America, a champion of free trade between the world’s nations… right?

Actually, the United States places tariffs (taxes on import) on virtully every item it trades for with the rest of the world. Below is just one tiny section of the 75 page table of contents (!!) of the “Harmonized Tariff Schedule of the United States”.

JOGGING SUITS knitted or crocheted . . . . . . . . .. . . . . 6112.11-19
JOINERY of wood, for builders . . . . . . . . . . . . . . . . . . . . . . . . . 4418
JOINTS artificial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . 9021.11
JOJOBA OIL . . . . . . . .  . . . . . . . . . . . . . . . . . . 1515.90, 1516-1518
JOKE ARTICLES . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 9505.90
JONGKONG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . Ch. 44
JOURNALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . 49-3, 4902
JUDO UNIFORMS of cotton . . . .  . . . . . . . . . . . . 6203.22, 6204.22
JUICES fruit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20-US1-3
fruit and vegetable . . . . . . . . . . . . . . . . . . . . . . . . 20-5, 2009.11-90
meat, fish, or aquatic invertebrates . . . . . . . . . . . . . . . . . .1603.00
JUMPSUITS men’s or boys’ . . .  . . . . . . . . . . . . . . . . . . .  6211.32-33
women’s or girls’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6211.42-43
JUNIPER seeds of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …0909.50

Yes, folks. Even “Joke Articles” made overseas are taxed before ending up in the hands of American consumers (by 70% as it turns out!). But tariffs are no joke. The podcast below offers an excellent evaluation of the effects of America’s tariffs on various stakeholders, including American consumers, producers, and workers and on foreign producers, consumers and workers.

After listening to the whole podcast, respond the the following questions in a comment.

Discussion Questions:

1. How does a tariff on Chinese tires affect American tire manufacturers? Why are American firms that make tires actually opposed to the tariff on Chinese imports?
2. Which group is the main proponent of higher tariffs on Chinese tires? Why does this group favor higher tariffs?
3. How have the Chinese responded to the American tire tariff? Why are American chicken farmers upset about the tax on Chinese tires?
4. Why do “97% of economists say tariffs are a bad idea?” The commentator says economists hate them because “they are so inefficient”. Discuss the economic reasoning behind this statement.
5. Do you think it is likely that the 35% tariff on Chinese tires will save or create jobs for Americans? Why or why not? What are your conclusions regarding the economic wisdom of tariffs?

US president Barack Obama made a speech directly to Wall Street today. In his speech, Obama reflected on the many lessons America has learned in the last year since the financial crisis began. He urged his audience of investors, bankers and brokers that

“Normalcy cannot lead to complacency,” Obama said. “Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them.”

“They do so not just at their own peril, but at our nation’s,” the president added.

In addition to his warnings about the threat posed by overly risky financial markets to the US economy, President Obama expressed his commitment to free trade and “the fight against protectionism”.

Obama says:

…enforcing trade agreements is part and parcel of maintaining an open and free trading system.

The enforcement of existing trade agreements Obama refers to is his way of justifying a decision his administration made over the weekend that actually limits free trade between America and one of its largest trading partners, China.

Trade relations between two of the world’s biggest economies deteriorated after Barack Obama, US president, signed an order late on Friday to impose a new duty of 35 per cent on Chinese tyre imports on top of an existing 4 per cent tariff.

In his first big test on world trade since taking office in January, Mr Obama sided with America’s trade unions, which have complained that a “surge” in imports of Chinese-made tyres had caused 7,000 job losses among US factory workers.

So, in his speech today, Obama decries protectionism and calls for expanded trade and free trade agreements which are “absolutely essential to our economic future”. But only three days ago, he supported a blatantly protectionist measure aimed at keeping foreign produced goods out of America in order to save a few thousand American jobs.

Obama’s decision is a bad one for several reasons. As an economics teacher, I will turn firstly to a diagram for an illustration of the net loss to the American people of higher tariffs on imported tires:

The key point to notice in the above graph is that a tariff on imported tires results in a net loss of welfare in America. The blue area represents the increase in the welfare of tire manufactures (this could be interpreted as the jobs saved in the tire industry and the profits earned due to higher prices); the black areas, on the other hand, are welfare loss. Since all tire consumers in America pay more for their tires due to the 35% tariff, real income is affected negatively for the nation as a whole.

One effect of the protectionist policy the graph does not illustrate, and perhaps the most serious negative impact of the tariff on America, is the response the Chinese are likely to take to what they interpret as a violation of existing free trade agreements between the US and China.

