Economics in Plain English » Protection

Protectionism’s many weaknesses

Jason Welker — Thu, 29 Sep 2011 10:15:46 +0000

After our lesson on tariffs and protectionism the other day, one of my year 2 IB Econ students emailed me with a few questions she had not had the chance to ask in class. I thought I’d post my responses here, since they were such good questions!

Question: Hi Mr Welker, I asked this on Monday’s blog about self-sufficiency, but no one answered my question and I have been meaning to ask this in class but I always get distracted and I forget. And perhaps you have already answered this, pardon me if you have.

Since Exports and Investment have a great effect on economic growth, why would a government want to protect its nation by imposing barriers to trade? Because by doing so, foreign firms cannot invest in that nation and potentially create job opportunities and also contribute to that nations GDP since, even though it’s a foreign investment, the revenue is collected by that government.

Answer: Protectionism is not typically aimed at reducing the amount of exports from the nation engaging in it, rather reducing the amount of imports or promoting increased exports. You’re exactly right that exports and investment contribute to aggregate demand (and therefore economic growth and employment) in a nation. But imports are a ‘leakage’ from the nation’s economy, and the greater the level of import spending, the lower a nation’s net exports. A nation with a trade deficit actually experiences negative net exports. The purpose of protectionism is to reduce import spending, or increase export revenues, and thereby increase net exports and aggregate demand and employment in the nation.

As for foreign investment, one of the consequences of a large trade deficit is increased foreign ownership of domestic resources or factors of production. Since a country that imports more than it exports spends more on foreign goods than it earns from the sale of its own goods to foreigners, foreign governments and firms end up with large amounts of that country’s money that is NOT being spent on that country’s goods. Much of this ends up back in the deficit country as foreign investment. Sometimes foreigners will buy government bonds (invest in the deficit country’s debt, in other words), but sometimes the money comes back home as foreigners buying up factories and real estate. Foreign investment may indeed help create jobs at home, but so does domestic investment, and when foreigners invest it means the country’s resources are now owned by interests abroad, which many countries view as a threat to their national and economic security. This can also serve as a justification for protectionism: to prevent foreign ownership of domestic assets.

Question: Also if the country is not exporting, it’s not enjoying the benefits of revenue from exported goods that could boost their economic growth. And anyway, isn’t the point of making money to spend it? Otherwise what is the incentive of being employed and earning an income? Unless of course, one can argue that income earned can then be spent on domestically produced goods.

Again, the purpose of protectionism is not to reduce a country’s exports, rather to reduce its imports and to increase its exports. But you have made a very important observation here that points to a major flaw in the argument for protectionism. The purpose of exporting goods it to make money to spend on imported goods, otherwise, WHY TRADE? A country gains from trade not only because it has a wider market for its own goods, but because the people of the nation have a wider market from which to choose the goods they themselves can consume. When a nation erects barriers to trade, it will ultimately have the effect of reducing not only imports, but possibly the nation’s own exports. Since foreigners earn less money from selling goods to the protected nation, they have less money to spend on that nation’s goods!

All protectionism can hope to do is increase the welfare of particular industries while reducing the welfare of the rest of society. It is rarely justifiable on the grounds that it will increase the total welfare of society as a whole, unless of course the protected industry is one vital to national security, such as the defense sectors or the energy sector (even this one is debatable!)

Question: Or do government spending (through subsidies, and creating job opportunities) and increased consumption due to income gains caused by government intervention overcome these factors and compensate for the lost opportunity of exports and investments.

Increasing government spending to off-set the fall in social welfare resulting from protectionism will only lead to greater inefficiency in society. Government may have to spend more on unemployment benefits for workers whose jobs are lost due to protectionism, which may require higher taxes on those workers whose jobs are being protected. As explained above, one industry’s gain leads to a loss of welfare for society as a whole. This is the problem with protectionism. It favors certain industries but imposes higher prices on consumers and higher costs of production on other industries. It should not be the government’s job to “pick winners and losers” in the global economy. By protecting certain industries, however, government attempts to do just that, but society as a whole loses.

