ECO-252: Ch. 9: International Trade [Pgs. 161-176]
Vocabulary-definition: Tariff (P.162)
A tariff is a tax on imports.
Vocabulary-definition: Trade Quota (P.162)
A trade quota is a restriction on the quantity of goods that can be imported: Imports greater than the quota amount are forbidden or heavily taxed.
[Does Free Trade Exploit the Poor?] Missionaries urged the British government toward acquiring control of various countries in Africa. Who often opposed such urging?
Chancellors of the Exchequer (Finance Ministers). The wars and subsequent governance were too costly for the country.
CHECK YOURSELF QUESTION: Who benefits from a tariff? Who loses? (P.167)
Domestic producers gain from a tariff and domestic consumers lose.
FILL IN THE BLANK [P.169; REFERRING TO FIGURE 9.4 in my book] The lesson of Figure 19.5 (or 9.5) on page 439 (or 181) is that __________ reduces child labor.
Economic growth.
Does "Buy American" make sense besides the fact that not trading makes us worse off?
No. We have no idea what percent of a given product is made in America or what percent of the sales goes to Americans.
When you bought a $299 30-gigabyte video iPod a few years ago, who retained the majority of the retail value?
People at Apple in the U.S. Explanation: - $163 of the $299 retail value was captured by the U.S. (distribution/retail, Apple, components etc.). - $26 went to Japan (mostly via the Toshiba disk drive). - Korea contributed less than $1. - China accounted for about $3.
ANSWER QUESTION [P.170; Para. 4] According to Youssef Boutros-Ghali, Egypt's former minister for trade, when do industrial countries start feeling concerned about third-world workers?
When third world labor has proved to be competitive.
FILL IN THE BLANK [Last paragraph on pg.166 & first paragraph on pg.167] Why does the government support the U.S. sugar tariff when U.S. consumers lose much more than U.S. producers gain? One clue is that the costs of the sugar tariff are spread over millions of consumers so the costs per consumer are ________. The benefits of the tariff, however, flow to a small number of producers, each of whom benefits by ___________. As a result, the producers support and lobby for the tariff much more actively than consumers oppose the tariff.
small; millions of dollars
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] CHILD LABOR: NOTES
*Child labor was common in 19th-century Great Britain and the U.S. *Child labor declined in the developed world as people got richer. *Forces that reduced child labor in the developed world are at work in the developing countries. *Economic growth reduces child labor (Figure 9.4 on P. 169).
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] KEY INDUSTRIES: NOTES
*Key industries are those that create spillovers. "Computer chips are better than potato chips". *Not a compelling argument. Today most computer chips are cheap, mass produced products. In 1990 Walmart contributed more to the boom in productivity than Silicon Valley. No one knows which industries are the ones with the really important spillovers.
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] STRATEGIC TRADE PROTECTIONISM: NOTES
*Possible for a country to use tariffs and quotas to get a larger share of the gains from trade. Done by limiting or taxing exports. Allows domestic firms to act as cartel when selling to international buyers. Can be effective if there are few substitutes for U.S. produced goods. *Not such a great idea if other countries can retaliate.
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] TAKEAWAY: NOTES
*Restrictions on trade waste resources by transferring production from low-cost foreign producers to high-cost domestic producers. *Restrictions on trade also prevent domestic consumers from exploiting gains from trade. *Some arguments for restricting trade are valid, but are usually of limited applicability.
Why are some people against free trade?
*Some people lose their jobs. *Bad labor conditions (e.g., child labor in developing countries). *Environmental damages. (Physically moving goods around consumes resources and causes pollution).
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] TRADE & NATIONAL SECURITY: NOTES
*TRUE: Some industries probably should be protected to protect National Security. BUT: This is subject to great abuse - almost every industry can make this argument for protection. EXAMPLES: (1)Vaccine production? - probably a good idea. (2)Angora Goat fleece? - Seriously? Yes. This is protected. Some people think goats are vital to national security. No kidding.
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] TRADE & JOB: Some history...
