
buy to 45 million a year.
U.S. garment makers
increase production to
35 million T-shirts a year.
4. Imports of T-shirts
decrease to the quota
of 10 million.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Winners, Losers, and the Social Loss from an

Import Quota
When the U.S. government imposes a quota on imported
T-shirts:
• U.S. producers of T-shirts gain.
• U.S. consumers of T-shirts lose.
• Importers of T-shirts gain.
U.S. consumers lose more than U.S. producers gain and
importers gain.
Figure 8.8 illustrates the winners and losers with a quota.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Figure 8.8(a) shows the

total surplus with free
international trade.
The world price is $5 a
T-shirt.
1. Imports
2. Consumer surplus
3. Producer surplus
4. Gains from free trade
Total surplus is maximized.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

The import quota raises

the U.S. price of a T-shirt
to $7.
The quantity of T-shirts
produced in the United
States increases and the
quantity bought
decreases.
5. Imports decrease.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

6. Consumer surplus
shrinks to the green
area.
7. Producer surplus
expands to the blue
area.
Area B is a transfer
from consumer surplus
to producer surplus.
8. Importers’ profit is the
sum of the two areas C.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

9. The sum of the two

areas labeled D is the
loss of total surplus—a
deadweight loss
created by the import
quota.

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© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Other Import Barriers

Two sets of policies that influence imports are
• Health, safety, and regulation barriers
• Voluntary export restraints
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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8.3 INTERNATIONAL TRADE RESTRICTIONS

A voluntary export restraint is like a quota allocated to a

foreign exporter of the good.
A voluntary export restraint decreases imports just like a
quota does but the foreign exporter gets the profit from
the gap between the domestic price and the world price.

© 2018 Pearson
8.3 INTERNATIONAL TRADE RESTRICTIONS

Export Subsidies
A subsidy is a payment made by the government to a
producer.
An export subsidy is a payment made by the
government to a domestic producer of an exported good.
Export subsidies bring gains to domestic producers, but
they result in overproduction in the domestic economy
and underproduction in the rest of the world and so
create a deadweight loss.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Despite the fact that free trade promotes prosperity for

all countries, international trade is restricted.

Three Traditional Arguments for Protection

Three traditional arguments for restricting international
trade are
• The national security argument
• The infant industry argument
• The dumping argument

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

The National Security Argument

A country must protect industries that produce defense
equipment and armaments and those on which the
defense industries rely for their raw materials and other
intermediate inputs.
This argument for protection can be taken too far.

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8.4 THE CASE AGAINST PROTECTION

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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8.4 THE CASE AGAINST PROTECTION

The Dumping Argument

Dumping occurs when a foreign firm sells its exports at
a lower price than its cost of production.
Two reasons why a firm might engage in dumping are
• Predatory pricing—when a firm sells below cost in the
hope of driving out competitors
• Subsidy—a firm receiving a subsidy can sell the good
at price below cost and make a profit.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

This argument does not justify protection for three

reasons:
1. It is virtually impossible to determine a firm’s costs.
2. If there was a natural global monopoly, it would be
more efficient to regulate it than to impose a tariff
against it.
3. If the market is truly a global monopoly, better to
regulate it rather than restrict trade.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Four Newer Arguments for Protection

Other common arguments for protection are that it
• Saves jobs
• Allows us to compete with cheap foreign labor
• Brings diversity and stability
• Penalizes lax environmental standards

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Saves Jobs
The idea that buying foreign goods costs domestic jobs
is wrong.
Free trade destroys some jobs and creates other better
jobs.
Free trade also increases foreign incomes and enables
foreigners to buy more domestic (U.S.) production.
Protection to save particular jobs is very costly.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Allows Us to Compete with Cheap Foreign Labor

The idea that a high-wage country cannot compete with
a low-wage country is wrong.
Low-wage labor is less productive than high-wage labor.
And wages and productivity tell us nothing about the
source of gains from trade, which is comparative
advantage.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Brings Diversity and Stability

A diversified investment portfolio is less risky than one
that has all of its eggs in one basket. The same is true
for an economy’s production.
A diversified economy fluctuates less than an economy
that produces only one or two goods.
But big, rich, diversified economies like those of the
United States, Japan, and Europe do not have this type
of stability problem.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Penalizes Lax Environmental Standards

The idea that protection is good for the environment is
wrong.
Free trade increases incomes and poor countries have
lower environmental standards than rich countries.
These countries cannot afford to spend as much on the
environment as a rich country can and sometimes they
have a comparative advantage at doing “dirty” work,
which helps the global environment achieve higher
environmental standards.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Why Is International Trade Restricted?

The key reason why international trade restrictions are
popular in the United States and most other developed
countries is an activity called rent seeking.
Rent seeking is lobbying and other political activity that
seeks to capture the gains from trade.
You’ve seen that free trade benefits consumers but
shrinks the producer surplus of firms that compete in
markets with imports.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Those who gain from free trade are the millions of

consumers of low-cost imports. But the benefit per
individual consumer is small.
Those who lose are the producers of import-competing
items. Compared to the millions of consumers, there are
only a few thousand producers.

© 2018 Pearson
8.4 THE CASE AGAINST PROTECTION

Because the gain from a tariff is large, producers have a strong

incentive to incur the expense of lobbying for a tariff and against free
trade.
Because each consumer’s loss is small, consumers have little
incentive to organize and incur the expense of lobbying for free
trade.
The gain from free trade for any one person is too small for that
person to spend much time or money on a political organization to
lobby for free trade.
Each group weighs benefits against costs and chooses the best
action for themselves.
But the group against free trade will undertake more political
lobbying than will the group for free trade.

© 2018 Pearson
Economists generally agree that the gains from
globalization vastly outweigh the losses.
But there are both winners and losers.
The U.S. consumer is a big
winner.
Globalization has brought
iPads, Wii games, Nike
shoes, and a wide range of
other products to our shops
at ever lower prices.

© 2018 Pearson
The Indian (and Chinese
and other Asian) worker
is another big winner.
Globalization has brought
a wider range of more
interesting jobs and
higher wages.

© 2018 Pearson
The U.S. (and European)
textile workers and
furniture makers are big
losers.
Their jobs have
disappeared and many of
them have struggled to
find new jobs even when
they’ve been willing to
take a pay cut.

© 2018 Pearson
But one of the biggest
losers is the African
farmer.
Blocked from global
food markets by trade
restrictions and
subsidies in the United
States and Europe,
globalization is leaving
much of Africa on the
sidelines.

© 2018 Pearson