“This is a grave act of trade protectionism,” Mr Chen said in a statement. “Not only does it violate WTO rules, it contravenes commitments the US government made at the [April] G20 financial summit.”

Beijing said it had requested WTO-sanctioned consultations with the US over Washington’s new duties on tyres. Yao Jian, a commerce ministry spokesman, said the duties were in ”violation of WTO rules”.

China said it would now investigate imports of US poultry and vehicles, responding to complaints from domestic companies.

The problems with protectionism are myriad. Clearly American consumers suffer through higher tire prices. In addition, Chinese manufacturers will see sales fall as their product becomes less competitive in the US market. According to the CCTV report below, as many as 9,000 workers in the Chinese tire industry will lose their livelihoods due to declining demand from the US. But the unforseen effects of the US tariff on Chinese tires is the retaliatory measures China will almost certainly take. If China imposes new tariffs on American automobiles and poultry, the scenario in the graph above will be reversed, and Chinese consumers will face higher prices, Chinese car and poultry producers will experience rising sales, while the American auto worker and chicken farmer will suffer.

Free trade tends to result in net benefits for economies that choose to participate in it. American tire manufacturers are certainly harmed by cheap Chinese imports; however, America as a whole benefits through cheaper goods, more consumer surplus, higher incomes in China and therefore greater demand for imports of products made in America. The road to protectionism is a dangerous path to take for the Obama administration. Justifying these new tariffs by claiming that they “enforce existing free trade agreements” is a political maneuver aimed at covering up the truth, which is that the Obama administration has sided with a special interest group to save a few thousand jobs and garner political favor at a time when 700,000 American jobs are being lost each month. By doing so, he is calling into question his own commitment to free trade, and harming America’s image as a global proponent of global economic integration.

Discussion Questions:

1. Why is the Chinese government so upset about a new tax on such an insignificant product as automobile tires?
2. “Self-sufficiency is the road to poverty”: Do you agree?
3. Some would say that it is a small price to pay for Americans to face higher prices for one product like tires in order to “save” 7,000 Americans’ jobs. Would you agree? Why or why not?
4. If 7,000 Americans were to lose their jobs due to free trade with China, what would we call the type of unemployment experienced by these workers? Is this the same type of unemployment experienced by the 700,000 workers who have lost their jobs each month during the last year of recession in the United States?

U.S. Trade Gap Widens on Oil Imports – WSJ.com

Terms of trade is a term that is often misunderstood by IB Economics students. Simply put, a nation’s terms of trade refers to the relative price of a country’s exports to its imports.

When a country’s imports increase in price, while the value of its exports stays the same, the country’s terms of trade are said to deteriorate. As a nation experiences deteriorating terms of trade, it finds itself moving towards a deficit in its current account, meaning that expenditures on imports are growing more than income from exports, also called a trade deficit.

The United States has run trade deficits for most years since 1970. Since 2004 the US has annually spent over $600 billion MORE on imports than it earned from the sale of its exports. (Balance of trade data going back to 1960 can be found here).

Usually, when a country enters a recession, it would be expected that its balance of trade would improve, since households demand fewer imports and domestic inflation decreases making the country’s products more attractive to foreign households. In fact, in 2008, when the US entered its current recession, its trade deficit actually decreased. Recently, however, due to the weakness of many of its trading partners and a deterioration in terms of trade, America’s recession is accompanied by a deepening trade deficit:

The U.S. trade deficit widened for the first time in eight months during March, as the price and use of imported oil both climbed.

The U.S. deficit in international trade of goods and services increased to $27.58 billion from February’s revised $26.13 billion, the Commerce Department said Tuesday. Originally, the February deficit was estimated at $25.97 billion.

U.S. exports in March slipped by 2.4% to $123.62 billion from $126.63 billion as trading partners bought less consumer goods and cars from the U.S. U.S. imports fell at a lower rate, dropping 1.0% to $151.20 billion from February’s $152.76 billion

Discussion Questions:

1. How did rising oil prices lead to an increase in America’s trade deficit?
2. What determines demand for American exports in the rest of the world? Why is demand for American goods and services falling even as their prices decline due to deflation in the US?
3. Where does America get the money to buy hundreds of dollars more in imports than it sells in exports? What do foreigners do with all the US dollars they earn from their enormous trade surplus with the US?
4. Why doesn’t the US government simply place tariffs or quotas on imports to try and achieve more balanced trade with the rest of the world? Is this an appropriate response to a trade deficit?

