8.5 SUMMARY

1. International trade is of growing importance to Canada and of even greater importance to most other countries. International trade, like trade among individuals, arises from comparative advantage: the opportunity cost of producing an additional unit of a good is lower in some countries than in others. Goods and services purchased abroad are imports; those sold abroad are exports. Foreign trade, like other economic linkages between countries, has been growing rapidly, a phenomenon called globalization.

2. The Ricardian model of international trade assumes that opportunity costs are constant. It shows that there are gains from trade: two countries are better off with trade than in autarky.

3. In practice, comparative advantage reflects differences between countries in climate, factor endowments, and technology. The Heckscher-Ohlin model shows how differences in factor endowments determine comparative advantage: goods differ in factor intensity, and countries tend to export goods that are intensive in the factors they have in abundance.

4. The domestic demand curve and the domestic supply curve determine the price of a good in autarky. When international trade occurs, the domestic price is driven to equality with the world price, the price at which the good is bought and sold abroad.

5. If the world price is below the autarky price, a good is imported. This leads to an increase in consumer surplus, a fall in producer surplus, and a gain in total surplus. If the world price is above the autarky price, a good is exported. This leads to an increase in producer surplus, a fall in consumer surplus, and a gain in total surplus.

6. International trade leads to expansion in exporting industries and contraction in import-competing industries. This raises the domestic demand for abundant factors of production, reduces the demand for scarce factors, and so affects factor prices, such as wages.

7. Most economists advocate free trade, but in practice many governments engage in trade protection. The two most common forms of protection are tariffs and quotas. In rare occasions, export industries are subsidized.

8. A tariff is a tax levied on imports. It raises the domestic price above the world price, hurting consumers, benefitting domestic producers, and generating government revenue. As a result, total surplus falls (this loss of surplus is called deadweight loss). An import quota is a legal limit on the quantity of a good that can be imported. It has the same effects as a tariff, except that the revenue goes not to the government but to those who receive import licences.

9. Although several popular arguments have been made in favour of trade protection, in practice the main reason for protection is probably political: import-competing industries are well organized and well informed about how they gain from trade protection, while consumers are unaware of the costs they pay. Still, Canadian trade is fairly free, mainly because of the role of international trade agreements, in which countries agree to reduce trade protection against one anothers’ exports. The North American Free Trade Agreement (NAFTA) and the European Union (EU) cover a small number of countries. In contrast, the World Trade Organization (WTO) covers a much larger number of countries, accounting for the bulk of world trade. It oversees trade negotiations and adjudicates disputes among its members.

10. In the past few years, many concerns have been raised about the effects of globalization. One issue is the increase in income inequality due to the surge in imports from relatively poor countries over the past 20 years. Another concern is the increase in offshore outsourcing, as many jobs that were once considered safe from foreign competition have been moved abroad.