CHAPTERFOURTrade Model Extensions and Applications*66 1
ContentsCHAPTER ONEThe International Economy 1
The United States as an Open Economy 2
Consequences of Increased Openness 5
FOREIGN COMPETITION AND THE U．S．AUTOINDUSTRY 6
What Makes a Company“American”? 7
International Competitiveness 8
Firm(Industry)Competitiveness 8
A Nation s Competitiveness 8
EVEN THE BOEING 777 ISN T ALL AMERICAN 9
Globalization and Competitiveness 11
Is International Trade an Opportunity or a Threatto Workers? 13
COMPETITION IN THE WORLD STEEL INDUSTRY 14
The Plan of This Book 15
Summary 15
Study Questions 16
Part OneInternational Trade Relations 17
CHAPTER TWOFoundations of Modern Trade Theory 19
Historical Development of Modern Trade Theory 19
Why Nations Trade:Absolute Advantage 20
The Mercantilists 20
Why Nations Trade:Comparative Advantage 21
Comparative Advantage in Money Terms 23
WHERE DOES U．S．COMPARATIVE ADVANTAGELIE? 24
Transformation Schedules 25
Trading under Constant-Cost Conditions 27
Constant Costs 27
The Basis for Trade and Direction of Trade 29
Production Gains from Specialization 29
Consumption Gains from Trade 30
Distributing the Gains from Trade 31
Complete Specialization 32
Productivity and Comparative Advantage 32
Changing Comparative Advantage 33
DO RISING HEALTH-CARE COSTS LEAD TOCOMPETITIVE DISADVANTAGE? 34
U．S．Manufacturing Productivity Trends 36
Trade Restrictions 37
Increasing Costs 38
Trading under Increasing-Cost Conditions 38
Increasing-Cost Trading Case 39
Partial Specialization 41
Comparative Advantage Extended to Many Productsand Countries 41
More Than Two Products 42
More Than Two Countries 43
Exit Barriers 44
THE RACE IN RESEARCH AND DEVELOPMENT 45
Empirical Evidence on Comparative Advantage 46
Summary 48
Study Questions 49
CHAPTER THREEInternational Equilibrium 52
Indifference Curves 52
Autarky Equilibrium 54
Basis for Trade,Gains from Trade:A Restatement 54
The Equilibrium Terms of Trade 56
Theory of Reciprocal Demand 58
Offer Curves and the Equilibrium Termsof Trade 59
Economic Growth and the Terms of Trade 61
Terms-of-Trade Estimates 62
Summary 64
Study Questions 65
Factor-Endowment Theory 66
Factor-Price Equalization 68
Trade and the Distribution of Income 69
Does Trade Make the Poor Even Poorer? 70
Are Actual Trade Patterns Explained by the Factor-Endowment Theory? 71
HAVE U．S．MANUFACTURERS FORGOTTENTHE BASICS? 72
Specific Factors:Trade and the Distribution of Incomein the Short Run 75
Economies of Scale and Specialization 76
Theory of Overlapping Demands 80
Intraindustry Trade 81
Product Cycles 84
POCKET CALCULATORS AND THE INTERNATIONALPRODUCT CYCLE 85
Dynamic Comparative Advantage:IndustrialPolicy 85
Environmental Regulatory Policies and InternationalCompetitiveness 87
JUMBO JET AIRCRAFT COMPETITION ANDINDUSTRIAL POLICY 88
Trade in Business Services 93
Transportation Costs 95
Trade Effects 95
Transportation Costs and the U．S．SteelIndustry 97
Summary 98
Study Questions 98
CHAPTERFIVETariffs 100
The Tariff Concept 101
Types of Tariffs 101
Effective Rate of Protection 103
Tariff Escalation 105
Offshore-Assembly Provision 106
Postponing Import Duties 107
Bonded Warehouse 107
Foreign Trade Zone 108
Tariff WeIfare Effects:Consumer Surplus and ProducerSurplus 109
Tariff Welfare Effects:Small-Nation Model 110
CALCULATING THE WELFARE EFFECTS OFA TARIFF 112
Tariff Welfare Effects:Large-Nation Model 113
Tariff Examples 117
Motorcycles 117
COST TO THE CONSUMER OF PRESERVING APRODUCTION WORKER S JOB 118
How a Tariff Burdens Exporters 120
Japanese Luxury Cars 120
Arguments for Trade Restrictions 123
EFFECTS OF ELIMINATING IMPORT TARIFFS 124
Job Protection 124
Protection against Cheap Foreign Labor 126
Maintenance of the Domestic Standardof Living 128
Fairness in Trade:A Level Playing Field 128
