ECONOMICS U$A
INTERNATIONAL TRADE
To illustrate the concepts of specialization and comparative advantage. The viewer is made aware that trade benefits society as a whole but that it can hurt certain groups. Conversely, tariffs, quotas and other trade restrictions can protect certain groups and industries but generally restrict the amount of goods available and raise prices.
OBJECTIVES:
1. If two countries have different opportunity costs in the production of a good, then the country with the lower opportunity cost has the comparative advantage.
2. It is more efficient from a world economic point of view for nations to specialize in the production of those goods for which they have a comparative advantage and to trade for other goods.
3. Free trade generally benefits society as a whole because it results in the least costly way of producing goods. However, in each country, there are industries that may not be able to compete effectively in world markets and, therefore, may decline. Thus free trade can hurt certain industries and certain groups in the economy.
4. Countries may decide to restrict imports in order to protect industries and jobs, and for national security reasons. Trade restrictions include tariffs and quotas. Protectionism benefits certain groups at the expense of the economy as a whole.
KEY ECONOMIC CONCEPTS:
economies of scale, product life cycle, specialization and trade tariffs, quotas and other barriers to free trade, trade and efficiency, protectionism and national defense opportunity protectionism and job security
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Contemporary Issues International Trade Over the past twenty-five years, China has transformed itself from one of the most closed economies (under Maoism) to one of the world’s top-ten traders. This remarkable change has both fascinated and frightened other countries. One commonly expressed fear is that China’s success is based on the low wages of its large working population. However, low wages are one of the most fleeting sources of comparative advantage. If low wages are, in fact, the basis for comparative advantage, why has Africa not become an exporting powerhouse? The simple answer is: productivity. No only are Chinese workers paid low wages, but relative to other low-wage workers (e.g. in Africa and Latin America) they are more productive. What can other countries do to become more competitive vis-à-vis China? |
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| Japanese Auto Restaints US automakers didn’t worry too much about the first Japanese cars to reach the US. However, in 1973 when there as an oil embargo, and there were skyrocketing prices and long gas lines, Americans were choosing the gas efficient Japanese imports over the gas guzzling US cars. The powerful Auto Workers Union were worried that importing Japanese cars would mean many US workers would lose their jobs. They took their case to Capitol Hill. However to free trade economists they felt that by protecting the US auto industry there was no incentive for the industry to reform and fought to prevent Congress from passing a bill to reduce imports. Instead they asked the Japanese to restrain their exports in order to give the US automakers time to re-tool for a new market demand. Japanese auto imports dropped by almost 8% in a year. Because there were less imports this caused the price of the Japanese import cars to rise. It was a boom for Japanese auto dealers, but also for American auto dealers because they discovered that they could raise prices too as long as they stayed under Japanese prices. This was good news for car dealers, but bad news for consumers buying cars. The competition that comes with trade means choices for society as well as consumers. The cost of saving thousands of American jobs may be fewer choices and higher prices for millions of American consumers. Comment and Analysis by Richard Gill Over the long run, exports and imports for a given country tend to balance out. However, in the short run, increases in particular imports can cost jobs in those industries. Nonetheless, restraining competition inevitably leads to higher prices for consumers. |
| Trigger/Price Mechanism What happens when a foreign company, doesn’t play fair? In the 1970’s the American steel industry found itself under come under fire for the first time by steel producers from countries like German and Britain undercut American companies. These foreign countries were suspected of dumping, selling steel in the US for less than they were selling it at home, perhaps even less than it cost them to make it. It was feared that if another government could pick an industry, subsidize it, and give it enough money to buy into the US market, and if they gave them enough they could destroy the US industry because our industry is just one,two or three companies competing with the whole government in some other country. This could cause American workers to be laid off. With industry and jobs on the line, President Carter turned to one of the country’s experts on international trade and finance, Deputy Treasury Secretary Anthony Solomon who suggested a "trigger price mechanism". The idea was to use Japanese cost of production as a guide. Anything lower would be considered good grounds that the company was dumping and not covering their costs of production which was the definition under the law. This policy was an effort to differentiate between fair and unfair trade practices and avoid protectionist quota action. In addition it helped to speed up reform in the domestic steel industry. Comment and Analysis by Richard Gill Most obstacles that countries place in the way of foreign imports are subtle, and are called non tariff barriers trade and can be complex, and sometimes hidden. |
| Mexico and Maquilladora A major problem for the US was how to stem the flow of job-seeking Mexicans flooding across the borders. Even though Mexico had ready supplies of energy and access to the huge consumer markets of the US and a large labor force their economic policies excluded investment in industries that would create jobs for Mexican workers at home. The Maquiladora was a solution to attract investments in Mexico and induce Mexican workers to look for work at home. Maquiladoras were border factories in which Mexican workers assemble US made components for export with reduced tariffs to the American market. By 1993 two thousand Maquiladoras were doing $6 billion dollars worth of business employing over half million workers. Policies begun in the 1980’s made Mexico more attractive to investment from abroad. American companies benefited by lowered labor costs, foreign ownership restrictions were loosened and government regulations were reduced resulting in more foreign investment and better job opportunities for Mexican workers in Mexico. Comment and Analysis by Nariman Behravesh Trade benefits both the country making the investment and the country receiving the investment. The Maquiladora was a first step and a major factor behind the establishment of the North American Trade agreement. |