Should the US bail-out their car industry? – Welker’s Wikinomics Page

Web 2.0 never ceases to amaze me. Over at our class wiki, Zurich International School students regularly debate economic issues that relate to the topics we are studying in IB and AP Economics. The latest hot topic of debate was started by an 11th grade Brazilian student, Mark, who posed the following question:

Should the US bail-out their car industry?
Monday, 4:04 PM EST

In America, everyone believes that the American car companies like GM, Ford and Chrysler, which are nearly bankrupt, should be bailed-out by the government, to save their national pride. In this week’s “The Economist” magazine, they argue that bailing-out the car industry would be a grave mistake. Firstly, they argue that it would “open an invitation” to other companies to apply for aid to survive the recession. Banks qualify for this help because the economy depends on them; the car industry in the US failing would not be so disastrous. Secondly, they argue that the car industry is shifting from the saturated (full, at its peak) markets to the fast-growing emerging markets. This means, even if the car businesses fail in America, they would still have opportunities in other countries. In Brazil for example, Fiat has a plant where they produce 800,000 cars each year… that is a new car coming off the production line each 20 seconds! And they are not slowing the production; the plant continues operating with three shifts a day!

So, should the US government bail-out GM, Ford and Chrysler, save many lost jobs, and one of their nation’s prides, or should they be influenced not to, by economists that predict it would not help the economy at all?

I love to see students take an interest in the issues dominating our news that tie so closely to the topics we study in our principles classes at the AP and IB levels. The debates are interesting, insightful, and conflicting yet valid viewpoints on controversial issues.

If you’re interested in the economic issues dominating our news and want to join the debate, join the Discussion Forum at Welker’s Wikinomics Wiki and share your points of view.

FT.com | The Economists’ Forum | The case for forward-looking protectionism in the US

Free trade is an ideal. This is a theme of my IB Economics class which I emphasize repeatedly during year two of the course. Free trade, defined as the exchange of goods, services, resources, and financial assets based on the principle of comparative advantage, results in a more efficient allocation of the world’s resources, an increase in total world output and welfare, and increases the opportunity for growth and development for all countries that prescribe to its principles. This is the ideal, at least.

In the real world, free trade is rarely practiced. Free trade agreements between nations represent managed trade; the selected removal of protections such as tariffs, quotas and subsidies on the exchange of particular goods does not represent free trade, rather managed trade. The problem with free trade in the real world is simply that it has never been truly practiced, therefore the adjustments that both developed and developing countries would have to undergo to adopt widespread free trade would be extremely disruptive both economically and socially. Entire industries would disappear from the developed countries as manufacturing resources were reallocated to low cost countries. Poor countries trying to build their manufacturing industries would lose any competitive advantage offered by protectionism, forcing their “infant industries” to wither and die in the face of global competition from countries that long ago achieved economies of scale in manufacturing. Farmers used to heavy subsidies would see their livelihoods disappear as the world’s food would be sourced from the countries with true comparative advantages in agriculture. Simply stated, the social costs of the widespread adoption of free trade are not politically palatable, thus leaders have only hesitantly pursued this ideal on the world stage.

For decades, America has stood for the ideal of free trade, proselytizing its advantages and urging developing countries to reduce or remove their barriers to the free flow of resources and goods from nation to nation. Today, however, the United States faces the very fate free trade prophesized as its own automobile industries teeters on the edge of collapse. As many as 3 million American jobs stand to be lost if the auto industry goes under. Today, America faces the ultimate test of its will to stand for and defend free trade in the world. Should America erect new barriers to trade, bail out its auto industry, and save this dying sector from collapse to avoid the political hardships its death would incur? Or should America stand for the ideal of market liberalization and allow the auto industry to disolve as the principle of comparative advantage indicates it should?

The question is dire, and it’s one that Barack Obama will be forced to address early in his term as president. Cambridge economcis professor Ha-Joon Chang argues the case for protectionism by America in this time of economic turmoil:

Mr Obama’s trade policy… is already causing controversy. He has vowed to protect American jobs and even argued for re-negotiating the NAFTA. There is already some hand wringing among free-trade economists, worrying that his protectionist policies may destroy the world trading system in the same way the infamous Smoot-Hawley Tariffs of 1930 did after the Great Depression. They counsel that the US should maintain its historical commitment to free trade.

However, contrary to what most people think, the US is the true home of protectionism. Between the 1830s and the 1940s, against superior European competition, the US developed its industries behind literally the highest tariff wall in the world, with the average industrial tariff rate ranging between 35% and 55%. Even the Smoot-Hawley Tariffs were not an aberration – the average US industrial tariff in 1931 was, at 48%, well within the historical range.

