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31.2: Gains from Trade

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    Exports: The Economic Impacts of Selling Goods to Other Countries

    Exporting is a form of international trade which allows for specialization, but can be difficult depending on the transaction.

    learning objectives
    • Evaluate the effects of international trade on exporting countries

    Exports

    Export is defined as the act of a country shipping goods and services out of the port of a country. In international trade, an export refers to the selling of goods and services produced in the home country to other markets (other countries). The seller of the goods and services is referred to as the “exporter.”

    key-export-markets.png

    Exports: The map shows the primary exporters for countries around the globe. The colors indicate the leading merchandise export destination for the indicated country (the United States main export destination is the European Union). Exporting is the act of shipping goods and services to other countries.

    Protecting Exports

    In order to protect exports, commercial goods are subject to customs authorities for both the exporting and importing countries. Legal restrictions and trade barriers are in place internationally to control trade, whether goods are being exported or imported. When legal restrictions and trade barriers are lessened or lifted the producer surplus increases and so does the amount of the goods and services that are exported to other countries.

    Impact of Exports

    Exporting goods and services has both advantages and disadvantages for countries involved in international trade.

    Exporting allows a country’s producers to gain ownership advantages and develop low-cost and differentiated products. It is viewed as a low-risk mode of production and trade. Exporters also experience internationalization advantages which are the benefits of retaining a core competence within a company and threading it through the value chain instead of obtaining a license to outsource or sell the goods or services.

    Disadvantages of exporting are mainly the result of manufacturers having to sell their goods to importers. In domestic sales, manufacturers sell directly to wholesalers or even directly to the retailer or customer. For exports, manufacturers face and extra layer in the chain of distribution which squeezes the margins. As a result, manufacturers may have to offer lower prices to the importers than to domestic wholesalers in order to move their product and generate business.

    Imports: The Economics Impacts of Buying Goods from Other Countries

    Imports are critical for many economies; they are the defining financial transactions of international trade and account for a large portion of the GDP.

    learning objectives
    • Evaluate the effects of international trade on an importing country

    Imports

    Imports are defined as purchases of good or services by a domestic economy from a foreign economy. The domestic purchaser of the good or service is called an importer. Imports and exports are critical for many economies and they are the defining financial transactions of international trade.

    Protecting Imports

    Due to the economic importance of imports, countries enact specific laws, barriers, and policies in order to regulate international trade. Protectionism is the economic policy of restraining trade between countries through tariffs on imported goods, restrictive quotas, and government regulations. When trade barriers and policies of protectionism are eliminated, consumer surplus increases. The price of a good or service will decrease while the quantity consumed will increase.

    Impacts of Buying Imported Goods

    On a national level, in most countries international trade and importing goods represents a significant share of the gross domestic product (GDP). International trade has a significant economic, social, and political importance in many countries. Imports provide countries with access to goods and services from other nations. Without imports, a country would be limited to the goods and services within its own borders.

    key-import-sources.png

    Imports: The map shows the largest importers on an international scale. The color indicates the leading source of merchandise imports for the indicated country (the United States’ imports the largest percentage of its goods from China). Imports account for a significant share in the gross domestic product (GDP) of a country.

    International trade is generally less expensive than domestic trade despite additionally imposed costs, taxes, and tariffs. However, the factors of production are usually more mobile domestically than internationally (capital and labor). It is common for countries to import goods rather than a factor of production. For example, the U.S. imports labor-intensive goods from China. Instead of importing Chinese labor, the U.S. imports goods that were produced in China by Chinese labor.

    On a business level, companies take part in direct-imports, which occur when a major retailer imports goods that are designed locally from an overseas manufacturer. The direct-import program allows the retailer to bypass the local supplier and purchase the final product directly from the manufacturer. Direct imports save retailers money by eliminating the local supplier.

    Costs of Trade

    Free trade is a policy where governments do not discriminate against imports and exports; creates a large net gain for society.

    learning objectives
    • Identify the groups that benefit and the groups that are harmed by free trade policies

    Free Trade

    Free trade is a policy where governments do not discriminate against exports and imports. There are few or no restrictions on trade and markets are open to both foreign and domestic supply and demand.