*Thomas Edison destroyed the whaling industry with his invention of the light bulb. *CD's destroyed jobs in the record industry. *MP3s destroyed jobs in the CD industry. *Employment and the standard of living keep rising over time. The reason they're rising is precisely that old jobs are being destroyed, new jobs are being created.
FILL IN THE BLANK [Not in Book; on doc in 'Modules'] According to one study, India's partial ban on child labor in 1986 {decreased or increased} child labor. The ban {increased or reduced} child wages because firms that hired children now faced the possibility of fines. It meant that poor families became even poorer. To make up for the decline in their income, poorer families were forced to {decrease or increase} the amount of work done by children.
...in 1986 {increased} child labor. The ban {reduced} child wages.... ...poorer families were forced to {increase} the amount of work done by children.
FILL IN THE BLANK [Not in Book; on doc in 'Modules'] The Trump administration increased tariffs on more than 12,000 products imported from China, Canada, Mexico and other countries. These other countries retaliated with tariffs on thousands of U.S. exports. Many of China's tariffs and trade restrictions were placed on goods produced in counties where a majority of voters voted for {Republicans or Democrats} in 2016. China, for example, abruptly ordered Chinese companies to stop buying American soybeans. {Chinese consumers or American taxpayers} ended up supporting American farmers. China {increased or did not increase} its trade restrictions on U.S. aircraft because it's much {easier or harder} to find alternative suppliers of aircraft. China imposed a tariff of 25% on exports of U.S. lobster and at the same time {increased or reduced} the tariff on Canadian exports of lobster.
...where a majority of voters voted for {Republicans} in 2016. {American taxpayers} ended up supporting American farmers. China {did not increase} its trade restrictions on U.S. aircraft because it's much {harder} to find alternative suppliers of aircraft. ....at the same time {reduced} the tariff on Canadian exports of lobster.
1. According to the video clips, does boycotting sweat shops that hire children help or hurt them? 2. Kenyans used to need a permission to import non-GM automobiles and had only 300,000 land-line telephones. And there is no way for them to compete against foreign countries in the auto or cell phone industries. Did freeing up the markets for automobiles and cell phones help or hurt Kenyans?
1. It hurts them because the alternatives to working at the sweat shops for the children are worse. 2. It helped them because many Kenyan businesses and consumers got access to cheaper automobiles and cell phones.
1. Does outsourcing cost American jobs as a whole over time? [Yes or No] 2. Does a sugar quota protect American jobs as a whole. [Yes or No]
1. No. With outsourcing, we free up resources for other things we are more suited to do and thus create more jobs in the fields with more efficiency. Simply put, we will have more goods and services. 2. No. No, a quota raises the sugar price in the U.S., which: •Reduces the amount of consumption on other goods and the industries that produce those goods don't grow as much or shrink. •Raises the cost of producing goods that use sugar and the sugar-using industries don't grow as much or shrink.
What allows people at Apple to conceive of and design iPod?
Free trade.
[Does Free Trade Exploit the Poor?] Which two large countries grew most after WWII? What is the common factor between them?
Germany and Japan. They lost the WWII and their colonies.
Of the three conditions that explain why a free market is efficient (from Chapter 4), which condition or conditions cease to hold in the case of a tariff on imported goods? I. The supply of goods is bought by the buyers with the highest willingness to pay. II. The supply of goods is sold by the sellers with the lowest costs. III. Between buyers and sellers, there are no unexploited gains from trade and no wasteful trades.
II and III
CHECK YOURSELF QUESTION: What would happen if the U.S. government decided that computer chip manufacturing was a strategic national industry and provided monetary grants to Silicon Valley companies? Trace the effects of this policy on Silicon Valley companies, foreign competitors, and the cost and benefits to U.S. taxpayers and consumers. (P.171)
If the U.S. government subsidized the Silicon Valley computer industry, it would encourage more computer chip manufacturing, but at a higher cost (production would not be as efficient). This would be a waste of resources. Foreign competitors would be pushed out of the industry. Consumers of computer chips would benefit from the subsidy, but they would benefit by less than the cost to U.S. taxpayers.
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] TRADE & JOB: What happens when a tariff is lowered?
