How do Chinese granite quarries and a decline in the US death threaten a family business in rural Vermont?

Listen and find out…

 

 Chinese headstones [4:09m]: Play Now | Play in Popup | Download

Source: NPR Economy Podcast, 2/29/2008 

Tighter European limits set to push up price of carbon emissions - Times Online

When it comes to correcting the market failure of negative externalities, governments have several options. The most interventionist approaches may involve placing strict limits on the amount of a pollutant firms are allowed to emit and fining them for exceeding this limit, taxing firms that pollute in order to shift their supply curves leftward, decreasing output and increasing price closer to a socially optimal level, or simply banning the production and consumption of goods whose existence places excessive spillover costs on society.

Such interventionist approaches to externality reduction tend to require a complex bureaucracy to administer, monitor, execute and enforce. The government may not be able to determine the appropriate level of a tax on a polluter if it can’t determine the exact level of the externalized costs placed on society; the government cannot always check up on every producer in the economy to determine just exactly how much pollution each factory’s producing, and then levying a fine on excessive polluters again raises the question of how high should a penalty be?

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New York Manhole Covers, Forged Barefoot in India - New York Times

In the revealing story above, the NYT reports on the manufacture of the New York’s thousands of manhole covers, which it turns out come primarily from a foundry in the Indian state of West Bengal. An NYT photographer discovered the Indian factory, and his photos prompted the report here:

Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Seemingly impervious to the heat from the metal, the workers at one of West Bengal’s many foundries relied on strength and bare hands rather than machinery. Safety precautions were barely in evidence; just a few pairs of eye goggles were seen in use on a recent visit.

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NPR : Farmers May Switch Crops Due to Labor Shortage

Pure competition forces firms to produce their output in the most efficient manner. Productive efficiency is achieved when producers achieve their minimum average total cost. Any increase in costs may lead to economic losses for a firm, and if costs increase too much a firm may be forced to shut down.

 

 Farmers May Switch Crops Due to Labor Shortage [5:29m]: Play Now | Play in Popup | Download

The scenario above is basically a textbook explanation of the reality faced by farmers in the American Southwest this very day. Hundreds of fruit and vegetable farmers are facing higher variable costs as tougher border security and immigration laws has led to a shortage of cheap labor, which the farmers depend on in the labor-intensive fruit and vegetable industry.

Listen to the podcast above, then study the graphs that accompany this article. Can you identify the changes that have occurred in the American fruit and vegetable industry? What are the possible outcomes for Southwest farmers? How might technology help save these growers from having to shut down their operations? What other alternatives do they have to shutting down in the long run?

Rising costs for in a perfectly-competitive (PC) industry: Click on the thumbnails of the graphs to see the full-sized versions

Made in China: News & Videos about Made in China - CNN.com

Thanks to James Hannam from my IB Econ class for providing the link to the site above. CNN jumps on the China bashing bandwagon and does its part to trump up fears of the danger posed by the “Wild West” of China’s manufacturing sector. This site has a wealth of anti-Chinese features including videos, quizzes, investigative reports and so on. Here’s the headlines warning us to be afraid of Chinese imports:

• Recalled: 255,000 Chinese tires - CNN.com
• Shoppers offered few safeguards against ‘Wild West’ imports - CNN.com
• FDA blocking import of 5 species of fish from China - CNN.com
• FDA: Melamine-tainted poultry, fish safe for humans - CNN.com
• Avoiding Chinese food products nearly impossible - CNN.com
• Tainted medicine in Panama
• China detains manager at heart of U.S. pet food recall - CNN.com

Given the tendency of media to dramatize and blow out of proportion certain issues for the sake of entertainment and to feed the American appetite for scandal, the full blown anti-Chinese campaign is no real surprise. Americans’ own insecurity about the strength (or should I say weakness) of their manufacturing sector surely fuels the Sino-bashing trend that seems to be dominating the media. All this will provide political fodder for lots of nationalistic, pro-America “protect American jobs” rhetoric in the upcoming presidential race too, I’m sure.

