US and South Korea Trade

Another trade agreement threatened by Trump, the US and South Korea Free Trade Agreement. Trump stated that the agreement needed to be renegotiated or terminated. Trump seems to be staying true to his promises about lowering the US deficit, he is being aggressive and that could be what the US needs. He may be a little rude in his approach, although, his point is being made. His step towards lowering the deficit is by redefining the trade agreements he feels are not supportive of reducing America’s goods deficit. Along with having “fair, reciprocal trade.”

U.S., South Korea Announce Plans to Tweak Trade

A Brief History of the German Economy

Last month, Ontarrio posted “Germany is Booming” and addressed Germany’s trade surplus and the rising tensions between Deutschland and President Trump. Trump has considered trade restrictions and even tariffs to alleviate this “unfairness,” but what if instead of getting-even we decided to take a lesson from the German economy? In order to do this, we must first understand their history…

Germany carries one of the most unique economic histories in the modern era; escaping financial disaster not once, but twice, in the 20^th century following the defeats of WWI and WWII. Left in rubble and a deep sense of shame, Germans were driven to by a desire of salonfähig, meaning to “be fit to be invited to a civilized party” again. As new buildings and infrastructure began to grow, so too did their economy.

In the wake of WWII, Germany was divided into East and West while it’s most important city, Berlin, was cordoned from the rest of society. The result of this political division was a decentralized economy. Unlike many other major European counties such as the United Kingdom or France, where the majority of economic activity is congregated in one or two major cities, Germany had a number of mid-sized towns that dispersed the economic activity throughout the land. While there are returns to density, such as bigger cities being more productive than smaller ones, density also carries along costs like higher rent and housing prices, increased cost of living and traffic congestion.

Once the Berlin Wall fell, the German government worked hard to bring East Germany back up to speed. With this, came a huge economic boom because of the massive infrastructure investments being made in the East. However, once the euro was embraced in the European Union, the overvalued currency made German exports more expensive and began to drag the German economy, inspiring Germans to move their capital elsewhere in Europe. This blow to the manufacturing sector made unemployment even worse – nearly 12% by the early 2000’s.

It wasn’t until 2003, when the Hartz Reforms were introduced, that their economy started a turnaround. While the polices themselves were not popular at the time, it allowed the manufacturing sector to flourish. This created a unique situation where small- and medium-sized firms (typically family owned) in the many mid-sized towns became international successes. Not only that, but the workers of these firms were highly paid and protected by unions and work councils because in German culture, CEO’s are more willing to grant decision-making power to lower management and often include union representatives on the board of the company.

Germany’s trade surplus hit a record high of nearly $300 billion last year and has become a major source of pride it’s citizens. Their adaptive system has allowed for the retention of manufacturing jobs as German labor has been resilient to changes in technology by such practices as voluntary wage cuts. Jeromin Zettelmeyer, former senior official in Germany’s Ministry for Economic Affairs, summarizes the German narrative, “It is true that the success of Germany in export markets is a national prerogative, that so many jobs depend on them. As a result, you tend to have unions both at the company level and sector unions that are happy to prioritize competitiveness over wage increases.”

Comparing the German economy to that of the US, we can observe that Germany’s comparative advantage is in manufacturing (hardware) while the US holds a comparative advantage in Information Technology (software). So, what lessons could the US learn from Germany? Are companies like Google or Apple carrying too much of the weight or is the US dynamic enough to maintain its competiveness in a globalized market?

If you’re interested in learning more and diving even deeper into Germany’s economic history, check out the Freakonmics Podcast episode below:

The Economy After NAFTA

North America After NAFTA

Recent talks over NAFTA have made little progress in creating a new agreement that ensures its longevity for years to come. This threat to longevity creates a particular problem for Mexico. ImpactEcon, an economic consulting firm based in Colorado, estimates that Mexico will lose around 1 million low-skilled jobs as a result of the loss of NAFTA. This relates quite interestingly with our latest class discussion, and using the bucket diagram to display labor movements across countries.

If there is a loss of jobs totaling one million low-skilled workers in Mexico, this would cause a massive shift inward of the bucket diagram, which would lead to a massive increase in wages for those still employed. However, the loss in the returns to capital would be greater than the gains to the workers.

These seems to promote the principles that Trump emphasized in his campaign about securing better standings for workers. However, this overall loss on the returns to capital leads to a net negative effect on the economy as a whole. So while it will seemingly help workers in the short run, in the long run this will not be maintained. 

This shift will eventually lead to a greater amount of immigrant workers trying to enter the United States from Mexico. With the border wall having made little progress as of now, this influx of immigrants to the United States will eventually reduce the wages back to lower levels. The benefits to the workers will not be maintained in the long run, and the losses to capital will still outweigh the benefits to workers in the United States. 

This loss of return to capital will reduce the benefit of investing in these business areas, and it will likely be seen for companies who previously had work in Mexico, will attempt to ship their business to other labor-abundant nations that the United States has favorable trade agreements with.