Imports increase, fewer jobs in the import competing industry. But why do people send us goods? Ultimately, they want goods in return. We pay for our imports with exports: Trade moves jobs from import-competiting industries to exporting industries; Wages increase an average due to comparative advantage; Problems can occur, however, when we lose jobs in low-skill import competing sectors and gain jobs in high-skill export sectors.
NOTES: Vital for National Security? (P.170)
In 1954 the U.S. government declared that mohair, the fleece of the Angora goat, was vital for national security (it can be used to make military uniforms). For nearly 40 years mohair producers received millions of dollars in annual payments. Finally, after much ridicule, the program was eliminated in 1993...only to be reestablished in 2002. Hard to believe? Yes, but we aren't kidding.
CHECK YOURSELF QUESTION: Identify the deadweight loss area in Figure 9.3 and describe in words what is lost. (P.167)
In Figure 9.3, area C represents the deadweight loss; it results from the lost gains from trades not happening.
Let's focus just on the lobbyists who are restricting trade. If the United States were to amend the Constitution to permanently ban all tariffs and trade restrictions, these lobbyists would lose their jobs, and they'd have to leave Washington to get "real jobs." Would this job change raise U.S. productivity or lower it? Which is more likely over time?
It would raise U.S. productivity.
FILL IN THE BLANK [P. 165; Para. 2] The U.S. government greatly restricts the amount of sugar that can be imported into the United States. As a result, consumers typically pay 50% to 100% more for sugar than the world price, depending on the year. The tariff has two effects: It {increases or decreases} domestic production and {increases or decreases} domestic consumption. Each of these has a cost. First, sugar is no longer supplied by the {lowest-cost or highest-cost} sellers, and resources that could have been used to produce other goods and services are instead wasted producing sugar. Second, due to higher costs, the price of sugar {rises or lowers} and {fewer or greater} people buy sugar, reducing the gains from trade.
It {increases} domestic production and {decreases} domestic consumption. First, sugar is no longer supplied by the {lowest-cost} sellers, and..... Second, due to higher costs, the price of sugar {rises} and {fewer} people buy sugar, reducing the gains from trade.
The Japanese people currently pay about four times the world price for rice. If Japan removed its trade barriers so that Japanese consumers could buy rice at the world price, who would be better off and who would be worse off: Japanese consumers or Japanese rice farmers? If we added all the gains and losses to the Japanese, would there be a net gain or net loss?
Japanese consumers would be better off while Japanese rice farmers would be worse off. There would be a net gain.
Vocabulary-definition: Protectionism (P.162)
Protectionism is the economic policy of restraining trade through quotas, tariffs, or other regulations that burden foreign producers but not domestic producers.
Many people will tell you that, whenever possible, you should always buy U.S.-made goods. Some will go further and tell you to spend your money on goods produced in your own state whenever possible. (Just do a simple Google search for "Buy [any state]" and you'll find a Web site encouraging this kind of thinking.) The idea is that if you spend money in your state, you help the economy of your state, rather than the economy of some other state. By the same logic, shouldn't one buy only goods produced in one's own city? Or on one's own street? Ultimately, where does this thinking lead to?
Self sufficiency
This chapter pointed out that trade restrictions on sugar cause U.S. consumers to pay more than twice the going world price for sugar. However, you are very unlikely to ever encounter bumper stickers that say things like "Out of money yet? Keep taxing foreign sugar!" or "Hungry? It's probably because domestic sugar is so expensive!" Why do you think it is that these bumper stickers are not popular?
The costs of the tariffs are relatively small for each individual as it is spread out among many, many people.
NOTES: How to Smuggle Sugar (P.166)
The high price of U.S. sugar has encouraged smuggling and attempts to circumvent the tariff. In the 1980s when the U.S. price was four times the world price, Canadian entrepreneurs created super-high-sugar iced tea. The "tea" was shipped into the United States and then sifted for the sugar, which was resold. To combat this entrepreneurship, the U.S. government created even more tariffs for sugar-containing products liked iced tea, cake mixes, and cocoa.
