Donald Trump's planned return to Mercantilism

Watching Monday night's presidential debate whilst studying for the first International Economics exam of the semester, meant that Donald Trump's brash claims about the economy and particularly the need to address the trade imbalance which he calls "the greatest theft in the history of the world" seemed even more absurd than usual. Trump has talked throughout the campaign about the fact that "Foreigners are killing us on trade" because the rest of the world spends far less on American exports than the American public spends on foreign imports. In short, he believes that economic success and gains from trade are made when a nation sells more to it's competitors than it consumers of theirs. Mercantilism as trade policy has been outdated since Adam Smith's Wealth of Nations and goes against the last 200 years of western economic orthodoxy. In fact, Trump is the first Republican nominee in a century to call for higher tariffs as a defence against low-cost imports.
According to I.M Destler of the University of Maryland, the last time a Republican rose to prominence on such a trade policy was Herbert Hoover. Everything that we have learned so far in this class supports the idea that such policy was rightfully left behind. Mercantilists fail to understand the concept of comparative advantage and the Ricardian model. Despite the fact that such a trade policy has been debunked by Adam Smith, David Hume, John Locke, David Ricardo and countless other economic thinkers over the past two centuries seems to be lost on Trump and those who support him. If Trump wins the election in November and succeeds in implementing the trade policy he has proposed, it could definitely be a step backwards for the US economy.

Voters Fail to See the Benefits of Trade

I recently read an article titled, “WhyVoters Don’t Buy It When Economists Say Global Trade Is Good” by N. Gregory Mankiw, an economics professor at Harvard. The article starts by referencing a poll conducted by CBS News and the New York Times where only 35% of registered voters think that the US has gained from international trade. The thinking of the voters in this poll is in direct contradiction with what we have learned in class. We have learned that countries that move out of autarky and open themselves to trade end up gaining overall. Through trade, countries are able to produce more product and improve the overall welfare of their country by moving up to higher indifference curves. The same poll also showed that 55% of voters think that the US actually lost as a result of trade. From what we have learned so far in class, this is not true.

                The article also provides two hypotheses as to why those voters felt that way. The first hypothesis was that voters feel like they have not gained from trade because not everyone gains from trade. In class we learned that workers in certain industries lose from trade, but overall the gains outweigh the losses. The hypothesis is that the voters who lose from trade are going to oppose it.

                 The second hypothesis from Edward Mansfield and Diana Muntz dismisses the first one and then concludes that people oppose trade for three reasons. The three reasons they found was isolationism, meaning the US should stay out of foreign affairs, nationalism, thinking the US is “culturally superior to other nations”, and ethnocentrism, thinking that their own ethnic group is better than others. In the end, Mansfield and Muntz conclude that people base their feeling toward trade on their psychological worldview rather than their knowledge of economics.

                While it is hard to determine individual preferences, there is no denying that opening up to trade is better than autarky. Through comparative advantage, countries end up gaining from trade and improving the welfare of its citizens. Despite what voters may feel toward global trade, it is important that our politicians understand the benefits of international trade for the country and do not let the general public try to persuade them otherwise.

The Effects of Globalization on the World

                Through this week of class we have been able to see and understand the clear advantages of free trade in comparison with autarky. In the article Put Globalization to Work for Democracies, Dani Rodrik analyzes 5 principles of globalization that has affected democracies all over the world. Rodrik points out that differences in laws between countries can cause and adverse effect among nations who favor of a less democratic nation as their regulatory laws may not be as stringent as other nations. In class we have used labor as our factor of production to show comparative advantage, however other less developed countries have less regulations in term of not just labor but environmental impacts. Rodrik continues to point out China was able to push exports by placing barriers on imports which allowed them to protect their employment in state enterprises.

                While this strategy may work well for Chinese employees we learned through comparative advantage this may not be the most optimal way on a global scale, because other countries may be able to produce products at a most cost effective level. Additionally, Rodrik points out that the goal of globalization should be to enhance democracies around the world. Stating that more global governance on countries such as increased requirements on transparency, public deliberation, broad representation and accountability will help lead to devising norms that overcome these obstacles. While globalization has helped people all over the world, it is time to refocus it goals by aiming to not just work for democracies but improve them.                                   

Productivity Between The US and France

In class this week we have looked at the Ricardian Model. Part of this model looks at how the productivity of two countries compare with certain products. At the end of the last class we looked at the graph that compared countries productivity to the US. This graph showed us how the different labor forced compared. In the article Which Country Has the Most Productive Workers, I found that the US are third in productivity out of all the different countries labor forces. However the US workers are second to Korea for the longest hours worked. France were ahead of the US with their GDP to hours worked, and this is surprising because of the vacation time the French workers take. The article talks about how more vacation times lead to a happier workforce and how that improves the Frances productivity, also the diminishing returns for the US of working 40 hour weeks. However looking at the Ricardian model we found that not only do the French take more vacation time, but they will get higher wages due to the fact their productivity is higher, which is seen as a producer problem for the Ricardian Model, because he believed that wages needed to be the same in all sectors otherwise nobody would work in the lower paying sector. however in real life not everyone can more to France and Germany for the higher wages.
     Also because of the difference in productivity, it could be said the the French have an absolute advantage to most products compared to the US. However what we discussed in class is that the US will have certain products where they have the comparative advantage over France and this is why we have trade between these two countries. If we didn't look at the comparative advantage, we would assume the the French just wouldn't trade with the US.

