Chapter 11: International

Trade

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 Learning Outcomes
On completion of the chapter, the student will be
able to:
Describe benefits of international trade
Distinguish between absolute advantage and
comparative advantage
Determine trading patterns using comparative
advantage
Define and explain the reasons of trade restriction
and describe the types of trade restriction

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What Does Malaysia Export and Import?
Exports: automobiles,
“Tongkat Ali”, rubber,
cocoa, palm oil, scientific
instruments, tobacco, and
plastics.
Imports: petroleum,
automobiles, clothing,
iron and steel, office
machines, footwear, fish,
coffee, and diamonds.

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 Benefits

1 Consumers enjoy increased variety of

goods.

2 Producers sell to a larger market, may

achieve lower costs by producing on a
larger scale.

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 Benefits
3 Competition from abroad may reduce
market power of domestic firms,
which would increase total welfare.

4 Trade enhances the flow of ideas,

facilitates the spread of technology around
the world.

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 Absolute Advantage
Absolute Advantage: The situation in which a
country has total advantage in producing goods
with fewer resources compared to another
country. Lower Unit costs
Example: Country Computers Cars

U.S. 2,000 1,500

India 1,000 800

- U.S. can produce more computers and cars compared to

India. Therefore, U.S. has absolute advantage in production
of both goods. 6
 Comparative Advantage
Comparative Advantage: The situation in which a
country can produce a good at a lower opportunity
cost than another country.
Countries specialize in the production of the good
in which they have a comparative advantage.
Assume a two countries-two good world. The
countries are U.S. and Japan, and the goods are
food and clothing.
Both countries can produce both of goods in 4
different combinations listed in Exhibit 1.

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 Comparative Advantage
Country Computers Cars

U.S. 2,000 1,500

India 1,000 800

US
To produce 1 computer, must forgo 0.75 car. ( 1500/2000)
INDIA
To produce 1 computer, must forgo 0.8 car. ( 800/1000)

US have comparative advantage in producing computers,

therefore should specialise in the production of computers.
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 Comparative Advantage
Country Computers Cars

U.S. 2,000 1,500

India 1,000 800

US
To produce 1 car, must forgo 1.33 computer. ( 2000/1500)
INDIA
To produce 1 car, must forgo 1.25 computer. ( 1000:800)

INDIA have comparative advantage in producing cars, therefore

should specialise in the production of cars.
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 TRADE PATTERNS
HOW TO DECIDE WHETHER A COUNTRY
WILL BE AN EXPORTER OR IMPORTER
IN IN TERNATIONAL TRADE?
• USE COMPARATIVE ADVANTAGE. (CA)
• A COUNTRY WILL EXPORT GOODS
WHERE IT HAS A CA AND IMPORT
GOODS WHERE IT DOES NOT HAVE CA.

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 US AND INDIA
US will export computers since it has CA.
It will import cars since it has no CA.

INDIA will export cars since it has CA.

It will import computers since it has no CA.

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 US AND JAPAN
U.S will export food since it has a CA in food.
It will import clothing since it has no CA.

Japan will export clothing since it has a CA in

clothing.
It will import food since it has no CA.

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Trade Restrictions
International trade theory shows
that countries gain from free trade
(without government intervention).
Specialization and international
trade benefit individuals in different
countries. But the benefits of
international trade are not equally
distributed to all individuals in the
population.
Every individual person may not
gain, in fact some may lose.
Unfavorable distributional effects
may lead to trade restrictions.

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 Types of Trade Restrictions/ Trade Barriers
(A) Tariffs
- A tax on imports.
A tariff is a tax on goods produced abroad and sold
domestically.
 
Tariffs raise the price of imported goods by the amount of
the tariff.
 
The increase in price will lead to a decrease in demand
and thus imports will be reduced.

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Types of Trade Restrictions/ Trade Barriers
(A) Tariffs

- Two types:
i) Revenue Tariff – to provide the government with
revenue.
- applied to a product that is not being produced
domestically, for example, tin, coffee or grapes.
- rates on revenue tariff are moderate.
ii) Protective Tariff – to protect domestic producers
from foreign competition by increasing import prices
& therefore putting foreign producers at a competitive
disadvantage in selling in domestic market.
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Types of Trade Restrictions / Trade Barriers
(B) Import Quota
- A Quota is a legal limit on the maximum amount of a
good that may be imported in any period.
- Import quotas can be more effectively retard
international trade than tariffs. A product might be
imported in large quantities despite high tariffs; low
import quotas completely prohibit imports once quotas
have been filled.
- A quota reduces the supply of a good and raises the price
of imported goods to domestic consumers.

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 THE ARGUMENTS FOR
RESTRICTING TRADE
National- Defence Security Argument
Infant-Industry Argument
Unfair-Competition Argument
Jobs Argument
 Why Nations Restrict Trade?
1. National Defence/ Security Argument
: Certain industries, especially if they manufacture
items vital to our national defense, such as aircraft,
petroleum and weapons should remain based in our
country.

The country can’t depend on other countries for its

national defence and as such these industries should be
protected.
.

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 National Defense/ Security
Argument
Economists’ response:
Fine, as long as we base policy on true security needs.

But producers may exaggerate their own importance to

national security to obtain protection from foreign
competition.

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Why Nations Restrict Trade?
2. Infant Industry Argument:
New industries often need to be protected
from older, established foreign competitors
until they are mature enough to compete.

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 Infant Industry Argument
Economists’ response:
Difficult for govt to determine which industries will
eventually be able to compete and whether benefits of
establishing these industries exceed cost to consumers of
restricting imports.

Besides, if a firm will be profitable in the long run,

it should be willing to incur temporary losses.

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Why Nations Restrict Trade (cont.)
3 Unfair Competition :
Antidumping Argument: Dumping is the sale of
goods abroad at a price below their cost and below the
price charged in the domestic market.
- Foreign competitors will sell goods at below cost of
production so as to penetrate markets.
- Example: if a French firm sells wine in the U.S. for a
price below the cost of producing the wine and below
the price charged in France, it is said to be dumping
wine in the U.S.
- Dumping practice can be detected by comparing
export prices of foreign producer to prices charged in
its own domestic market. 22
Why Nations Restrict Trade (cont.)
Foreign – Export – Subsidies Argument: Some
governments subsidize the firms that export goods.
- By offering below-market (interest rate) loans, offsetting
shipping & customs costs etc, the foreign government ↓ the
production & distribution costs of the foreign producers
(exporter).

Allowing it an unfair advantage against unsubsidized

competitors (domestic producers).

So, trade restriction must be imposed in order to protect the

domestic producers.
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 Foreign – Export – Subsidies
Argument
Economists’ response:
Great! Then we can import extra-cheap products
subsidized by the other country’s taxpayers.

The gains to our consumers will exceed the losses

to our producers

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 Why Nations Restrict Trade (cont.)
4. Saving Domestic Jobs Argument:
Critics often argue that imports – fair or unfair –
displace domestic output and create domestic
unemployment.
This means that if a domestic producer is being
outcompeted by foreign producers, domestic jobs in a
particular industry will be lost as a result.
-

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 Saving Domestic Jobs Argument:

Economists’ response:
- Look at the data to see whether rising imports cause rising
unemployment.

- However, as long as the jobs are being lost due

to more efficient foreign production, the job loss is a
signal that resources could be put to better use in an
industry in which the country holds a comparative
advantage.

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