I hope you understand what I am asking for here. Whenever you have time, I would love to hear your perspective.

Maphrida

Great questions, Maphrida!

Discussion Questions:

How might protectionism lead to an increase in aggregate demand and domestic employment?
Why does a large trade deficit lead to a build-up of foreign ownership of domestic factors of production?
Discuss the view that protectionism in the form of tariffs on particular goods helps certain industries but harms the rest of society. Can you imagine an example of a protectionist policy that could increase the welfare of society as a whole?
Explain how a protectionist policy that makes imports more expensive and thus reduces demand for imported goods can ultimately lead to a reduction in demand for the protected country’s exports abroad.

US / China Trade War – Could this be the beginning?

Jason Welker — Wed, 06 Oct 2010 20:57:25 +0000

This post was originally published on September 15, 2009. It is being reposted today for my year 2 IB Econ students, who are studying free trade and protectionism as part of Unit 4 of the IB Econ course.

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:

Why is the Chinese government so upset about a new tax on such an insignificant product as automobile tires?
“Self-sufficiency is the road to poverty”: Do you agree?
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?
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?

Tit, tat, tariff… China and America’s latest shoving match is underway

Jason Welker — Tue, 22 Sep 2009 20:42:54 +0000

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.

[podcast]http://welkerswikinomics.com/blog/wp-content/uploads/Tariffs.mp3[/podcast]

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

Discussion Questions:

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?
Which group is the main proponent of higher tariffs on Chinese tires? Why does this group favor higher tariffs?
How have the Chinese responded to the American tire tariff? Why are American chicken farmers upset about the tax on Chinese tires?
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.
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?

Deteriorating terms of trade and the current account balance

Jason Welker — Tue, 12 May 2009 15:32:47 +0000

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:

How did rising oil prices lead to an increase in America’s trade deficit?
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?
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?
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?

Students debate the proposed bailout of the US automobile industry

Jason Welker — Thu, 20 Nov 2008 13:12:57 +0000

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.

A call FOR protectionism!

Jason Welker — Sun, 16 Nov 2008 19:47:54 +0000

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:

What is the difference between the protectionism America needs today and the protectionism it used in the late 19th and early 20th centuries?
How could protectionism be used responsibly by developing countries to promote economic growth and development?
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?

McCain vs. Obama on the costs and benefits of free trade

Jason Welker — Wed, 22 Oct 2008 13:42:26 +0000

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:

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?
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?
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?

Fair trade vs. free trade: the problem with “dumping”

Jason Welker — Tue, 21 Oct 2008 14:22:39 +0000

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:

Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
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?
When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.

China’s challenge – reestablishing its standing as an economic superpower

Jason Welker — Mon, 21 Apr 2008 08:05:19 +0000

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:

“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.

The politics of free trade vs. protectionism

Jason Welker — Tue, 15 Apr 2008 09:56:32 +0000

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.

Click here to view the embedded video.

Discussion questions:

Why do you think the White House is so adamant about pushing through the trade deal with Columbia?
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?
Should America be trying to dictate the labor standards of its trading partners? Why or why not?

Intro to International Economics – “Making Globalization Work”

Jason Welker — Tue, 15 Apr 2008 07:29:03 +0000

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.

Click here to view the embedded video.

Discussion Questions:

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

America: Land of the free, home of “jackass” economists

Jason Welker — Thu, 06 Dec 2007 07:49:09 +0000

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:

Click here to view the embedded video.

America has been the champion of trade liberalization and global economic integration since the world embarked on the wide-spread adoption of free market principles in the second half of the last century. We used to pride ourselves on our principles of freedom that were bringing wealth and prosperity not only to ourselves, but to the poor countries of the world that embraced our economic fundamentals. Korea, Japan, followed by the Southeast Asian Tigers, the Middle East, Latin America, the countries of the former Soviet block, China, India, even parts of Africa have opened their minds and economies to the principles of free trade. Slowly but surely, market liberalization seems to be lifting the world’s poorest nations out of poverty.