Moreover, the theory that justified such protectionism, namely, the ‘infant industry’ argument, had been first developed by none other than the first Treasury Secretary of the US – Alexander Hamilton (that’s the guy you see on the $10 bill). Hamilton argued that producers in relatively backward economies needed to be protected and nurtured through tariffs, subsidies, and other government policies before they mature and can compete with producers from more economically developed countries.

Of course, the protectionism that Mr Obama is advocating is protection to ease the adjustment of mature industries, rather than to promote infant industries. The case for such protectionism is not as overwhelming as that of infant industry protection. However, well-designed and time-bound protection of mature industries can facilitate, rather than hinder, trade adjustment and industrial upgrading. Japan and some European countries in the aftermath of the 1970s Oil Shocks come to mind.

Mr Obama should use protectionism in a similarly forward-looking way. Industries that can be revived through re-tooling of its factories and re-training of its workers should be given protection, but only if they fulfill certain conditions regarding investment and training. Industries that have no future should be given strictly temporary protection to ease phasing-out through orderly liquidation and redundancy.

…Keeping its market open is not enough for the US to play a genuinely positive role in the world trading system. The US should also stop pushing for trade liberalization in developing countries and give them the chance to use (intelligently-designed, of course) infant industry protection, which it invented and benefited so much from. Mr Obama should take a lead in creating a world trading system that allows asymmetric protectionism between the rich countries and the poor countries, with the latter protecting their markets more and gradually opening up in line with their economic development.

All these call for a much more activist role for the US government than it has been the norm. Providing protectionism to facilitate structural changes, and not just to protect existing jobs, would require a much closer coordination between trade policy and those policies to upgrade American industries, such as R&D support and worker training. Redesigning the welfare state as a vehicle to promote skills upgrading and labor mobility would push the US government into an uncharted territory.

These are big challenges. However, the US cannot continue its peculiar mixture of free-trade mythology and uncoordinated, ‘reactive’ protectionism that has served ordinary Americans and the developing nations so poorly.

Mr Obama has turned a new chapter in US history by becoming the country’s first Afro-American president. He will turn a new chapter in world history if he can come up with a forward-looking protectionist strategy that that both protects American jobs better in the long run and help developing countries develop faster.

Discussion Questions:

1. What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?
2. How could protectionism be used responsibly by developing countries to promote economic growth and development?
3. Professor Chang argues that responsible protectionism should allow industries with no future to be phased out “through orderly liquidation and redundancy”. What does he mean by this and why is such a policy so hard to accomplish politically?

YouTube – Obama / McCain 3rd Debate, Part 10 – Free Trade

Below is a clip from the third and final presidential debate, in which the candidates discuss the benefits of free trade.

Both candidates support the principles of free trade, one more enthusiastically and with fewer conditions than the other. Only Obama speaks of “fair trade”, which he seems to think means trade that does not encourage the violation of human rights abroad.

Notice how towards the end of the discussion of free trade, McCain attempts to wrap up the conversation when he claims:

“I don’t think there is any doubt that Senator Obama wants to restrict trade and to raise taxes; and the last president of the United States who tried that was Herbert Hoover, and we went from a deep recession into a depression…”

Hoover, of course, was the US president at the time of the Great Depression, when the government’s response to a financial crisis on Wall Street worsened the economic meltdown, throwing the US into its deepest and longest slowdown in history.

Discussion questions:

1. How would a free trade agreement with Columbia help “create jobs in America”? What are the “billion dollars or more that (America) has already paid” through its trade with Columbia?
2. What is the source of Obama’s lack of enthusiasm for the Columbia Free Trade Agreement? Do you agree with his position on the importance of limiting free trade in order to stand for human rights? Why or why not? Is his view a protectionist one?
3. One of Obama’s highest priorities is to hold auto makers responsible for improving the fuel efficiency of American-made automobiles. How does he plan to create “five million new jobs all across America, including in the heartland”? Does Obama’s plan to invest in a clean energy economy sounds remotely protectionist? Why or why not?

FT.com / World – Anti-dumping investigations soar

Free trade is good, right? This sentiment is one that economists typically agree with wholeheartedly. The mutual gains from free trade among nations that specialize in the goods for which they have the comparative advantage results in increased global output and consumption among trading nations. That, at least, is the basic premise of free trade.

But is there such a thing as unfair free trade? The World Trade Organization, whose mission is the removal of barriers to trade among all the world’s nations, thinks there is such a thing as unfair trade. Under certain circumstances, the WTO allows member nations to place protective tariffs on particular imports, and recently, more and more nations have taken action to protect their domestic markets from unfair trade practices of their trading partners:

The number of new anti-dumping investigations soared by nearly 40 per cent in the first six months of this year, the World Trade Organisation said on Monday, reflecting increased trade tensions as the credit crunch began to take its toll on the global economy.

