Saturday, December 6, 2014

CAFTA turns 10 (...almost)


This coming June marks the 10th year since the ratification of CAFTA. Branching off John’s post, I decided to write about the Central American Free Trade Agreement and how it has affected Central America. The countries included in CAFTA are the Dominican Republic, Costa Rica, El Salvador, Guatemala, Nicaragua, and Honduras. CAFTA was first crafted as an expansion of NAFTA. This agreement set out to eliminate most of the tariffs and barriers to investment between the United States and Central America and also to enforce labor regulations within Central America.

Prior to the ratification of CAFTA there were many mixed views on the topic. Some individuals, primarily Bush supporters, liked the agreement because they believed it would help minimize the United States’ trade deficit and create jobs for those in Central America resulting in fewer immigrants moving to the United States. On the other hand, there were also many individuals who strongly disagreed with the agreement. These individuals were worried about a list of things including American jobs lost to cheaper labor in Central America and the increased volume of trade putting a larger burden on the region’s already “critical” environmental status. Ten years later and the effects of CAFTA seem to have caused more harm to the economies of Central America than good. (Here's a link discussing the main issues swirling around CAFTA before it was ratified.)

In the article I have linked in the title, Congresswoman Marcy Kaptur and Research Director for Public Citizen’s Global Trade Watch, Ben Beachy, discuss the effects of CAFTA. Ben starts the discussion by quoting a previous Representative, Tom Davis, who encouraged listeners to pass CAFTA in order to “ebb the growing flow of immigrants from South America and fight the ever-more-violent MS-13 gang.” For the rest of the article Beachy provides arguments as to how CAFTA has not accomplished nearly anything it was created to do for Central America. “Gang and drug-related violence in Central America has reached record highs and the ‘growing flow’ of immigrants from Central America has surged.” Beachy makes it quite clear that the argument of CAFTA being solely responsible for the rise in gang violence and increased immigration to the U.S. cannot be made. However, discussing some of the changes in Honduras, El Salvador, and Guatemala might lead one to believe CAFTA has not really benefited Central America.

After CAFTA was ratified, imports in Honduras, El Salvador, and Guatemala rose 78%. Farmers in these countries didn’t have the technology, land, or subsidies to compete with American companies and, therefore, caused many farmers in Central America to lose their jobs. People in these countries were also promised to find jobs in the textile industry due to CAFTA but since its ratification textile exporting to the United States has dropped 40% causing less creation of jobs than anticipated. This kind of financial distress for families is thought to be one of the primary reasons for higher gang activity in communities. Finally, Central America was promised to experience a boost in economic growth after CAFTA but this has not happened. Average growth rates in Honduras, El Salvador, and Guatemala in the years since CAFTA was ratified have fallen below the overall growth rate in Latin America.

To conclude, CAFTA seems to have hurt countries in Central America more than help them progress globally. When constructing trade policy, the U.S. should try to take a better look at how the agreement will affect those in the partnering countries.

 

Friday, December 5, 2014

Trade, Poverty and Employment

I have read this very interesting working paper about the impacts of trading with China on Argentina's poverty and welfare. It is a bit of a long and difficult read but I learned a lot from it and it had some very interesting information and I would recommend reading it. I will be summing it up a bit and share my thoughts on this paper.

In class we talk about how there are winners and losers in trade but I believe in most cases the overall welfare in both countries went up so I thought this paper would be very interesting. This paper talks about how during the 90's Argentina increase it's trade with China greatly especially in industrial sectors. With this increased competitions there were some negative effects. There were slow lagged declines in industrial employment but the studies in this paper find that trade with China only had small impacts on this.

Based on household surveys and the amount of trade that was being done with China the authors of the paper were able to determine that trade with a low wage country in this case China, would sightly reduce poverty and there also is a slight reduction in inequality in a developing country like Argentina. The authors also go into the importance of looking at tariffs, price changes and trade reforms and how they can greatly influence the results. Unfortunately this paper only goes into trade with a low wage country like china and a developing country like Argentina but does not touch on if non developed countries were to trade with China.