Equalization of Production Costs 129
Infant-Industry Argument 129
Noneconomic Arguments 129
PETITION OF THE CANDLE MAKERS 131
The Political Economy of Protectionism 131
Summary 134
Study Questions 135
CHAPTER SIXNontariff Trade Barriers 137
Import Quota 138
Trade and Welfare Effects 139
Sugar Import Quotas 141
ALLOCATING QUOTA LICENSES 142
Quotas versus Tariffs 144
Tariff-Rate Quota:A Two-Tier Tariff 145
Orderly Marketing Agreements 148
Export-Quota Effects 148
EFFECTS OF ELIMINATING NONTARIFFTRADE BARRIERS 149
Japanese Auto Restraint 151
Domestic Content Requirements 152
CATERPILLAR OPPOSES STEEL QUOTAS 153
Subsidies 155
Domestic Subsidy 155
Export Subsidy 157
HOW“FOREIGN”Is YOUR CAR? 157
Forms of Dumping 160
Dumping 160
International Price Discrimination 161
Excess Capacity 163
Antidumping Regulations 164
Washington Apples 165
Other Nontariff Trade Barriers 165
Government Procurement Policies 165
SMITH CORONA FINDS ANTIDUMPING VICTORIESARE HOLLOW 167
Technical and Administrative Regulations 168
Summary 168
Study Questions 169
The Smoot-Hawley Act 172
CHAPTER SEVENTrade Regulations and Industrial Policies 172
The Reciprocal Trade Agreements Act 174
The General Agreement on Tariffs and Trade andthe World Trade Organization 174
FAST-TRACK APPROACH FOR NEGOTIATING TRADEAGREEMENTS 177
The Uruguay Round 178
INTERNATIONAL TRADE IN SERVICES 180
The World Trade Organization 181
Trade Remedy Laws 182
The Escape Clause 182
Countervailing Duties 183
Antidumping Duties 186
Section 301:Unfair Trading Practices 186
U．S．-Japan Automotive Trade Dispute 187
Remedies against Dumped and Subsidized Imports 188
Protection of Intellectual Property Rights 190
Trade Adjustment Assistance 193
Industrial Policies of the United States 194
Export Promotion and Financing 196
Knowledge-Based Growth Policy 197
Industrial Policies of Japan 198
HAS INDUSTRIAL POLICY HELPED JAPAN? 200
Strategic Trade Policy 200
Imperfect Competition and GovernmentSubsidies 201
Welfare Effects of Strategic Trade Policy 203
Economic Sanctions 206
Factors Influencing the Success of Sanctions 207
Iraqi Sanctions 208
Summary 210
Study Questions 211
CHAPTER EIGHTTrade Policies for the Developing Nations 212
Developing-Nation Trade Characteristics 212
Trade Problems of the Developing Nations 213
Unstable Export Markets 214
Worsening Terms of Trade 215
Call for a New International Economic Order 217
Stabilizing Commodity Prices 218
Production and Export Controls 219
Buffer Stocks 220
Multilateral Contracts 222
Commodity Agreement Experience 222
The OPEC Oil Cartel 223
Maximizing Cartel Profits 224
OPEC as a Cartel 226
Generalized System of Preferences 227
Economic Growth Strategies:Import Substitutionversus Export-Led Growth 228
Import Substitution 228
Export-Led Growth 230
IMPORT-SuBSTITUTION LAWS BACKFIRE ONBRAZIL 231
High-Performing Asian Economies 232
The Four Tigers 234
China as a High-Performing Economy 235
China s Most-Favored-Nation Trade Status 237
CHINA S FAILURE TO PROTECT U．S．INTELLECTUALPROPERTY 238
Study Questions 239
Summary 239
CHAPTER NINERegional Trading Arrangements 241
Types of Regional Trading Arrangements 242
The Impetus for Regionalism 242
Effects of a Regional Trading Arrangement 243
Static Effects 243
Dynamic Effects 245
European Union 246
Pursuing Economic Integration 248
Agricultural Policy 250
Government Procurement Policies 253
U．S．Free Trade Agreements 255
U．S．-Canada Free Trade Agreement 255
North American Free Trade Agreement(NAFTA) 258
Regional Integration versus Multilateralism 262
Other Regional Trading Arrangements 262
The Transition Economies of Eastern Europe andthe Former Soviet Union 263
Financing Limitations 264
Industrial Cooperation 264
The Council for Mutual EconomicAssistance 266