Between January and June 16 WTO members started 85 new investigations compared with 61 in the first six months of 2007. China was the target of nearly half the probes, a jump of 75 per cent over the same period last year.

Under WTO rules, countries can put duties on unfairly priced imports that are sold in export markets more cheaply than at home. But until this year dumping actions had seemed to be on a downward trend, with 164 investigations in the whole of last year compared with over 200 in 2006.

Anti-dumping actions, once mainly taken by rich countries against poor ones, have become a tool increasingly used by developing nations while industrialised countries have increasingly become targets…

The EU was the third-ranking target in the first half of the year, after China and Thailand. Canada, the US, New Zealand and Norway also had investigations opened against their exports.

The WTO said the main products affected were base metals (21 investigations), textiles (20) and chemicals (10).

The number of new measures taken as a result of anti-dumping probes also rose in the first six months of 2008, with 54 measures against 51 measures in the same period in 2007. India applied duties in 16 cases, with the EU some way behind in second place.

China was again the main target followed by Taiwan, the EU, South Korea, Russia and the US.

Discussion Questions:

1. Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
2. Does dumping refer to the sale of a country’s goods below the importing country’s costs of production or the costs of production in the country where the good is made? Why does this distinction matter?
3. When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.

Live from Shanghai – OnPoint with Tom Ashbrook

The 21st century has been called “China’s Century”. With the Olympics in Beijing in a couple of months, the torch relay touring the worlds’ major cities has been met with fierce anti-China protests as angry activists have accused China of countless offenses from human rights violations to oppression of democracy movements to environmental destruction. Although it may be “China’s Century”, it sometimes seems that the rest of the world is not too happy about China’s emergence as a global superpower.

Last week, NPR’s Tom Ashbrook, journalist and host of the OnPoint radio program, visited Shanghai and featured daily stories about China in the world today. Below is an excerpt from the first of these stories, which caught my attention because it shared a minor fact that I had never heard before but which I find extremely interesting. Ashbrook’s guest, David Lampton, is a leading scholar on China’s re-emergence as a global superpower. Listen to what he says here:

 

 China's Challenge - OnPoint with Tom Ashbrook: Play Now | Play in Popup | Download

“Re-claim their share of global GDP?” you might be asking? Here’s the thing… for much of the last 2,000 years, China was THE leading superpower in the world. In fact, up to the 1430’s, China had the largest navy in the world, had established tributary relations with dozens of kingdoms from Southeast Asia to India to Africa, had established and secured trade routes stretching overland to Europe and by sea as far away as East Africa, and some even think Chinese explorers had made it to North America seventy years before Columbus! While Europeans were dying of the plague by the millions and struggling under absolute poverty in a feudal society where the idea of national unity was still a century off, China had grown to be the largest empire the world had ever seen, first under the Yuan Dynasty and then the Ming.

As professor Lambert says, China’s GDP, or its total output of goods and services, accounted for ONE THIRD of the world’s output during much of the common era. This fact shocked me, but made sense once I thought about it. China truly was the greatest example of a global superpower the world had known by the 15th Century. Much of its wealth and power was a result of its efforts to globalize, or to integrate itself with the economies of the foreign nations, empires and kingdoms. Trade with its neighbors, near and far, had helped enrich China, but also built among China’s leaders a rightful sense of superiority over the other peoples of the world.

It was this sense of superiority that would lead to a long period of decline in Chinese dominance of the global economy. In 1432, the Ming emperor ordered the trading vessels of Admiral Zheng He destroyed. 3,000 of the largest ships the world had ever seen were sunk to the bottom of the Yangtze river and the East China Sea. The emperor declared China as “The Middle Kingdom” and ordered that all links with the outside world be severed, as China had no need for trade with others. China, the emperor claimed, was totally “self-sufficient” and could flourish without trade with the “barbarian” outsiders.

What followed was a long period of decline in China’s superpower status. From 1432, through the fall of the Ming in 1644 throughout the subsequent Qing Dynasty, into the 20th Century which saw repeated shifts in power between KMT, the Japanese and finally the CCP, China for the most part resisted attempts by its own and by foreigners to open its doors to the world, welcome trade, and encourage globalization of China’s rapidly dwindling domestic economy. The belief that China was “self-sufficient” endured while China’s share of total economic activity in the world dwindled to nearly nothing.