What I would challenge you, my students and readers, to ask is: who’s really at fault here? Are Chinese factory owners, whose sole purpose is to make a profit, really to be trusted to uphold standards of product quality and safety that America’s highly industrial economy took over a century to put in place? China only started industrializing in a modern way less than 30 years ago, and much of the development has been spearheaded and overseen by, yes, American firms. The sourcing of manufacturing to third party factories in recent years is a sign of the growing entrepreneurial spirit of China’s new generations of capitalists. Weak regulation by Chinese authorities is a sign not of corruption or malice on the behalf of Chinese producers, but of American consumer’s expectation that goods from China will get cheaper and cheaper.

American consumers seem to have forgotten an old adage, “you get what you pay for”. Just today, in my principles course, we talked about how you don’t always get what you pay for (i.e. diamonds). But in the case of cheap Chinese products, it would appear today that perhaps this adage holds true. Americans take for granted that products like seafood maybe aren’t supposed to be cheap! The freezers of Costco and Wal-Mart are filled with giant bags of shrimp, frozen fish, and other cheap seafoods that we have grown to expect to be there. If Americans want guarantees of their products’ safety, they should look for quality rather than quantity. Try eating locally if you fear the safety of imported food products.

Ultimately, the harm caused by Chinese products will be minimized not only by more and more government regulation, but also by consumers who change their buying patterns to reflect an appreciation for quality and safety over quantity and cheapness. Consumers who demand quality should vote with their pocket books, not rely on government to protect them from the dangers of the “Red Storm” Lou Dobbs warns us of. Markets contain the perfect mechanism for improving the quality and safety of products coming from China, and that’s the power of consumer sovereignty and strength to influence producer behavior through their buying behaviors.

Students, debate and discuss!

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Trade protectionism could cause economic isolation - Poole - Aug. 17, 2007

In our coming unit on International Economics we will weigh the various arguments for and against protectionism, or the erecting of barriers to trade, and examine examples of various types of protection, its aims and effects on international trade.

In the article above, St. Louis Federal Reserve Bank President William Poole warns that the US is working against trade liberalization goals established in Doha, Qatar in 2001 by playing on fears among American consumers of harmful food and toy imports from countries such as China:

Poole said in his speech that the slackening in trade liberalization could have serious consequences. “The Doha Development Agenda multilateral trade negotiations are on the verge of collapse. A collapse of the Doha round would raise doubts about the future effectiveness of the World Trade Organization,” he warned.

The current world trade talks to reduce barriers to imports are called the Doha round because they were launched in Doha, Qatar, in 2001.

Poole also said recent safety worries on product imports from China must not be allowed to create barriers to trade.

“My concern is that certain groups will attempt to use concerns over safety and job loss to restrict imports and thereby pursue an agenda of economic isolation in an increasingly globalized world.”

Recent scares following the discovery that Chinese imports of pet food and toothpaste into the United States contained impurities were compounded after a major U.S. toy maker withdrew millions of toys with lead paint.”

It is easy for retaliatory trade measures to escalate and derail the desirable movement to a more open trading environment. It is in the best interests of all the countries of the world to avoid trade wars,” Poole
said.

Ironically, some say the blame for the potentially dangerous imports from China lay not entirely on Chinese manufactures, but on American companies that own the factories producing the dangerous products. Check out this article:

Recalls: Should U.S. companies share some blame with China? - Aug. 14, 2007

The recent spate of product recalled - melamine-tainted pet food, toothpaste laced with antifreeze and a second batch of Mattel-branded toys made with lead paint - were all made in Southern China’s low-cost manufacturing hub that’s notorious for its lax regulations.But some industry watchers say U.S. importers that do business with these factories are more to blame than even their Chinese suppliers for allowing those unsafe products to enter the U.S. marketplace.