At the heart of this growing world prosperity lies a fundamental belief in the free flow of resources across political boundaries. Labor markets, when left unhindered by government, should achieve equilibrium through a shifting of workers from areas where labor is in low demand to areas of high demand. A basic example of this movement is the immigration of workers from Mexico and Latin America to the United States. Mexico is a country where demand for labor remains low relative to its northern neighbor, the US.

The main determinant of Mexico’s low demand for labor is the country’s relative lack of capital and technology, resulting in low productivity at home relative to the productivity in America, where a large capital stock and cutting edge technology result in high worker productivity, thus high wages. In addition, American workers have a relatively high level of education, which prepares them for jobs for which training and expertise are necessary, resulting in a shortage of workers in low-skilled labor markets in several parts of the US. Often, this drives wages for low-skilled workers above the minimum wage.

As the champions of free trade and market economics, it should come as a surprise that so many Americans today seem outraged by immigration and the resulting injection of labor into the American work force. In a discussion with my Econ class yesterday, I asked students to critically analyze the benefits and costs of immigration for the American economy. I asked them to put aside any social or cultural considerations, analyzing only the economic effects of the increase in the labor supply that results from immigration. Here’s a summary of our discussion:

Economic costs of immigration:

Lower wages for low-skilled workers: This may include high school drop-outs, teenagers, or anyone without any post-secondary education.
Higher unemployment: This point was disputable, however, because only in labor markets where the equilibrium wage rate falls below the minimum wage would increased labor supply result in unemployment. As we discussed, in many American labor markets, the minimum wage is “non-binding” or ineffective because the equilibrium wage is higher than the minimum wage. In this case, an influx of low-skilled workers would not create unemployment, only lower the equilibrium wage rate closer to the federal minimum wage.

Economic benefits of immigration:

Lower wages for low-skilled workers: Wasn’t this a cost? Yes, but it’s also a benefit, here’s how: Wages are a cost to firms, so lower wages mean lower costs for firms. In competitive product markets, where the price paid by consumers is close to the cost faced by firms, lower costs means lower prices. Lower prices are good for all American consumers, as it means higher real wages. Lower wages in unskilled labor markets may be offset by a lower price level in the nation as a whole.
Less likelihood that jobs will be “outsourced” or “off-shored”: By allowing more low-skilled workers into America, it’s more likely that firms who are forced to minimize their costs will keep their factories or operations within America’s borders, instead of opening up shop in Mexico, India or China, as so many firms have done in recent decades due to the shortage of low-skilled workers at home.
More tax revenue for the US government: American firms are more likely to remain in the US with a large supply of cheap labor, meaning the government can continue to collect taxes from them. More workers means more income tax (assuming immigrant workers are employed legally).
More efficient resource allocation: Labor is a resource. Prices act as a mechanism for allocating resources. When wages in the US are higher than those in other countries, it is a signal that the US demands more labor. Immigration to the US is no different from an economic standpoint than any resource shifting from a market where it’s not in demand to one where it is in demand. Also, American workers, who in general have a higher level of education and training than most immigrants, are freed up to pursue careers in more productive sectors of the economy, leaving the “low-skilled”, “menial”, jobs to immigrants.
Greater incentive for Americans to stay in school: We did not talk about this one in class, but it seems plausible. As the supply of low-skilled workers increases with immigration, wages in such labor markets will remain low. Low wages mean American households are willing to supply a lower quantity of labor; in other words, Americans are more likely to stay in school, seek higher education and more training to prepare themselves for a job in a labor market in which more advanced skills are required.

Despite the clear economic benefits of immigration as outlined above, many Americans have become isolationist in their view of globalization and free trade. CNN news anchor Lou Dobbs is one example. In his nightly news show, Dobbs spreads his anti-immigration, anti-globalization message to millions of American households, spurring Americans to join his cause: closing America’s doors to the rest of the world, “protecting” Americans from the threats posed by immigration, outsourcing, off-shoring, globalization in general. New York Times columnist David Brooks had this to say about Lou Dobbs in his recent column, Follow the Fundamentals:

Lou Dobbs is winning. He’s not winning personally. He’s not going to start winning presidential awards or elite respect. But his message is winning. Month by month the ideas that once prevailed on the angry fringe enter the mainstream and turn into conventional wisdom.