    Advantages

    Free trade is beneficial to society because it eliminates import and export tariffs. Restricted trade affects the welfare of society because although producers experience increases in surplus and additional revenue, the loss faced by consumers is greater than any benefit obtained. When a country trades freely with the rest of the world, it should theoretically produce a net gain for society and increases social welfare. Free trade policies consist of eliminating export tariffs, import quotas, and export quotas; all of which cause more losses than benefits for a country. With free trade in place, the producers of the exported good in exporting countries and the consumers in importing countries all benefit.

    effectoftariff.png

    Tariffs: This image shows what happens to societal welfare when free trade is not enacted. Tariffs cause the consumer surplus (green area) to decrease, while the producer surplus (yellow area) and government tax revenue (blue area) increase. The amount of societal loss (pink area) is larger than any benefits experienced by the producers and government. Free trade does not have tariffs and results in net gain for society.

    Disadvantages

    One of the main disadvantages is the selective application of free trade. Economic inefficiency can be created through trade diversion. It is economically efficient for a good to be produced in the country with the lowest production costs. However, this does not always occur if a high cost producer has a free trade agreement and the low cost producer does not. When free trade is applied to only the high cost producer it can lead to trade diversion to not the most efficient producer, but the one facing the lowest trade barriers, and a net economic loss. Free trade is highly effective and provides society with a net gain, but only if it is applied.

    Due to industry specializations, many workers are displaced and do not receive retraining or assistance finding jobs in other sectors. The nature of industries and trade increases economic inequality. As a result of unskilled workers the wages within the various industries may decline.

    Another disadvantage is that by increasing returns to scale, can cause certain industries to settle in an geographically area where there is not comparative advantage. Despite this disadvantage, the level of output that is generated by free trade for both the “winner” and the “loser” is increased substantially.

    The Results of Free Trade

    Economists have studied free trade extensively and although it creates winners and losers, the main consensus is that free trade generates a large net gain for society. In a 2006 survey of American economists, it was found that 85.7% believed that the U.S. should eliminate any remaining tariffs and trade barriers. Economists professor N. Gregory Mankiw explained that, “few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.”

    Key Points

    • Export is defined as the act of shipping goods and services out of the port of a country.
    • Legal restrictions and trade barriers are in place internationally to control trade, whether goods are being exported or imported.
    • When legal restrictions and trade barriers are lessened or lifted the producer surplus increases and so does the amount of the goods and services that are exported from the country.
    • Exporting allows a country’s producers to gain ownership advantages and develop low-cost and differentiated products.
    • Due to an extra layer in the chain of distribution which squeezes the margins, exporters may have to offer lower prices to the importers than to domestic wholesalers in order to move their product and generate business.
    • Imports are defined as purchases of good or services by a domestic economy from a foreign economy.
    • Protectionism is the economic policy of restraining trade between countries through tariffs on imported goods, restrictive quotas, and government regulations.
    • In most countries, international trade and importing goods represents a significant share of the gross domestic product ( GDP ).
    • International trade is generally more expensive than domestic trade due to additionally imposed costs, taxes, and tariffs.
    • On a business level, companies take part in direct-imports; a major retailer imports goods from an overseas manufacturer in order to save money.
    • Free trade eliminates export tariffs, import quotas, and export quotas; all of which cause more losses than benefits for a country.
    • With free trade in place the producers in exporting countries and the consumers in importing countries all benefit.
    • One of the main disadvantages is the selective application of free trade. Economic inefficiency can be created through trade diversion.
    • Trade restricts displaces workers, makes overcoming unemployment challenging, increases economic inequality, and can lower wages.
    • When free trade is applied to only the high cost producer it can lead to trade diversion and a net economic loss.
    • Another disadvantage is that by increasing returns to scale, can cause certain industries to settle in an geographically area where there is not comparative advantage.

    Key Terms

    • trade: Buying and selling of goods and services on a market.
    • export: Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade.
    • protectionism: A policy of protecting the domestic producers of a product by imposing tariffs, quotas or other barriers on imports.
    • import: To bring (something) in from a foreign country, especially for sale or trade.
    • tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
    • welfare: Health, safety, happiness and prosperity; well-being in any respect.
    • free trade: International trade free from government interference, especially trade free from tariffs or duties on imports.

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