In the mean time, Europeans “discovered” the New World, philosophized about the gains from trade, integrated their own markets and later the markets of the colonies in Asia, America, and Africa, and grew wealthy as a result of these global exchanges. All the while, China stuck to its path of isolationism and self-sufficiency, as its influence and power slipped ever deeper into obscurity.

This period of isolation essentially lasted until the death of Mao Zedong, who could basically be called China’s last emperor. Since 1978, China has followed a new path, one that has attempted to reverse the mistakes of past dynasties, based on the doctrine of isolation and protection of domestic markets. Since its re-emergence as a global economic superpower, China has rapidly seen its share of global GDP increase from less than 2% in the 1970’s to around 16% today; a rebound achieved only through year after year of rapid economic growth, fueled by exports to the rest of the world. Isolation, it appeared, was not the path to wealth and power. China had discovered a new path, one that has done wonders for it income and standing in today’s circles of global power.

China’s re-emergence was made possible by one simple shift in doctrine and philosophy among its leaders: the belief that trade is good. While today the country still has many obstacles to overcome, such as the environmental challenges posed by growth, achieving a more equal distribution of wealth and income, fostering the growth of a domestic market to lessen its dependence on exports, and the challenges relating to human rights and demands for democratization, it would be wrong to say that China has not benefited from economic globalization in many ways.

A little history lesson is sometimes necessary to better understand where China is coming from and where it is going on its path towards re-emerging as a superpower in the global economy. The West, in the mean time, should pause to consider the rightful place the Chinese people believe is theirs based on their long history of economic power and dominance that for hundreds of years placed China at the pinnacle of power in the world economy.

Bush pushes Congress to vote on Colombia trade pact. – Apr. 14, 2008

Click on the graphs for full-size versions

The benefits of trade, while visibly demonstrated by two basic economic models, the production possiblities curve and a simple supply/demand diagram, are not as straightforward when politics is involved. Case in point: the Bush administration has been trying to push through a free trade deal with Columbia, one of our key allies in a region ripe with anti-American sentiment. The White House views the trade deal as a win-win for the American economy:

The administration insisted the deal would be good for the United States economically because it would eliminate high barriers that U.S. exports to Colombia now face, while most Colombian products are already entering the United States duty-free under existing trade preference laws.

On the surface it appears the US has nothing to lose from extending trade relations with Columbia, since few if any American jobs will be lost by such a deal; so why are some Democrats resisting the trade deal?

In explaining their opposition, Democrats have cited the continued violence against organized labor in Colombia and differences with the administration over how to extend a program that helps U.S. workers displaced by foreign competition.

As is so often the case, what’s best for the economy does not seem to be what’s in the best interests of Americans. Our values extend, in some cases, beyond our pocketbooks. The White House argues that the US/Columbia free trade agreement only promises to increase demand for American products while doing little to affect domestic employment. The fact that most Columbian imports are already tariff-free probably confirms this. But the Democrats oppose this deal on the grounds that it would appear that America endorses the anti-labor activities of the Columbian governments.

Labor is a touchy political issue in America, where union membership among workers has fallen from around 40% in the 1950’s to around 13% today. As Columbia and other developing economies become integrated into the global economy, there is increasing pressure for governments to liberalize their domestic labor markets, weaken unions, lower wages in order to attract more investment from abroad, lower the costs of production, thus increase the quantity of their exports demanded abroad. Labor market flexibility and liberalization is certainly an important step in attracting investment and demand to developing countries, but if it comes at the expense of the well-being of the citizens of a poor country, then perhaps standing against such anti-labor actions is a just cause.

The free trade deal with Columbia poses more of a moral dilemma than an economic one. From America’s stand-point, it appears to be a win-win situation. But from the perspective of international labor standards, approving a trade deal with Columbia threatens to undermine another set of American values: those of human rights.

Discussion questions:

1. Why do you think the White House is so adamant about pushing through the trade deal with Columbia?
2. Are the Democrats correct to oppose a deal that could create jobs in America while at the same time make more goods available to Columbian consumers at lower prices?
3. Should America be trying to dictate the labor standards of its trading partners? Why or why not?

We began our final unit in AP Economics today on international economics. Some of the topics we’ll cover in this unit are trade, protectionism and exchange rates. We’ll also continue the discussion that began today about the impact of economic globalization on both developed and developing countries.

One of the big questions we’ll address is whether globalization works; whether it has contributed to real improvements in the lives of people in both the rich and poor countries, whether the international financial and trading systems in place today are adequate, and the degree to which government should be involved in controlling the impact of international economic integration.