The problem with NAFTA are based in political arguments more than the economical pros and cons of the agreement. It seems to be in the best interest of the United States to continue to seek a NAFTA-like trade agreement with both Canada and Mexico. The benefits are too large to ignore. The demands from the common worker to bring back those jobs from Mexico are not feasible in the real world. While it seems to make sense that these jobs would come back to the United States, the fact is the United States is not low-skilled labor abundant. Instead companies who have operated in Mexico will instead shift their business to other more heavily low-skilled labor abundant countries. 

For more information please read these articles:

Bloomberg Article Discussing Loss of Jobs

More General Information on NAFTA

The Worker-Jobs Mismatch

The U.S. unemployment rate is very low right now at 4.2 percent. Although this makes it seem like there wouldn’t be any major issues in the labor force, there is. The issue is that only 63% of American adults are even in the labor force. This shows that many of the possible employees have just stopped looking for a jobs because of the frustration that comes along with not being able to find one or possibly due to a lack of qualifications. A lot of people tend to blame the shortage of family sustaining jobs which a majority of these would fall under the category of either manufacturing or healthcare. These jobs are not to blame with 6.1 million new manufacturing jobs and 1 million new health care job openings as of August of this year. The three main mismatches that are believed to be causing all these issues include the skills mismatch, geographic mismatch, and the expectations mismatch. The skills mismatch basically means that there is a disconnect between the skills that would be expected by an employer and the skills that job seekers actually have. The geographic mismatch has to do with an issue between where jobs are and where job seekers live which ties into the expectations mismatch which has to deal with the incorrect assumptions of where jobs are in high demand. These three mismatches are the real reason for 37% of American adults not be in the labor force and is a problem that needs to be dealt with.  

Bring The Money Back

The United States is addressing the seemingly annual unicorn of legislation, tax reform and profit repatriation. American Stalwarts such as Amazon and Apple are in the sights of two competing forces, the U.S is staking out the position of allowing companies with profits abroad, a one-time tax waver to bring profits back home. While the E.U is putting the squeeze on countries such as Luxembourg and Ireland to collect the taxes that are owed by these companies to the tune of $293 million and $15.2 billion respectively, and this is giving these companies incentives to move those profits back home to avoid huge tax bills that have built up over time. The new proposed corporate tax system would tax only money that is earned in the United States, bring the rate down from 35% to 20%, which would be contingent upon repatriation. This is not a new phenomenon, companies have always sought tax havens abroad such as the Cayman Islands in order to soften their tax bill, what would be the effect of this proposal on the U.S economy, in terms of domestic investment? Increased employment?

IMF Fiscal Monitor

The International Monterey Fund is constantly observing the economies of the globe and providing in depth reports and predictions. The main goal of the Fiscal monitor is to help governments change policy to lessen income inequality while keeping up efficiency. The latest communications from the IMF include a statement about how global inequality is going down (Jim Bang mentioned this in class about how even though the advanced economies are experiencing greater inequality however vast amounts of the globe population that has been pulled out of starvation-level poverty). They also describe some of the benefits that are associated with less income inequality such as higher economic growth and less polarization in politics.  They suggest policies like reform of income taxation, universal basic income, and public spending policies on education and healthcare.  It has been observed that income inequality globally has been reduced by international trade. For example, when Japan started trading with the rest of the world they saw their standards of living greatly increase. Japan is also has much better income distribution then the United States.

Article:
http://econospeak.blogspot.com/2017/10/imf-fiscal-monitor-progressive-taxation.html#links

Exchange Rate and Balance of Payment

International trade has enabled people to buy foreign manufactured goods and services. Though this may have increased the standard of living of the citizen, but it has risen concern to the government due to falling Forex reserve and falling value of the local currency.  For example Pakistan's imports has increased significantly, and parallel to this the Forex reserve of Pakistan has fallen. This fallen Forex reserve was further aided by the falling export.

Many government has used fixed floating exchange rate, while many others has used just fixed or just floating exchange rate. One of the reason for which type of exchange rate should be maintain by the government depends on the level of import and export and the level of investment and capital outflows is taking place. Whatever the case is it is crucial for the government to maintain certain level of foreign currency to pay any unexpected scenarios. 

Setting or increasing the higher exchange rate will cause short term benefits, as the revenue  generated from export will increase. However in long term export will fall as the the price of export to foreign people will increase and these people will then move to lower price goods from another supplier. 

Therefore every government must set their level of exchange rate which provides them with the highest return, wither in profit in Balance of payment or minimum loss, such that these loss can be recovered in the long run. 

https://tradingeconomics.com/pakistan/imports
https://tradingeconomics.com/pakistan/foreign-exchange-reserves
http://www.investopedia.com/ask/answers/031715/how-does-balance-payments-impact-currency-exchange-rates.asp

The power to change the world

With the past Hurricanes raging and destroying millions of dollars’ worth of capital and land, places are left with nothing. Puerto Rico has been one of the most affected by these past disasters, being an island and isolated they must rely on foreign help to get better. The biggest problem they face is getting power back to the Island since most it was wiped out. Puerto Rico’s power grid was bad before, having outages wasn’t uncommon for the people. Right now, the island imports and burns oil to generate electricity.