I think this paper does a great job of showing how the country importing from a low wage country will see benefits even though some will lose their jobs like Argentinians working in the industrial sector in this case.


India foreign trade


India has made its stance clear that it will not easily give in to pressure from the Western world over trade protocols of the World Trade Organization.  India fears that agreeing to the trade facilitation agreement (TFA) could compromise its own food security.
            The TFA aims to fast track any movement of goods among countries by cutting down bureaucratic obligations. The problem with TFA runs in a clause that says farm subsidies cannot be more than 10 percent of the value of agricultural production. If the cap is breached, other members can challenge it and also go on to impose trade sanctions on the country.
            The developing countries would have a problem with the solutions offered by the developed countries as without the subsidies the food security of the developing nations could be seriously harmed. India agreed to the TFA only under the condition that temporary relief would be provided to the developing nations. It said no legal actions or sanctions would be imposed on the developing nations till 2017, by which time a solution would be worked out among the nations. However, this interim relief would not be appropriate if such subsidies would lead to trade distortions, by which one means, that prices of exports and imports cannot be affected by this.
            India is opposed because India's food security act, which is binding on the government by law, now, implies that the government will provide very cheap food to the most vulnerable part of the population at extremely low prices. Apart from providing subsidies to the consumers, through the public distribution system, it also provides subsidies to the producers of food grains. So it buys food grains from farmers at a minimum support price, and subsidies inputs like electricity and fertilizer.
            The first problem is with the 10% cap on subsidies, which will not be possible for India to achieve. Adding to the unfortunates is the fact that the 10% cap is calculated based on 1986-88 prices when the prices of food grains were much lower, so the cap has to be updated taking into account the present prices of food grain.
            The second problem is that even for providing subsidized food, India will have to open up its own stockpiling to international monitoring. It will not be able to add protein heavy grains like say, lentils, if it wants to, due to riders in the peace clause.
            Third, it might seem unfair to developing countries to not crack down on farm subsidies that the United States provides to its farmers to the tune of more than 20 billion per year. While the WTO is binding the developing countries to protocols, the issue of subsidies by developed giants like US seems to be off the table.
            India wants a permanent solution to the issue of public stock holding of food grains. China has supported India's stand on the ability to subsidies agricultural production and distribute it to the poor at low cost.
            WTO argues that if the developing countries continue to give prices to farmers, which are higher than the market prices, it might harm the poor farmers in other parts of the world. It also says the deal could add $1 trillion to global gross domestic product and 21 million jobs.

Boeing vs. Airbus

In class we took a look at a semi-realistic example of the prisoner's dilemma with Boeing  (BA) and Airbus (EADS). Within the commercial aviation industry BA and EADS are by and large the two most competitive and successful firms. The game theory model was determined by the willingness to compete in the large scale commercial aircraft sub sector of the industry which would account for the production of the Boeing 700 series and the Airbus 380 series. Now for simplicity's sake and in an effort to demonstrate the Nash Equilibrium's, we assumed that the performance of the two firms in production and sales were pretty similar if not equal. By doing so we came up with a prisoner's dilemma very similar to the one below:
Boeing/Airbus
DEVELOP
DON’T DEVELOP
DEVELOP
(-$10, -$10)
($50, $0)
DON’T DEVELOP
($0, $50)
($0, $0)

Since this model is based off of data from 2011 and previous, as of today the commercial aviation industry has changed its preferences. No longer are firms such as BA and EADS focusing on large transcontinental capable aircraft. Instead they are focusing on small regional/domestic aircraft such as the Boeing 737 series and the AirBus 320 series; and with good measure. Both of these lines of aircraft account for approximately 44% and 42% of total company revenue for BA and EADS respectively. Percentage of company revenues in no way is an accurate or sufficient measure in determining industry performance in the mid size aircraft sub sector; however, coincidentally the 2% difference in the percentage of total revenue that these aircraft lines produce for the two firms is a pretty good mirror of the actual performance of BA and EADS against each other in terms of: delivered aircraft, contractual backlog, and future contracts. This is to say that across the board BA holds an approximate 2% advantage over EADS in producing this particular type of aircraft. So as we shift the focus towards this production model versus the large scale aircraft model my question is how would this payout schedule look now with the given information about this sector?