Let's focus just on the lobbyists who are restricting trade. If the United States were to amend the Constitution to permanently ban all tariffs and trade restrictions, these lobbyists would lose their jobs, and they'd have to leave Washington to get "real jobs." Would most of these lobbyists likely earn more or less right after the amendment was enacted?
The lobbyists would probably earn less.
What are the "Arguments Against International Trade"? NOTE: There are 5 arguments. (P.167).
The most common arguments: 1) Trade reduces the number of jobs in the United States. 2) It's wrong to trade with countries that use child labor. 3) We need to keep certain industries at home for reasons of national security. 4) We need to keep certain "key" industries at home because of beneficial spillovers onto other sectors of the economy. 5) We can increase U.S. well-being with strategic trade protectionism.
CHECK YOURSELF QUESTION: Over the past 30 years, most U.S. garment manufacturing has moved overseas, to places such as India and China, where wages are lower. The result of this shift has been a sizable drop in the number of garment workers in the United States. While bad for these workers, why has this trend been a net benefit for the United States? (P.171)
The movement of the garment trade overseas has been a net benefit for the United States because clothing is now much cheaper for U.S. consumers and U.S. workers specialize in the fields in which they are most productive.
FILL IN THE BLANK The overall loss to consumers from protectionism is {_____} than the overall gain for the protected industries. Politicians do not oppose protectionism and help consumers who outnumber the protected industries because the loss from protecting one industry is spread over a large number of consumers, and each consumer's loss is very {_____}. The gain from protection is concentrated on a small group of producers and each member's gain is very {_____}. Therefore, those who {_____} (a small group of producers) work very hard to lobby for protection while those who {_____} (a large number of consumers) don't care about the loss or just don't see the loss.
The overall loss to consumers from protectionism is {greater} than the overall gain for the protected industries. ...and each consumer's loss is very {small}. ...and each member's gain is very {large}. Therefore, those who {gain} work very hard to lobby for protection while those who {lose} don't care about the loss or just don't see the loss.
FILL IN THE BLANK [Not in Book; on doc in 'Modules'] In early 2018, President Trump imposed big new tariffs on washing machines from abroad. Dryers were not subject to the tariff. The tariff increased the price of washing machines by about 12% and {also increased; decreased; or did not change} the price of dryers. Domestic producers like Whirlpool {raised their prices at least as much as did foreign producers; decreased their prices; did not change}. The foreign producers, Samusung and LG, {shrunk or expanded} their U.S. factories. How much did consumers pay to create the jobs in the domestic washing machine industry? The cost per job created was ${$1.48 billion; $100,000; 1.56 billion; or $821,000} per year.
The tariff increased the price of washing machines by about 12% and {also increased} the price of dryers. Domestic producers like Whirlpool {raised their prices at least as much as did foreign producers}. The foreign producers, Samusung and LG, {expanded} their U.S. factories. The cost per job created was ${$821,00} per job [$1.48 billion/1,800 new jobs].
ANSWER QUESTION [P.168; Para. 6] In 1992, labor activists discovered that Walmart was selling clothing that had been made in Bangladesh by subcontractors who had employed some child workers. Senator Tom Harkin angrily introduced a bill in Congress to prohibit firms from importing any products made by children under the age of 15. Harkin's bill didn't pass, but in a panic the garment industry in Bangladesh dismissed 30,000 to 50,000 child workers. Where did these children go?
To a worse job such as prostitution.
CHECK YOURSELF QUESTION: Why does trade protectionism lead to wasted resources? (P.167)
Trade protectionism leads to wasted resources because it shifts production from the lowest-cost producers to higher-cost producers.
ANSWER QUESTION [P.170; Para. 4] Who often are the biggest lobbyists for bills to restrict trade on behalf of "oppressed foreign workers"?
U.S. labor unions
[AUTHORS' VIDEO: ARGUMENTS AGAINST INTERNATIONAL TRADE] Practice Question: Some people argue for protectionism by pointing out that other countries with whom we trade engage in "unfair trade practices," and that we should retaliate with our own protectionist measures. One such policy is the policy of some countries to subsidize exporting industries. India, for example, subsidizes its steel industry. Who is hurt by this subsidy?