Luckily Elon Musk’s suggested that he could help rebuild their power grids using solar power. What that would suggest for them would be a more stable grid that could improve business with low costs in power. Having solar power energy is usually a long-term investment which pays off in the long run. A tweet from Elon has stated that “The Tesla team has done this for many smaller islands around the world, but there is no scalability limit, so it can be done for Puerto Rico too…” One of the islands that Tesla is talking about is Kauai in Hawaii which hold around 70,000 residents, Puerto Rico, on the other hand, has 3.4 million residents. With that significant of a population raises concerns if it’s possible.

As of right now one of the biggest projects Elon has is creating one of the biggest lithium-ion battery to Australia. What this could potentially mean for the future is a reduction in the cost of power utilizing the land more efficiently. This project could potentially help 1.7 million South Australians. These technological advancements could eventually help parts of the world where they still have most of the people without power.  

For more information 

http://money.cnn.com/2017/10/05/news/economy/elon-musk-puerto-rico-tesla-power-grid/index.html

http://money.cnn.com/2017/07/07/technology/tesla-elon-musk-australia-world-biggest-lithium-ion-battery/index.html?iid=EL

https://www.bostonglobe.com/news/nation/2017/09/25/damage-puerto-rico-power-grid-unprecedented/8XnniwOHxWKqs2WYz5J8gM/story.html

US Lifts Trade Embargo on Sudan

Trade with Sudan was minimal in the years before the ban that was introduced in 1997. After the ban, US and Sudan trade dropped substantially, but not completely. The US remained available for assistance in times of absolute need with little to no imports from Sudan and very few exports to Sudan. The reason for the embargo was due to Sudan’s government supporting international terrorism, destabilizing surrounding governments and violating human rights. Unfortunately, Sudan is still considered a state sponsor of terrorism. Recently, Sudan has made counter-terrorism efforts, along with progress towards human rights issues, because of this, the Sudan travel ban was lifted and with that the trade embargo was lifted.

            We all know that opening to trade with a country will raise both countries TOT; in this situation the US and Sudan will be gaining so much more from reestablishing relations. In Sudan will have the ability to use the US to fight its battles and aid them medically. The US obtains a strong presence in the area allowing the US to bargain with nearby countries to then aid in the resolves between the US and North Korea. It will be interesting to see how relations improve and how Sudan as a whole improves from this.

Links Below:

Sudan sanctions: US lifts most economic restrictions after two decades

U.S. lifts sanctions on Sudan, ending two decades of embargo

Trade in Goods with Sudan

Sudan Sanctions Program

Keeping Up with the Jones Act

Nearly three weeks after Hurricane Maria (and Hurricane Irma two weeks prior), Puerto Rico is still struggling to manage the amount of devastation left behind by the two storms. In their wake, nearly 3.5 million U.S. citizens are still without power, fuel, food and even lack access to clean water. Due to the immense power and destruction of Hurricane Maria alone, recovery is going to take a very long time and encompass a litany of challenges for the island. One challenge, specifically, is trade policy.

The Jones Act prohibits any foreign built or foreign flagged vessel from engaging in coastwise trade within the United States [Maritime Law Center]. Essentially, this law requires that only American ships can carry goods from one US port to another and any foreign vessels that enter an American port must pay punitive tariffs, taxes and fees.

If a foreign vessel carrying goods – such as food, water, medicine, or oil (which powers Puerto Rico’s entire electrical grid) comes directly into Puerto Rico it has to pay fees, duties, taxes and import quotas. Its only alternative would be to reroute to Jacksonville, FL, where the goods can be offloaded, reloaded onto an American vessel, then rerouted back to Puerto Rico. Regardless of the vessel's route, the costs this trade policy are passed along to the Puerto Rican consumer and delay emergency relief effort to the island.

Economist from the University of Puerto Rico found that the Jones Act penalized the economy of Puerto Rico to the effect of $17billion from 1990 to 2010. Research from the Federal Reserve Bank of New York also finds that the act hurts Puerto Rico’s economy. In fact, it appears that the only industry that continues to support this legislation is the shipbuilding industry (it should be noted that this law also decrees that every ship must be built, crewed, and owned by American citizens).

Now, President Trump – despite much opposition and delay – did temporarily suspend the Jones Act for Puerto Rico on September 28^th. However, The Department of Homeland Security announced on Thursday that it will not extend the 10-day waiver on shipping limitations. But with Puerto Rico still in a state of humanitarian crisis and the death count creeping upward, shouldn’t the waiver be extended so trade policy will not continue to affect the relief effort? And with the island having to completely rebuild its infrastructure and economy over the next several years, should the Jones Act be dismantled completely?

For more information visit:
http://money.cnn.com/2017/09/28/news/economy/jones-act-puerto-rico/index.html
https://www.nytimes.com/2017/09/25/opinion/hurricane-puerto-rico-jones-act.html?mcubz=0
http://www.reuters.com/article/us-usa-puertorico-shipping/extended-jones-act-waiver-not-needed-for-puerto-rico-dhs-idUSKBN1CA2C1
http://www.maritimelawcenter.com/html/the_jones_act.html