Boeing/Airbus
DEVELOP A320 Series
DON’T DEVELOP A320 Series
DEVELOP 737 Series


DON’T DEVELOP 737 Series




(A closely related Cornell University blog article which inspired this post is available here:Cornell University Blog )

Thursday, December 4, 2014

Problem Set Key and Office Hours

Here's a link to the Problem Set solutions from Chapter 8. I have some minor quibbles with the book's treatment of a few of those questions, but those quibbles are mostly based on some more advanced models than what we have learned.
I will not be holding office hours today or tomorrow. Home with a sick kiddo.
Final note: Deb Bennett, Program Coordinator for the DBA and MFIN programs, will be proctoring the first half of your final exam because I'm booked at that time for a meeting with three of the Universities high-ranking administrators and their staffs (and I swear it's not because I'm in trouble!). I don't expect there to be any problems with the exam, but in case one or two things slip through that require clarification, please wait until I am there at around 4 to answer your questions.
This is a test to see if editing this changes the date.

Wednesday, December 3, 2014

The structure of optimal tariffs

We have discussed in class that a tariff can increase a country's welfare if the term of trade gain exceed the total dead weight losses. It is possible because a tariff imposed by the large country can influence the world price thus increase its term of trade. How to determine the optimal tariff is a very tricky question for a policy maker. When imposing a tariff that is good for the country itself, other countries might retaliate. A optimal tariff for one country might not be the optimal tariff for its trading partner. 
The link article is a paper about how to determine the optimal tariff level in a two-country economic with more than two traded goods. The paper examines the structure of the Nash equilibrium tariff rates within the same trade group in a model with an asymmetric structure that allows general utility and production functions. It assume the condition that equilibrium tariff rate are uniform in both countries, and explore the relative size of the equilibrium tariff rates in each country when the uniform tariff condition is not satisfied. The paper found out that the elasticity of compensated excess demand for goods is a key factor of determining the equilibrium tariff.
What make this model meaningful is that it can be extend to more than two countries. In the paper, the model assume that the home (foreign) country exports (imports) only one good, but it can be extend to more goods which make this model useful for customs unions and trading blocs that use a common external tariff. This paper can be regarded as an investigation of the structure of common external tariff rates on different traded goods by assuming that the country is an entity of a customs union.
In all, the theory of the optimal tariff and its implications play an important role in tariff-imposing countries, it give the policy maker an idea of how to set a tariff. Besides, the theories are useful and suggestive for trading blocs and multilateral trade agreements for setting an common external tariff.

Monday, December 1, 2014

NAFTA Turns 20

The article linked in the title of this post is a review of how NAFTA came to be, and the effects of it over the past 20 years.  The North American Free Trade Agreement (NAFTA) was created to remove trade restrictions between Canada, Mexico, and the U.S.  Although this agreement seems very reasonable to us now, there were some opponents to its creation. These opponents of NAFTA argued that the U.S. would lose many jobs to Mexico as companies sought lower production costs there.  Those that supported the agreement suggested that it would create large economic gains for America. It was also said to lower the income disparity while creating thousands of jobs in the region.

So how well did NAFTA work?  It is hard to say exactly what the true impact was because of availability of data and the theoretical process of generating results from economic models.  However, the paper gave some numbers on increases in exports, what is traded, and how much of it.  With the enforcement of NAFTA, U.S. exports to Mexico have increased by 444% while exports to Canada have increased by a modest 200%.  The top import items from NAFTA partners include crude oil, cars, and car parts.  Approximately $100 billion worth of crude oil alone was traded between the partners in 2013.  The U.S. is the number one buyer of Canadian goods and supplier of imports.  The trade with Mexico has increased so much more than Canada due to NAFTA because the U.S. was already trading nearly duty free with Canada since 1989.  Although our trade with Mexico has increased, the U.S. has lost nearly 20% of its trade market-share of Mexican imports to China. 