“U.S. law is pretty clear. The importer is responsible for quality and safety of goods imported into the country,” said Erin Ennis, vice president with the U.S.-China Business Council

Part of the problem, says the article, is that competition has forced American firms to cut costs wherever possible, and often this means “sourcing” production to factories owned not by the American company, but by Chinese (or Vietnamese, Mexican, Malaysian, and other foreign owners) where strict oversight of product quality is not assured. Does this mean American firms are no longer responsible for their own product safety? Should the blame be placed on China when an American company produces toys that turn out to be dangerous?

One reason manufacturing products such as toys in China (80% or the world’s toys are made in China, according to the article) is because standards for products safety are so low, so the regulatory obstacles to production are almost non-existant, making production cheap.

Another connection this article makes to our IB course is in the area of development economics. The theory of comparative advantage says that a country should specialize in the products for which its resources are most adept at production. For two decades, China has emerged as a manufacturing giant. But with new fears of product safety, and more significantly the rising cost of labor and land in manufacturing hubs such as Shenzhen and Shanghai, Western firms are looking to China’s less developed neighbors as an alternative:

“If I was sourcing heavily in China, I would be exploring alternatives like Vietnam and Cambodia,” said Sean McGowan, an analyst with Wedbush Morgan Securities, referring to rising labor and production costs in the southern China’s manufacturing belt.

If China moves towards enforcing tighter standards of product safety in its thus far highly unregulated manufacturing industry, this will surely result in higher costs of production for companies like Mattel (the toy manufacturer who recalled 14 million toys last week because of safety issues). Higher production costs in China will send firms looking elsewhere for manufacturing options (such as Vietnam and Cambodia). In effect, the demand for higher quality standards will lead to tighter regulation by the Chinese government, leading to higher production costs in Chinese factories, leading to loss of business from Western firms, leading to the opening of new factories in even less regulated countries like Cambodia.

Discussion Questions:

1. Are retaliatory measures by the US government necessary to punish China for the dangerous exports that have arrived in the US recently?
2. Does tighter enforcement of quality standards by the Chinese government assure products like toys being imported to the US will be safer? Explain.
3. As wages and production costs continue to rise in China, how will less developed countries in Asia and elsewhere be affected?

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IF you’ve visited this blog in the last two weeks, you’ve probably seen the picture below of a beautiful sunset, a distant island and a wispy palm. Turns out I stayed two nights on the beach that picture was taken from, Ahmed in Bali’s remote northwest corner! What a beautiful island Bali is! Unlike many touristy places in Southeast Asia such as Phuket and Samui in Thailand, Bali is an island paradise that has managed to develop a thriving tourist industry while simultaneously maintaining its distinct Hindu culture and traditions that awe visitors and help them understand why it’s called the “island of the gods”. Not only do most Balinese outside the one or two major cities still live in the traditional style houses, but they actively practice their unique form of Hinduism (imported from India via Java in the 11th century), maintain the traditional forms of dance and religious ritual, and sustain themselves by practicing any number of artistic trades rooted in the island’s rich and colorful history. Indeed, in most villages we passed through, it was hard to tell which buildings were temples and which were houses. As much of Indonesia and the rest of Asia have rushed head-on into the age of globalization (often meaning westernization), Bali has thankfully held on to and even fostered one very precious and all too rare commodity: its own history.

Certainly after a year in Shanghai, where the closest thing to religion among urban Chinese is the pursuit of wealth, a couple of weeks in the rich spiritual heart of an ancient Hindu island culture was just what I needed to remind myself what was important in life. But alas, once an economist always an economist, and even with a thousand years of rich cultural heritage to turn my attention from school and economics, I could not help but notice the intricacies of Bali’s economy and how tourism and globalization have affected this remote island culture. My next few posts will cover casual observations made during my 16 day trip to Bali about its local economy and how it has been shaped by the global economy and tourism.