Once there was a majority in favor of liberal immigration policies, but apparently that’s not true anymore, at least if you judge by campaign rhetoric. Once there was a bipartisan consensus behind free trade, but that’s not true anymore, either. Even Republicans, by a two-to-one majority, believe free trade is bad for America, according to a Wall Street Journal/NBC poll.

Once upon a time, the fact that hundreds of millions of people around the world are rising out of poverty would have been a source of pride and optimism. But if you listen to the presidential candidates, improvements in the developing world are menacing. Their speeches constitute a symphony of woe about lead-painted toys, manipulated currencies and stolen jobs.

Dobbs and the millions of Americans who support his view share a common opinion of us economists: we are “jackasses” and “idiots” for believing what we do about free trade, immigration and globalization.

What do you think?

Is Dobbs message valid?
Should America do more to “protect” its citizens from the threats of the global economy and the immigrants who want to come join our labor force?
After watching the video above, what do you think about free market economics?
Has Dobbs convinced you that we’re all a bunch of “jackasses” because of our idiotic views of the benefits of economic liberalization and free markets?

Burgernomics and Purchasing Power Parity

Jason Welker — Tue, 06 Nov 2007 03:06:11 +0000

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.

If the price of a particular basket of goods for Americans is higher than the same basket of goods for Chinese given current exchange rates, than that would be a sign that the Chinese currency is undervalued. In the long-run, “exchange rates should move towards levels that would equalize the prices of an identical basket of goods and services bought in either of the two countries whose exchange rates are being compared.” This concept is known as Purchasing Power Parity (PPP).

China has been dealt harsh criticism and even been threatened with extreme protectionist measures (such as a proposed 27% tariff on all Chinese imports!) lately by the US in response to its interference in the foreign exchange markets to control the value of the Chinese Yuan. Many say that the yuan is grossly undervalued, giving China an unfair advantage over domestic producers in the US and elsewhere. As a closely managed yuan is kept artificially weak, Chinese products appear far cheaper than those from other countries, harming domestic industries in the US and elsewhere.

One way to test the level of undervaluation of the yuan is to apply the principle of PPP. If we could compare the price of a particular basket of goods (or even ONE good that can be bought in both countries), then we can determine whether at current exchange rates the RMB is under or over-valued. Luckily, the Economist magazine has developed its own measure of PPP, and it’s chosen one product that can be purchased in nearly every country in the world, the BIG MAC!

The table below shows by how much, in Big Mac PPP terms, selected currencies were over- or undervalued at the end of January… The most undervalued currency is the Chinese yuan, at 56% below its PPP rate; several other Asian currencies also appear to be 40-50% undervalued.

The index is supposed to give a guide to the direction in which currencies should, in theory, head in the long run It is only a rough guide, because its price reflects non-tradable elements—such as rent and labour. For that reason, it is probably least rough when comparing countries at roughly the same stage of development. Perhaps the most telling numbers in this table are therefore those for the Japanese yen, which is 28% undervalued against the dollar, and the euro, which is 19% overvalued. Hence European finance ministers’ beef with the low level of the yen.

Discussion Questions:

What are the shortcomings of the Big Mac Index in depicting the true under or over-valuations of various currencies.
How has China intervened in currency markets to maintain the value of the RMB at such a low level?
What are two likely complaints the Europeans have against the value of the Japanese Yen? Are these similar to the complaints the US has against China?
If the Chinese were to halt all interference in the currency markets, what do you think would happen to the value of the RMB? How would this affect the balance of trade between the US and China?

The World Trade Organization – a podcast introduction by IB Econ students at SAS

Jason Welker — Tue, 23 Oct 2007 01:14:06 +0000

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!

WTO – a podcast introduction, continued…

Jason Welker — Tue, 23 Oct 2007 01:00:10 +0000

Introduction to the WTO, continued…

The World Trade Organization – a podcast introduction by IB Econ students at SAS