The final point the paper made is how to improve our free trade agreement.  One idea is to emphasize the trade of intermediate goods and supply chains.  This pertains to improvements in border infrastructure in order to improve efficiency of cross-border trade.  The main concern here is the Mexican border, and the excessive time that it can take for Mexican businesses to transport goods into the U.S.  The other idea deals with regulatory cooperation in the areas of trade, transportation, economic growth, and security.  They have already made efforts towards this by starting a series of meetings known as the North American Leaders Summits.  Although communications have increased on these topics, success has been limited due to the absence of binding agreements.  So how do you think the North American Free Trade Agreement could be improved?



Friday, November 28, 2014

Transatlantic Trade and Investment Partnership (T-TIP) Agreement

For the last few years the U.S. and Europe have been developing a free trade agreement called the Transatlantic Trade and Investment Partnership Agreement. The goal of the T-TIP is to eliminate tariffs and other barriers to trade. The overview of the agreement through the link provides information on the U.S.'s objectives and benefits. It states that the U.S. exports $730 million in goods to the EU daily. Without trade restrictions prices would drop and demand would rise. In the end the U.S. will export more goods each year, rising the total terms of trade. There are people who still oppose the T-TIP agreement for environmental and labor reasons.

Environmentalists are concerned about corporations involved with the agreement will not need to adhere to high environmental standards already in place. Corporate profits would benefit by not needing to maintain standards. However, the WTO says a country has the right to refuse products from a country that doesn't meet a certain environmental law if and only if those same laws are implemented domestically. This means neither the U.S. or the EU needs to accept all products offered as exports.

Another concern is labor standards weakening as a result of increased competition. Though, the textbook states that U.S. trade laws give the president the right to refuse trade from a country that lack proper labor standards. That places a large responsibility on the president to be aware of labor standards around the world and to take intiative against a country when necessary. This shouldn't be a large issue working with the EU considering they have similar labor standards as the U.S.

Overall, the T-TIP is going to benefit the U.S. and the EU greatly. The agreement shouldn't take away from trade from other countries, but only increase existing trade between the U.S. and the EU. They want the agreement to set standards for future agreements with other areas around the world. Hopefully it will open more doors for other free trade agreements, but when working with developing countries questions of environmental and labor standards will be more difficult to address.

Friday, November 21, 2014

Export Subsidies

The World Trade Organization (WTO) has the goal to eliminate all export subsidies. In order to earn permission to subsidize exports countries need to make a commitment to reduce the amount of subsidies in the long run. Reducing subsidies will make all countries buy and sell goods at the world price. Right now developing countries are hurt by subsidies because they cannot compete with the developed countries’ low prices from subsidies. 

The process of reducing export subsidies needs to be gradual. The type of good depends on how long subsidies have to be eliminated. For one set it is 5 years for developed countries and 10 years for developing countries and the other set is 9 years for developed countries and 12 years for developing countries. Some developing countries suggest a longer timeframe. As importers they want to make sure they have enough time to adjust to buying products at higher world prices while exporters will need to adjust to selling at world prices. By eliminating the export subsidies it will create a more fair market system by selling at the world price. 

I’m curious to see when the subsidies are eliminated if countries will respond by enacting different tariffs to regulate imports to help domestic producers. Hopefully this doesn’t happen because it would be counter productive to enforce tariffs. It all just depends on how countries do adjust overtime.