The Transition toward a Market-OrientedEconomy 267
Summary 268
Study Questions 270
CHAPTER TENInternational Factor Movements and Multinational Enterprises 271
The Multinational Enterprise 272
Motives for Foreign Direct Investment 273
Demand Factors 273
Cost Factors 275
Direct Exporting versus Foreign DirectInvestment/Licensing 276
Supplying Products to Foreign Buyers:Whether toProduce Domestically or Abroad 276
Foreign Direct Investment versus Licensing 277
International Trade Theory and MultinationalEnterprise 278
Is Foreign Direct Investment a Threat to theUnited States? 279
Japanese Transplants in the U．S．AutomobileIndustry 280
International Joint Ventures 284
Reasons for Joint Ventures 284
Welfare Effects 285
NEW UNITED MOTOR MANUFACTURING,INC. 286
Multinational Enterprises as a Source of Conflict 288
Employment 289
Technology Transfer 289
National Sovereignty 290
BOEING WORKERS CONTEST TECHNOLOGYTRANSFER TO CHINA 291
Balanee of Payments 292
Taxation 292
Transfer Pricing 293
U．S．Production Sharing with Mexico 293
International Labor Mobility:Migration 296
Immigration as an Issue 298
Immigration and the U．S．Labor Market 299
Summary 301
Study Questions 301
Part TwoInternational Monetary Relations 303
Double-Entry Accounting 305
CHAPTER ELEVENThe Balance of Payments 305
Balance-of-Payments Structure 307
Current Account 307
INTERNATIONAL PAYMENTS PROCESS 308
Capital Account 309
What Does a Current Account Surplus(Deficit)Mean? 310
Statistical Discrepancy:Errors and Omissions 313
The U．S．Balance of Payments 313
Balance of International Indebtedness 316
The United States as a Debtor Nation 317
VIEWS CONCERNING U．S．INTERNATIONALINDEBTEDNESS 318
Summary 320
Study Questions 320
CHAPTER TWELVEForeign Exchange 322
Foreign Exchange Market 323
Types of Foreign Exchange Transactions 324
FOREIGN CURRENCY TRADING 325
Interbank Trading 326
Reading Foreign Exchange Quotations 328
ADJUSTING TO THE DEPRECIATING DOLLAR 331
Forward and Futures Markets 331
Foreign Currency Options 334
Advantage of Foreign Currency Options toExporters 335
Understanding Option Quotations 335
Exchange-Rate Determination 335
Supply of Foreign Exchange 336
Demand for Foreign Exchange 336
Equilibrium Rate of Exchange 337
Effective Exchange Rate:The Trade-Weighted Dollar 338
Arbitrage 339
The Forward Market 340
The Forward Rate 340
Forward Market Functions 341
Interest Arbitrage 342
Uncovered Interest Arbitrage 342
EXCHANGE-RATE RISK:THE HAZARD OF INVESTINGABROAD 343
Covered Interest Arbitrage 344
Foreign Exchange Market Speculation 346
Speculating in the Spot Market 346
Speculating in the Forward Market 347
Other Forms of Speculation 348
Speculation and Exchange Market Stability 348
Summary 349
Study Questions 350
CHAPTER THIRTEENExchange-Rate Determination 352
Exchange-Rate Determination in a Free Market 352
Real Income and Exchange Rates 354
Real Interest Rates and Exchange Rates 357
Inflation Rates,Purchasing-Power Parity,and ExchangeRates 359
Law of One Price 359
INTEREST RATES AND THE DOLLAR S EXCHANGEVALUE 360
Relative Purchasing-Power Parity 361
THE“BIG MAC”INDEX AND THE LAW OF ONEPRICE 362
Other Market Fundamentals and Their Effects onExchange Rates 365
Market Expectations and Exchange Rates 365
INFLATION RATES AND THE DOLLAR S EXCHANGEVALUE 366
Interaction of Exchange-Rate Determinants 369
The Monetary Approach to Exchange-RateDetermination 370
THE SLIDE OF THE DOLLAR 371
The Asset-Markets Approach to Exchange-Rate Determination 372
Exchange-Rate Overshooting 376
Forecasting Foreign Exchange Rates 378
Judgmental Forecasts 379
Technical Forecasts 380
Fundamental Analysis 382
Summary 383
Forecast Performance of Advisory Services 383
Study Questions 384
Appendix:Fundamental Forecasting-RegressionAnalysis 385