U.S. steel producers are hurt by this subsidy.
CHECK YOURSELF QUESTION: If there are winners and losers from restrictions, why do we hear more often from the people who gain from trade resitrictions than from the people who lose? (P.167)
You hear more often about people who gain from trade restrictions than people who lose because the gains from trade restrictions are concentrated on a few winners, while the losses are diffused over many losers. Even though the total gains are smaller than the total losses, the concentrated benefits mean that the winners have a greater incentive to argue for trade restriction than the losers do to argue against it.
FILL IN THE BLANK [P.168; Para. 7 (SUPPOSED TO BE 11%, but in book it says 18%)] About 11% of all children aged 5-14 around the world work for a significant number of hours each week. The vast majority of these children work in ________, and not in ________. Restrictions on trade, therefore, ________ directly reduce the number of child workers.
agriculture; export industries; cannot
Trade increases productivity through specialization and the division of knowledge. In other words, workers become more productive because they __________________________. Trade increases productivity through comparative advantage. In other words, workers become more productive because they __________________________.
can concentrate on producing only a few things; can concentrate on what they are good at
ANSWER QUESTION [P.170; 'Vital for national security?'] In 1954 the U.S. government declared that mohair, the fleece of the Angora goat, was vital for national security (it can be used to make military uniforms). For nearly 40 years the producers received millions of dollars in annual payments. Finally, after much ridicule, the program was eliminated in 1993 . . . only to be reestablished in 2002. This example:
casts doubt on the argument for restricting free trade based on national security.
FILL IN THE BLANK [P.166; 'How to smuggle sugar'] In the 1980s when the U.S. price was four times the world price because of the U.S. tariff on sugar, Canadian entrepreneurs started _____________________ and exported it to the United States.
creating super-high-sugar iced tea
In his book The Choice, economist Russ Roberts asks how voters would feel about a machine that could convert wheat into automobiles. This machine would ________ jobs in the auto industry and ________ jobs in other industries. Economists call this machine, "___________"
destroy; create; international trade
FILL IN THE BLANK [P.169; Para. 1] Studies have shown that more openness to trade ________ income and ________ child labor.
increases; reduces
Some people argue for protectionism by pointing out that other countries with whom we trade engage in "unfair trade practices," and that we should retaliate with our own protectionist measures. One such policy is the policy of some countries to subsidize exporting industries. India, for example, subsidizes its steel industry. Obviously, U.S. steel producers are hurt by this policy and would like to restrict imported steel from India. For the U.S. economy as a whole, restricting imported steel from India is:
not a good policy because the losses suffered by steel buyers and other industries outweigh the benefits gained by the U.S. steel industry.
FILL IN THE BLANK [Not in Book; on doc in 'Modules'] Between 1996 and 2006, imports from China increased by a factor of six, from about $50 billion per year to $300 billion per year. According to the economists Nicholas Bloom, Kyle Handley, André Kurmann, and Philip Luck, this "China shock" {increased or decreased} the demand for {all skilled workers or high-skilled workers in the complex export industry} and {decreased or increased} the demand for {all unskilled workers or low-skilled workers in the import industry} over time in the United States.
this "China shock" {increased} the demand for {all skilled workers} and {decreased} the demand for {all unskilled workers} over time in the United States.
Spend some time driving in Detroit, MI—the Motor City—and you're sure to see bumper stickers with messages like "Buy American" or "Out of a job yet? Keep buying foreign!" or "Hungry? Eat your foreign car!" Domestic auto companies and their workers are hurt by imported automobiles, but _______________ benefit(s).
workers at the foreign auto companies, domestic buyers, and other industries in the U.S
Does a tariff on wire garment hangers protect American jobs?
•A dry cleaner in East Harlem in NYC: The price of a box of hangers rose from $17.50 to $40. •Since it uses 4,000 hangers per week, his costs rose by $180 per week, or by $9,360 per year. •Out of 221,230 workers, over the following two years after the tariff, 17,000 lost their jobs (though not all of them related to the tariff). •It was estimated that about 300 jobs were saved in the wire hanger industry.