The Battle of Subsidies: Boeing and Airbus

In class, we have discussed the effects of subsidy imposed by governments in the aerospace industry, which is between Boeing and Airbus. The Battle ofthe Big Boys: A Critical Analysis of the Boeing Airbus before The WTO, a working paper, in which the author introduced the dispute caused by the implement of subsidy between the two big boys, Boeing and Airbus, and gave a critical analysis of making decision in the future which will have an deeply impact to the whole industry.
The commercial jetliner industry, which have been locked in a two horse race since the 1980’s through mergers and acquisitions in the industry, which led itself to be a state of duopoly. For the reason of that Airbus is appealing to be an undeniable champion in the market, the dispute and standing feud surpassed from between two companies into one of the most high profile trade dispute around the world. The stakes increased dramatically when both involving countries sued each other at the WTO, primarily trigged by an alleged grant of illegal subsidies by the governments of both parties to the two respective competitors.
According to this article, the author argued that there are erroneous messages sent out to the world struggling for control in a duopoly market, when liberalization and globalization have been a dominant trend worldwide, even if it is one of the longest and expensive conflicts in the history of international trade.
Although, the two parties are in compliance with the rules, there are still chances that one or both the parties would violate the terms unilaterally, leading to a provision of subsidies continuously. Additionally, with the resurrection of other countries in the relevant industry, there is an international cordial solution needed to be achieved with all the players involved.
To my perspective, currently, with the impracticability of the complete withdrawal of subsidies, the significant objective of the WTO is to prevent a thoroughgoing subsidy war, which is costly and will results in a historically-improved distortion in the whole industry.


Keystone XL Pipeline

Just this week, the United States Senate has narrowly failed to pass the bill that would created the much talked about Keystone XL Pipeline. There are many political reasons for this outside the scope of the class, but I'd like to take a look at some of the few implications associated with this bill that can be analyzed with what we have learned in class.

The Keystone XL Pipeline is in essence an oil pipeline covering the distance between Hardisty, Alberta, Canada, and Steele City, Nebraska. This stretch of pipeline would take a more direct route between locations of an already existing pipeline. The opposition is almost purely environmental in its motivation, citing oil independence and harmful impacts of implementing yet another pipeline as its prime arguments. I'll not get into any sort of discussion on that end because this is not a blog for an environmental economics class.

What does this mean for the United States in the way of trade? Surely the implementation of the pipeline would allow the United States to produce more oil for both domestic consumption and export. This means that the United State's demand for foreign oil decreases dramatically, while world supply of oil increases. Both of these would cause a serious drop in prices of oil world wide because the U.S. is a large country. This has an ambiguous effect on terms of trade for the U.S. as prices of imports goes down, as will the prices of exports. Not only will this cause a decrease in prices of oil but of almost every other good because of much lower transportation costs. This certainly improves welfare.

While this Keystone XL pipeline certainly improves the welfare of Americas and Foreigners alike, many people would still argue that there cannot be a price put on environmental sustainability.

The link to the article is http://www.bbc.com/news/world-us-canada-30103080
My links have a tendency to not work, so I'll name the article. on www.bbc.com the article is called  "US Senate narrowly fails to pass Keystone XL pipeline bill"

Thursday, November 20, 2014

International Labor Agreements (Corporate Responsibility)

     Throughout Chapter 11 in class we will begin to discuss the issue of International Agreements. One in specific will be in regards to labor. With everyday pressure from consumers and unions, corporations have began to monitor and improve the conditions in their overseas plants and the plants of their overseas subcontractors (Book Reference). Many overseas plants tend to do a number of unethical things ranging as far as pollution and child labor. Do you think companies are taking a big enough stand to improve their overseas operations or just sweeping it under the rug?

     One company taking a big stand is Wal-Mart. Recently, Wal-Mart ordered Chinese suppliers to raise their standards of operation. Wal-Mart wants Chinese suppliers to meet strict environmental and social standards or risk losing their business. Wal-Mart has been pursuing a drive to improve its' reputation on environmental and social issues over the past three years in response to growing criticism in the U.S. over issues that include labor conditions in its' supplier factories. At the time Wal-Mart was demanding a 20% increase in energy efficiency by the 200 largest Chinese suppliers as well as disclosure to the factories used so they can look into proper employment and working conditions.

     Another group of companies taking an unexpected stand are major U.S. apparel brands. This stand is being known as the RSN Cotton Pledge. Uzbekistan is one of the worlds' leading cotton producers and heavily relies on manual labor from children. Uzbekistan made a statement back in 2012 that they would aim to reduce their child labor force, yet have made no significant effort in doing so. Finally, several apparel brands are standing up and forcing Uzbekistan to stand by their word. The growing support for the Pledge is also sparking consumer awareness and rejection of the situation in Uzbekistan.