One of the leading economists in the field of international economics is Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics and author of the recent book, Making Globalization Work. As an introduction to some of the issues we will discuss in this unit, watch the video below in which Stiglitz addresses some of the major challenges nations face in making globalization work. Leave a comment sharing your responses to the questions below the video.

Discussion Questions:

1. What are some of the pressures faced by Americans in the era of globalization?
2. What does Stiglitz think it means to “manage globalization well”?
3. “Social protection doesn’t mean protectionism” – discuss…

Recently, in AP Economics, we have been learning about Labor markets; in IB Economics we’ve been focusing on the benefits and costs of international trade and global economic integration. As students of market economics, it is ingrained in us that economic liberalization, the freeing of markets, enabling resources to be allocated based on the price mechanism; these are all are good things. Removing barriers to the free movement of products and resources across national and political boundaries should eventually result in greater world output, and subsequently increases in living standards and wealth for the citizens of all free trading countries.

Nations will produce the products for which they have a comparative advantage, and trade with their neighbors for those products for which they don’t. Resources will flow from markets in which they are in low demand to those where they are in high demand. Prices in both product and resource markets will rise and fall, allocating scarce resources to the markets where they are needed most.

So why, in an era where the benefits of free trade and free flow of productive resources seem so visible around the world, do Americans seem so susceptible to views like those exhibited in the video below:

Continue Reading »

The Big Mac index | Economist.com

In IB Economics we’re studying the theory of exchange rates. A floating exchange rate system should be in equilibrium when the rate enables people in different countries to buy the same basekt of goods with an equal amount of money. In other words, If I walk into McDonalds in the US and have to pay $3.00 for a Big Mac, then board a plane, land in Shanghai and walk into a McDonalds there, the price I pay in Shanghai should, given current exchange rates, be the same as what I paid in the US. In reality, a Big Mac in Shanghai costs about 56% less than one in the US. This tells economists something about the value of the Chinese RMB. Continue Reading »

Understanding the World Trade Organization

Below is an audio introduction to the World Trade Organization, courtesy of my year 2 IB Econ students here at SAS. Our current unit (IB Unit 4) examines free trade, global economic integration, and the WTO among other topics. As an introduction to the WTO, student were asked to record a two-minute podcast of the main ideas from a specific page on the WTO’s website. Below are their summaries of the basic functions and agreements of the organization, summarized and podcasted for your listening pleasure!

 

 Marco Garafolo: "What is the WTO?": Play Now | Play in Popup | Download

 

 Enno Zhang: "Principles of the Trading System" [2:40m]: Play Now | Play in Popup | Download

 

 Manon Van Thorenburg: "Tariffs": Play Now | Play in Popup | Download

 

 Dennis Melzer: "Textiles": Play Now | Play in Popup | Download

 

 James Hannam: "Standards and Safety" [2:36m]: Play Now | Play in Popup | Download

 

 Kaj Nieman: "Anti-dumping, subsidies, etc.": Play Now | Play in Popup | Download

Introduction to the WTO, continued…

 

 Carlos Siu: "Intellectual Property": Play Now | Play in Popup | Download

 

 Lucas Topham: "Non-tariff Barriers": Play Now | Play in Popup | Download

 

 Wan Jin Park: "Services": Play Now | Play in Popup | Download

 

 Danny Witters: "Agriculture" [1:20m]: Play Now | Play in Popup | Download

 

 Daniel Yeung: "Plurilaterals" and "Trade Policy Reviews" [1:57m]: Play Now | Play in Popup | Download

Seeing Sugar’s Future in Fuel – New York Times

“The sugar producers say whatever its costs, the new farm bill is needed to save their industry.”

We’ve all heard the news about this amazing new fuel that just might save the world from the perils of global warming… ethanol, food fuel, alternative energy, replacement for oil, the panacea to all of America’s energy, climate, and geo-political woes! Corn farmers in America’s grain belt have benefited hugely of late due to large subsidies bundled with America’s latest farm bill.

The new version of this bill, being debated in Congress now, contains a proposal to prop up the country’s 12,000 sugar farmers by promising to buy any surplus sugar resulting from cheap sugar imports from Mexico (themselves the result of market liberalizations accompanying the North Atlantic Free Trade Agreement) at a profitable price. The sugar lobby insists that sugar should play a larger part in the production of ethanol, currently which is made mostly from corn.

To effect that policy, the government would buy excess sugar and sell it at a loss to ethanol producers. They ferment corn starch to ethanol, but adding a little sugar can speed the reaction…

Mr. Keenum suggested that the Agriculture Department would end up buying sugar for 22 cents a pound and selling it to ethanol producers for 4 to 7 cents a pound. “You can easily do the math and look at the loss potential,” he said.