CHAPTER FOURTEENBalance-of-Payments Adjustments under Fixed Exchange Rates 387
Price Adjustments 388
Gold Standard 388
Quantity Theory of Money 388
Balance-of-Payments Adjustment 389
Interest-Rate Adjustments 390
Capital Flows and the Balance of Payments 390
Income Determination in a Closed Economy 392
Income Adjustments 392
Income Determination in an Open Economy 394
Implications of the Foreign Trade Multiplier 395
Foreign Repercussions 396
Disadvantages of Automatic AdjustmentMechanisms 398
Monetary Adjustments 398
Payment Imbalances under Fixed ExchangeRates 398
Policy Implications 400
Summary 401
Study Questions 401
CHAPTER FIFTEENExchange-Rate Adjustments and the Balance of Payments 403
Effects of Exchange-Rate Changes on Costs andPrices 403
Cost-Cutting Strategies of Japanese Manufacturers inResponse to Yen Appreciation 407
The Elasticity Approach to Exchange-RateAdjustment 409
Requirements for a Successful Depreciation(Devaluation) 409
Empirical Measurement:Import/Export DemandElasticities 412
Time Path of Depreciation(Devaluation) 412
The Absorption Approach to Exchange-RateAdjustment 417
The Monetary Approach to Exchange-RateAdjustment 418
Summary 418
Study Questions 419
CHAPTER SIXTEENExchange-Rate Systems 421
Exchange-Rate Practices 421
Fixed Exchange-Rate System 425
Par Value and Official Exchange Rate 425
Exchange-Rate Stabilization 426
Devaluation and Revaluation 427
Legal versus Economic Implications 428
Floating Exchange Rates 430
Achieving Market Equilibrium 430
TRADE RESTRICTIONS,JOBS,AND FLOATINGEXCHANGE RATES 432
Arguments for and against Floating Rates 432
Adjustable Pegged Rates 433
Managed Floating Rates 435
Managed Floating Rates in the Short Run andLong Run 436
Exchange-Rate Stabilization and MonetaryPolicy 437
CAN CENTRAL BANKERS PROP UPA CURRENCY? 438
The European Monetary System 440
The Maastricht Treaty 441
The European Currency Crisis of1992-1993 442
The Crawling Peg 443
Exchange Controls 444
Summary 446
Study Questions 447
CHAPTER SEVENTEENMacroeconomic Policy in an Open Economy 448
Economic Policy in an Open Economy 448
Economic Objectives of Nations 449
Policy Instruments 449
Exchange-Rate Policies and Overall Balance 450
Monetary Policy and Fiscal Policy:Effects on InternalBalance 451
Fiscal Policy with Fixed Exchange Rates andFloating Exchange Rates 452
Monetary Policy with Fixed Exchange Ratesand Floating Exchange Rates 454
Monetary and Fiscal Policies:Effects on ExternalBalance 455
Monetary Policy and Fiscal Policy:Policy Agreementand Policy Conflict 455
Inflation with Unemployment 457
International Economic Policy Coordination 458
Policy Coordination in Theory 459
Plaza Agreement of 1985 and Louvre Accordof 1987 460
Summary 462
Study Questions 463
CHAPTEREIGHTEENInternational Banking:Reserves,Debt,and Risk 464
Nature of International Reserves 464
Demand for International Reserves 465
Exchange-Rate Flexibility 465
Other Determinants 467
Supply of International Reserves 468
Foreign Currencies 468
International Gold Standard 470
Gold 470
Gold Exchange Standard 471
THE INTERNATIONAL MONETARY FUND 472
Demonetization of Gold 472
Special Drawing Rights 474
Facilities for Borrowing Reserves 475
IMF Drawings 475
General Arrangements to Borrow 475
Swap Arrangements 476
Compensatory Financing for Exports 476
Oil Facility 477
Buffer Stock Financing Facility 477
International Lending Risk 478
The International Debt Problem 479
Reducing Bank Exposure to Developing-NationDebt 483
HOW A DEBT/EQUITY SWAP WORKS 484
Debt Reduction and Debt Forgiveness 484
Mexican Financiai Crises 485
1980s Crisis 485
1994-1995 Crisis 486
The Eurocurrency Market 487
Eurocurrency Market Development 488
Financial Implications 488
Summary 489
Study Questions 489
Notes 491
Index 495