     Again I raise the question: Do you think companies are taking a big enough stand to improve their overseas operations or just sweeping it under the rug? I want to hear everyone else's views on the subject and how you believe international trade is affected by corporations not being responsible and using child labor or unethical pollution.

Fossil Fuels With $550 Billion Subsidies Hurt Renewables

According to the International Energy Agency, fossil fuels are reaping $550 billion a year in subsidies, which is holding back investment in clean energy. While wind, solar, and biofuels received a $120 billion payout, oil, coal, and gas received more than four times that. These huge subsidies are giving the incentive to consume more and more of these harmful forms of energy. That basically means that we are continuing to pay to pollute the world, when we could be using that money on the clean forms of energy that I have already mentioned earlier. Renewable resources will account for about half of the global increase in power generation to 2040 due to the outcome of the government subsidies. While these subsidies will basically stay the same, wind and solar capacity is projected to grow up to six times of what it is currently at now, which shows that their economics are greatly improving. It is reported that globally, wind power will take more than a third of the growth in clean power; hydropower accounts for about 30 percent, and solar 18 percent. These $550 billion fossil fuel subsidies are another example of how subsidies can be harmful, not just to the rich or the poor, but also to the world environment. The policy is in need of a shift to clean energy because the world’s temperature is on pace to rise by 3.6 degrees Celsius by the end of the century. This means an increase in sea levels, damaging storms, and drought, according to the International Energy Agency. These subsidies are putting people at a great risk years down the road if we continue to depend so heavily on fossil fuels, instead of going in the direction of clean energy. From class we know that subsidies are granted to assist an industry so the cost can remain low and competitive, but this is definitely a subsidy that will be doing much more harm than good in the long-run. http://www.bloomberg.com/news/2014-11-12/fossil-fuels-with-550-billion-in-subsidy-hurt-renewables.html

Happy Thanksgiving

A couple of people have missed weeks when they were supposed to post and/or comment. If you are among this group, then you may write up to one original post and up to two comments to replace those missings. Anyone may also post for their extra comments if they would like to do so as well.
I will be in Atlanta presenting at a conference this weekend, after which I will be spending Thanksgiving with the in-laws. I feel well-prepared for the former, but please wish me luck on the latter.

Tuesday, November 18, 2014

U.S historical “Embargo” in 1807 Vs. U.S opened Japan’s Market in 1854




In class, we talked about how autarky is different from free trade market and how large the gains are from trade. An embargo is when all export systems shut down.  In 1807 to 1809 Thomas Jefferson imposed an embargo during the war between Britain and France. Still U.S prevents trade from several countries. During this period U.S. exports fell from $49 million to $9million, especially products like cotton, flour, tobacco, and rice. This is loss for the U.S. economy. On the other hand, in 1854, United States forced Japan to open up their trade. Due to this event Japan’s economy developed quickly.

I found some good embargo examples. As we learned, there is an embargo between U.S and Cuba. Most communist countries are against American government. Powerful countries use some widget to cut off goods and service for long times in order to change political or economic trade. For example, Cuba can’t reach American goods for over 50years.


In my opinion, embargo and forcing to open the market is governmental powerful strategies. Nowadays the global economy has more conflict, but is also getting bigger and powerful through some institutions as WTO. 

At the same time, the United States and other powerful countries wanted to have free trade with Korea, but Korean government refused. They wanted to keep national isolation or exclude foreigners because they wanted to keep their power and kingdom. Around 1910, the Korean government failed and all powerful countries controlled and took away Korean resources. The most powerful control was Japanese cruelty oppression. In this situation the trade was unequal. There is no give and take, only one side took away everything. Therefore, all this is not right between embargo and opened market by power ruled but there is also chance to change to develop like Japan did. The most important is the government decision when this happens. The Korean government rejected change when this happened, so Korea lost everything for 50years.  If would have been better for Korea to participate in right trade.