Links for September 19-September23

Here are some links generally related to the class in some way. I'll try to link some articles each week. Read ones that you find interesting and leave the rest.

Dani Rodrik: Should we roll back globalization? A response (not rebuttal) by Chris Blattman.
Tyler Cowen: Internal globalization? This summary of academic work claims that internal globalizers globalized more externally over time.
WSJ on Trumponomics: Very bad things will happen. Don't get me started.
The effects of cheap oil: More consumption spending, less investment (especially in oil-related sectors)
A history of globalization.

China Threatens Britain with International Trade

Thursday, September 15, 2016

In the article Collateral damage, Britain has stated that it will leave the EU and some of Britain's counties are being effected by world trade. One specifically is Blackburn and they are getting a lot of imports from China, as seen on the map in the article. Britain is also facing a collapse in manufacturing employment, as a result of imported goods. I will be focusing on pareto optimal, export-biased growth and import-biased growth from last week's discussion. 

Is it possible for Britain to become pareto optimal? In the article, it states that Blackburn has had a decline in employment of about one-third. It also stats that the gambling rings and pawn shops are more dominant than restaurants and bars. Blackburn was also for leaving the EU, among other Chinese heavy traders, in Britain. After looking at these facts, I believe Britain can become pareto optimal. First, I believe Britain can try to generate more restaurants and bars in Blackburn’s center to get its employment back up. In order to accomplish this, they will need to follow through training employees and they need to make Blackburn a more attractive place to live and work. In this pareto optimal, Britain will become better off with its own economy. China will be getting hurt from this because they will not be trading as much with Britain colonies as it once was.

Is it possible for Britain to have an export-biased growth? As of now, Britain has been import-bias heavy because of China. Three colonies have already been become import-bias, two of which are near the water. Is it possible for Britain to become export-bias, or, will Britain become even more import-biased with even greater trade from China? I think Britain will become more export-biased because of their hurt economy, the immigrants that they keep accumulating, and their lack of trained workers despite all their “rapid response service.”

The Current Oil Market

         
          During class this past week we have discussed many topics that can be related to an article in the "Wall Street Journal" New Reality for Oil. These topics consist of terms of trade: maximizing a countries' welfare: small Vs. large countries and the welfare gains from trade. In the article it is said that it is now easier to stop and start production of oil regulating the risk of oversupply, much like what happened in 2014.
         What happens if their is an oversupply of oil? A variety of things could potentially take place. The first of which being the price for oil falls which would hurt the terms of trade of countries who export the oil such as Saudi Arabia who is the biggest oil exporting country. Is it safe to assume that the preferences concerning oil are monotonic? In terms of it being a commodity that does potentially have an end it would be in the best interest of everyone to have an oversupply on hand. Although, this may hurt the oil companies such as a car dealership who has too many cars on the lot that aren't selling. They don't stop or slow the production of cars, instead they offer discounts on the cars to free up space on the lot.
        If oil companies were to do this would that have an effect on the world price? As stated earlier there was an oversupply of oil in 2014 and by looking at this graph, you can see how that directly related to the world price of crude oil. This directly effects everyone in the oil market especially the likes of Saudi Arabia whom we can consider to be a large country.
        A large country can use its power to influence the terms of trade. In this instance, Saudi Arabia exports nearly sixty percent of the worlds crude oil. A decline in the world price of crude oil such like that that occurred in 2014 can have lead to deterioration in the terms of trade of the country exporting it. This can also contribute to export biased growth if the country exports an abundance of oil than the price of the oil may fall leading to a decline in the terms of trade. This can be directly tied to the marginal utility of that product.
        In the article it stated that economists believe that the oil price will stay steady at $47.02 for the next few months which is a significant cut from 2014 which was around a hundred dollars at that time. Is the oil market stabling out? Will our importing of oil help our terms of trade in the coming months? I suppose we will have to wait and see.

We have talked a lot this week about the gains from trade. A recent summary of new research by Nigai (2016) shows that differences in consumption across different consumers within a country are an important source of differences in public perceptions about the gains from trade. For example, in countries where many consumers may already spend large portions of their budget on food, trade involving large amounts of agriculture exports may have harmful consumption effects on poor households. The article uses a simulation technique (using theory-based predictions calibrated to observed data) to show that the gains from trade may vary greatly across the income distribution of a country, and the errors of assuming a "representative consumer" may vary across countries as well.
The article exposes two problems with common claims about the gains from trade that we have discussed in class. The first is that preferences can be easily aggregated. Even if preferences are not too different for different consumers, differences in income may result in differences in outcomes in terms of households' responses to price changes. This is because households' preferences are not homothetic, i.e. households do not spend a constant proportion of their income on primary goods (like food or energy) as they do on manufactured goods (like electronics or cars) - the poor tend to spend a lot higher proportion on food.
Even more importantly, since different consumers have different incomes, price changes impact them differently. We mentioned this with respect to the gains from trade: Households that spend a lot on the exported good will "lose" in their consumption (even if their income remains constant), where households that spend a lot on the imported good will "win" in consumption. The reverse is true for households involved with production of exports and imports. The worst case scenario, of course would be to consume a high proportion of your income with exported goods, but work in a sector that competes with imports.