Why countries trade (I)
Principles of Economics // Fall 2025
marcio.santetti@emerson.edu
Advantages
Advantages
Q: Why do countries trade?
Advantages
Advantages
Q: Why do countries trade?
Two fundamental concepts:
- Absolute advantage;
- Comparative advantage.
Advantages
A few cases:
Oil
Coffee
Copper
Corn
iPhones
Apparel
The current context
The current context
The current context
An excerpt from this Forbes piece:
“Take vanilla: around 80% of America’s supply of it comes from Madagascar, one of the only places it can be produced thanks to about 100 inches of rainfall per year and humid temperatures between 68 and 86 degrees. President Trump’s widely discredited formula for calculating reciprocal tariff rates, which intended to eliminate trade deficits with around 90 countries, places Madagascar’s tariff at 47%, despite the fact that it would be impossible for the island nation of 31 million with a GDP per capita of $506 per year to import more than the $733 million it exports, mostly in vanilla, clothing, titanium, cobalt and nickel, to the United States.”
The current context
So…
What is a tariff?
- A tariff is a tax levied on imports to the importing country (e.g., the United States).
By raising the cost of foreign-produced goods or services relative to locally produced ones, a tariff redistributes some of the benefits of trading from local consumers and foreign producers to local producers of import-competing goods.
Barriers to trade
Barriers to trade
Imposing barriers to international trade is known as protectionism.
The most common types of barriers to trade are:
Tariffs;
Import quotas;
Embargoes.
Barriers to trade
Import quotas are numerical limitations on the quantity of products that a country can import.
Barriers to trade
Embargoes (aka sanctions) are penalties (which can go beyond trade-related measures) against countries, entities, or individuals.
Tariffs (in general)
Tariffs (in general)
Little bits of History:
1945: Creation of the United Nations (UN)
1946: Creation of the World Bank (WB) and the International Monetary Fund (IMF)
1947: 23 nations signed the General Agreement on Tariffs and Trade (GATT)
- 1995: GATT transformed into the World Trade Organization (WTO).
Tariffs (in general)
The WTO’s main goal is to reduce the barriers to trade.
WTO negotiations happen in “rounds,” where all countries negotiate one agreement to encourage trade, take a year or two off, and then start negotiating a new agreement.