 

Friday, November 14, 2014

Tariffs and Quotas in Oil Price

Recently, the oil price was going down. It is the result of oil’s price war against U.S., Russia and Iran from Saudi Arabia to implement its oil market share stabilization policy. They increase oil production and cut oil price. Therefore, the global oil price is dropped. What are the United States’ reactions?

According to the article, the Saudi dump oil on the United States by selling oil below the global price because they want to slow down the growth of shale production. On the United States’ side, they have several weapons to counter the Saudi. First, since the oil price is cheap, the United States’ government will buy more oil. Therefore, they will get benefit from this cheap price, and this price support amounts to place a price floor under the United States’ oil price. Second, they can set a tariff. This tariff will rise up the oil price to against the Saudi. However, WTO’s rules state that outlaw imposing tariffs on non-agricultural goods. Third, the United States can set a quota on the exports of Saudi oil to the United States. However, this quota will be more harmful and less effective, as the Saudi oil exports to the United States has diminished with the increases in domestic shale production. Lastly, they can also lift the oil exports ban. Although this measure can help the shale industry, it will lower the global oil price.

In conclusion, business is war, and imposing tariffs and quotas are main weapons of government to against other countries.

References:

http://search.proquest.com.proxy.sau.edu/docview/1624954299/E13E497903144982PQ/6?accountid=28567 

Fuel Subsidies Effect on Rich & Poor

Recently in class we have been discussing how subsidies are often seen to be very beneficial to the trade of a country, but that is not necessarily the case.  We have learned that subsidies can flood the world market of a certain good, thus hurting the country involved even more than a tariff would.  I looked for an article discussing the negative effects of a subsidy on a certain commodity or resource, and found the following article on fuel subsidies.


http://oilprice.com/Energy/Gas-Prices/Why-Fuel-Subsidies-are-Bad-for-Everyone.html


This article delves into the specific ways that people within the country that is receiving the subsidy are hurt.  First it discusses the ramifications that the subsidy will have on the poor.  The article explains that there are both good and bad things that come from subsidies.  The obvious bright side to a subsidy, is that it makes the good cheaper to the importing country.  The problem is, that in most countries, the poor account for a very small percentage of fuel consumption.  It is the rich people within the country that are reaping the benefits of the discounted price of fuel.  The government is using their budget on subsidized fuel which could be used in other ways to directly help the poor.  They do not experience very much benefit from this, and are hurt by lack of government attention to other direct needs. 


On the other hand, the rich are hurting from these subsidies as well through taxes.  It is the rich within the country that are eating these consumption taxes that are proven to rise along with the subsidies.  The progressive nature of the tax tends to out-weigh the regressing price of fuel that comes with the subsidy.  The author also makes the argument that subsidies can hinder economic growth by changing a countries' structure of trade.  A country will often begin to export goods or resources that have higher opportunity costs rather than in places where they have a competitive advantage.  This will in the end, hurt the countries' terms of trade.


My response to this article was that I agree with a lot of the points that are being presented mainly due to the discussions that we have had in class.  I have never previously viewed subsidies to be an issue, but seeing how they can hurt everyone within a country with minimal benefits, it makes you wonder why they are put in place at all.

Monday, November 10, 2014

Differential Export Taxes

http://www.ifpri.org/sites/default/files/publications/ifpridp01236.pdf

http://southeastfarmpress.com/soybeans/us-soybean-industry-protests-argentina-s-unfair-export-tax

The link above leads to a working paper discussing the reasoning behind differential export taxes and the effects of removing these taxes from those countries that commonly use them.  Essentially a differential export tax is a tax which is higher for exported goods which are lower on the value added chain and lower for exports which are higher on the value added chain.  The working paper commonly refers to the soybean industry in Argentina and its differential export tax which taxes the exportation of unprocessed soybeans much more heavily than soybean-based products such as biodiesel.  

Argentina developed this differential export tax to combat a series of tariffs created by its trading partners on soybeans and other agricultural goods.  The idea is that by rewarding the production of goods higher up the value chain Argentina stimulated investment in the production of goods less heavily tariffed by other countries.  Unfortunately this has distorted the world market of soybeans, and the American soybean industry is particularly unhappy.  The second link above leads to an article on the unrest of the US soybean industry and what its members think needs to be done to remedy the problem.  