Continue Reading »

Here’s an online special for my IB students. We’ve recently started our unit on International economics, and one of the first topics is free trade, protectionism, barriers to trade, and the arguments in support of and against such protection. Below are the graphs we discussed in our Smartboard lesson during today’s class.

If you click on each image it will take you to a full size version.

What to notice about the impact of a tariff: Domestic producers benefit at the expense of domestic consumers and foreign producers. The green triangles represent efficiency or welfare loss because that is consumer surplus that is forgone after the tariff. The yellow rectangle is not DWL because it is tariff revenue for the government.

Be sure to understand the indirect effects of such policies also. For example, any of the three forms of protection shown here will lead to a decrease in net exports for America’s trading partners, which means a decrease in Aggregate Demand and the possibility of higher unemployment, recession, lower income, thus less demand for American products abroad. So, not only does the tariff hurt American consumers through higher prices and lower quantity, but it could harm other American businesses whose products are no longer in demand from foreigners whose incomes have declined thanks to the American tariffs.

Note also the regressive nature of tariffs. Much like a VAT or an excise tax, tariffs place a greater burden on low income earners than high income earners, as a particular tax on imports represents a larger percentage of a poor person’s income. Continue Reading »

FT.com / Asia-Pacific / China – Beijing rejects North American pork

Here’s a follow up to the previous post about China’s attempt to keep inflation low by clamping down on rising prices through price controls. The main cause of the record inflation figures is the shortage of pork in the country. This headline’s irony was obvious, only a few articles below the one linked in the last post!

Here’s the thing; pig shortages have driven up the price of pork by around 60-70% in China. What’s one obvious solution to this problem? Import more pork from overseas to meet the excess demand. So, what’s the government doing about it? Playing politics with the US and blocking imports of American pork! Ha! Looks like their concern for the common Chinese may take a backseat to the retaliatory message sent to the US, which has recently threatened new tariffs on Chinese goods in the wake of concerns over product safety and frustration over the persistent trade imbalance between the two countries.

Beijing has rejected consignments of pork from the US and Canada because they contain a banned additive – in spite of a domestic shortage of China’s staple meat, which pushed inflation to a
10-year high in August.

Again, China’s meddling in the market economy seems to only make things worse for the Chinese people.

Chinese officials have said they expect the pork shortage to remain a problem into next year, but prices have already started to come down from their August high, Xinhua, the official news agency, reported at the weekend. Prices decreased by 11.3 per cent in early September from the levels in August because of an increase in supplies of pigs, Xinhua said.

The number of pigs ready for sale was up 9.9 per cent early this month compared with a year ago, said Sun Zhengcai, the agriculture minister.

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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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Cuba libre | Free exchange | Economist.com

Here’s a piece from the Economist’s blog about whether America removing its embargoes on trade with Cuba would have all that big an impact on the lives of the average Cuban.

Trade is, it goes without saying, wonderful stuff. But trade with America isn’t that marvelous. Cuba is, right now, free to trade with just about every other country in the world, yet it’s still a pit of economic misery for most of its citizens. Yes, shipping costs would be higher, stopping some trade from happening. But China is much farther from America than Cuba is from Europe; it still manages to run an enormous trade surplus with that country.

According to the CIA World Factbook, Cuba exports roughly $3 billion a year. Even assuming that the American embargo is so effective that it has slashed Cuba’s exports in half, that would give Cuba new gains from trade of only another $3 billion, or $272 for each of its 11 million citizens. (We assume for the sake of argument that Cuba is so true to the Socialist Revolution that elites will not appropriate a single extra dollar of the surplus to themselves, or to wastefully showy political projects.) It should be obvious from descriptions of Cuba that this will not be enough to lift Cubans out of the grinding poverty in which they currently live.

Trade can only make countries better off if they make something worth selling; Cuba largely doesn’t. Opening up trade with America, but not opening up the sclerotic state owned economy to internal change, would result i a little extra income on the margin, but it has no prospect of transforming the economy. Without little things like relative changes in price signals to allow inputs to flow to their highest valued uses, free movement of capital to profit opportunity, and incentives for higher quality work, trade cannot work any economic miracles.

Discussion Questions:

1. Based on what you read above, how much freedom do you think exists in Cuba’s economy? What type of economic system does Cuba have?
2. Besides free trade, what else must Cuba do to help its citizens to escape poverty?
3. Explain and discuss the following passage: “Without little things like relative changes in price signals to allow inputs to flow to their highest valued uses, free movement of capital to profit opportunity, and incentives for higher quality work, trade cannot work any economic miracles.”

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