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After studying this chapter, you will be able to:
• Explain how markets work with international trade
• Identify the gains from international trade and its winners and
losers
• Explain the effects of international trade barriers
• Explain and evaluate arguments used to justify restricting
international trade
How Global Markets Work
• The goods and services that we buy from other countries are called imports;
and the goods and services that we sell to people in other countries are our
exports
International Trade Today
• In 2016, global exports and imports were $21 trillion
• The United States is the world’s largest international trader and accounts for
10 per cent of world exports and 13 per cent of world imports. Germany and
China, which rank 2 and 3 behind the United States, lag by a large margin.
• In 2016, total SA exports were R1 330 billion, which is about 29 per cent of the
value of SA production.
• Total SA imports were R1 308 billion, which is about 30 per cent of total
expenditure in South Africa.
• In 2016, SA exports of services were about 16 per cent of total exports and
imports of services were about 17 per cent of total imports.
What Drives International Trade?
• Comparative advantage is the fundamental force that drives international trade.
Comparative advantage is a situation in which a person can perform an activity or
produce a good or service at a lower opportunity cost than anyone else. This
• same idea applies to nations.
• We can define national comparative advantage as a situation in which a nation can
perform an activity or produce a good or service at a lower opportunity cost than any
other nation.
• The opportunity cost of producing a T-shirt is lower in China than in South Africa, so
China has a comparative advantage in producing T-shirts.
How Global Markets Work
Why South Africa Imports T-Shirts
• South Africa imports T-shirts because the rest of the world has a comparative
advantage in producing T-shirts
• Figure 7.1 illustrates how this comparative advantage generates international trade
and how trade affects the price of a T-shirt and the quantities produced and bought
• Part (a) shows the SA market for T-shirts with no international trade
• Part (b) shows the SA market for T-shirts with international trade
• World demand and world supply determine the world price
Why South Africa Exports Wine
• Figure 7.2 illustrates international trade in wine
• The demand curve tells us the quantity of wine that SA consumers are willing to buy
at various prices
• The supply curve tells us the quantity of wine that wine makers are willing to sell at
various prices
• South Africa has a comparative advantage in producing wine.
How Global Markets Work
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Winners, Losers and the Net Gain from Trade
• We measure the gains and losses from imports by examining their effect on
consumer surplus, producer surplus and total surplus.
• In the importing country the winners are those whose surplus increases and
the losers are those whose surplus decreases.
• This increase in total surplus results from the lower price and increased
purchases and is the gain from imports.
Winners, Losers and the Net Gain
from Trade
Gains and Losses From Exports
• This increase in total surplus results from the higher price and increased production and
is the gain from exports.
• This increase in total surplus results from the higher price and increased production and
is the gain from exports.
Gains for All
• You have seen that both
imports and exports bring
gains
• Because one country’s
exports are other countries’
imports, international trade
brings gain for all countries
• International trade is a win-
win game
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Economics 3ed: Global and Southern African Perspectives © 2020
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.
International Trade Restrictions
Winners, Losers and the Social Loss from a Tariff
• When the SA government imposes a tariff on an imported good:
❖ SA consumers of the good lose
❖ SA producers of the good gain
❖ SA consumers lose more than SA producers gain
❖ Society loses: a deadweight loss arises
International Trade Restrictions
Import Quotas
An import quota is a restriction that limits the maximum quantity of a good that may be
imported in a given period
Winners, Losers and the Social Loss from an Import Quota
• When the government imposes an import quota:
o SA consumers
of the good lose
o SA producers of
the good gain
o Importers of the
good gain
o Society loses:
a deadweight
loss arises
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International Trade Restrictions
• You can now see the one difference between a quota and a tariff: A tariff brings in revenue for
the government while a quota brings a profit for the importers
• All the other effects are the same, provided the quota is set at the same quantity of imports
that results from the tariff
Other Import Barriers
Health, Safety and Regulation Barriers
• For example, SA food imports are regulated by the Directorate Food Safety and Quality
Assurance under the Agricultural Standards Act
Voluntary Export Restraints
• A voluntary export restraint is like a quota allocated to a foreign exporter of a good
Export Subsidies
• An export subsidy is a payment by the government to the producer of an exported good
• Export subsidies are illegal under a number of international agreements
The Case Against Protection
• For as long as nations and international trade have existed, people have debated whether a
country is better off with free international trade or with protection from foreign competition.
The Infant-Industry Argument
• The infant-industry argument for protection is that it is necessary to protect a new industry to
enable it to grow into a mature industry that can compete in world markets.
The Dumping Argument
• Dumping occurs when a foreign firm sells its exports at a lower price than its cost of
production.
• There are many arguments against globalisation and for protection
• The most common ones are that protection:
❖ Saves jobs
❖ Allows us to compete with cheap foreign labour
❖ Penalises lax environmental standards
❖ Prevents rich countries from exploiting developing countries
The Case Against Protection
Offshore Outsourcing
What Is Offshoring?
• A firm in South Africa can obtain the goods and services that it sells in any of four ways:
❖ Hire South African labour and produce in South Africa
❖ Hire foreign labour and produce in other countries
❖ Buy finished goods, components, or services from other firms in South Africa
❖ Buy finished goods, components, or services from other firms in other countries
Why Is International Trade Restricted?
Tariff Revenue
• Government revenue is costly to collect
Rent Seeking
• Rent seeking is lobbying for special treatment by the government to create economic profit or
to divert consumer surplus or producer surplus away from others
The end…