They claim that differential export taxes are against the World Trade Organization’s policies and are worried that because Argentina’s use of differential export taxes have gone unopposed, more and more middle market economies such as Ukraine and Indonesia will increase their use of the same kinds of taxes.  This could be particularly harmful to the United States’ economy as it is more developed and exports many goods that are higher on their value added chains.  These differential export taxes are also a problem because the government of the United States cannot even use them because export taxes are illegal under constitutional law.  


In the end, the working paper shows that these differential export taxes are indeed causing distortions in the market which are hurting many people worldwide.  The paper shows that were some of the import tariffs on agricultural goods lifted then countries would not be forced to use differential export taxes to stimulate their economies.  This in turn would create more consistent world prices and a better allocation of resources worldwide.  

Friday, November 7, 2014

U.S. Tariffs on Chinese Solar Panels


In this article, Diane Cardwell and Keith Bradsher examine the trade dispute between America and China over China’s import dumping of solar panels in America. In 2012, Chinese companies were proven to have been granted subsidies while selling their products in America for less than it took to produce them. The disagreement began in 2011 when a German solar panel producer, SolarWorld, filed a case against Chinese solar panel manufacturers for competing unfairly in America. America’s solution for this problem was to impose a 24% to 36% tariff on solar panels imported into America. However, those opposing the tariffs coincide with what we have learned in class this week. Imposing tariffs on Chinese solar panels will not penalize the Chinese companies but only hurt American consumers. The only party losing in the current situation is American solar panel manufacturers. This is unfortunate and something should be done to allow American, Chinese, and German solar panel producers to compete equally but imposing tariffs at the expense of American consumers is unfair.

Another possible solution that would allow American solar panel companies to better compete with foreign companies would be to provide subsidies to American companies. Just as we have demonstrated in class, providing subsidies for companies delivers nearly the same outcome as tariffs without the negative effects falling on consumers. For the solar panel situation in particular, subsidies seem to be a better alternative to tariffs because they will make it easier for American companies to compete with the Chinese and reduce the negative effects incurred by American consumers.

Import Tariffs or Free Trade?

As we learned in class on Wednesday, tariffs are not beneficial to the consumer.  Many people believe that the government should reduce tariffs so that Americans will be able to buy more at a lower price.  I found an extreme version of this idea in the article attached in the title of this blog post.  The author suggests that our government should dispose of all unilateral import tariffs and quotas.  His point is somewhat valid based on the empirical data charts provided in the article.  These charts show how a reduction of import tariffs in countries such as Chile, China, Australia, and New Zealand have all resulted in a dramatic increase in economic growth. 

However, the idea of cutting or completely disposing of import tariffs is highly unlikely due to political pressure.  Opponents say that the economic value from cuts is modest at best.  Companies that want lower or no tariffs would also require political action by persuading their local legislators.  Those that back import tariff eradication argue that our current tariffs are aimed towards developing countries, while more developed countries face near zero taxation on their exports to the U.S.  The article refers to this dispersion of tariffs as a two-tier tariff system. This is true, but I disagree with the article’s negative attitude towards higher tariffs from developing countries.  The main reason these tariffs are higher is due to the types of products that come from developing countries that compete against domestic laborers as opposed to imports from already developed countries that are similar to American products.


Personally, I agree with the idea that import quotas should be disposed of because of their possible extreme effects on multiple economies.  On the other hand, I disagree with completely free trade.  I think that the ease and amount of government revenues collected is too high to just get rid of completely.  However, an alternate idea could be for the government to lower income taxes that would give Americans a higher disposable income.  To counteract the lower tax, the government could raise some import tariffs to still bring in equal tax revenues.  This may potentially protect domestic jobs while making the average Joe even happier by lowering income taxes.  The downside to my idea is the negative impact on the exporting countries, but if the two-tier system is taxed more evenly then the increased tariffs will be absorbed more easily.