The Economic Costs of Linguistic Diversity

We know from Chapter 1 of our textbook that "similar" countries tend to engage in high volumes of trade with one another. But why? European countries trade frequently with each other for a multitude of reasons, the biggest being geographical proximity (easier to ship goods/services) and low import tariffs. However, in a market like the European Union (EU) we also see a multitude of different languages spoken by different people. How exactly does this affect trade?

Freakonomics Radio - the podcast that explores the hidden side of everything - ventures into that very question along with the other implications of linguistic diversity at both macro and microeconomic levels. In general, they find that the multitude of languages has a negative impact on economic growth. In looking at the European market, Shlomo Weber, gives a real world example of why not having one unified language in the EU creates a barrier to trade: "[To] give another, even more painful example, about the patent application: if you need a patent in different countries, you really have to do it in every country, because there is no unified legislation across the Union. Every company in every country has to go for different patent, and it delays so many things."

His economic analysis shows that there is indeed a conflict between localization and globalization as we can also observe positive impacts between two countries who trade in the same language. “Weber documented that a 10 percent increase in the probability that two people from different countries share a language increases their trading by 10 percent.”

Some other major takeaways from this week's episode:

• Linguists predict that of the roughly 7,000 languages now spoken on earth, some 3,000 will go extinct within the next century
• Language and religion are the two most important factors in the self-identification of people and groups
• We spend roughly $40 billion a year on “global language services” - primarily translation and interpretation
• Another $50 billion a year is spent learning other languages

Incentives and Migration: Push Factors or Pull Factors?

This week's hot international economics topic: immigration, and specifically the Deferred Action for Childhood Arrivals (DACA) order. Let's not get too far ahead of ourselves with the course material (we will analyze migration later in the course), and instead stick to basic individual cost-benefit analysis. Taking a rational choice perspective, the decision to migrate hinges on (1) the net benefits of staying; and (2) the net benefits of leaving (to a particular destination). In other words, there are push factors (reasons to leave) and pull factors reasons to choose a particular destination.
In the rollout of the DACA phaseout yesterday, Jeff Sessions stated, “The effect of this unilateral executive amnesty, among other things contributed to a surge of minors at the southern border with humanitarian consequences.” Let's analyze the plausibility of this theoretically, then see what the evidence says. At first blush it seems there should be no doubt that a program like DACA would cause an influx of new migrants hoping to qualify for it. It gives new minor children - especially teenagers - a sort of legal status that might qualify them to work legally in the US later on. On closer inspection it is not so clear. The law requires minors to be in school, meaning they cannot work to support themselves. It also makes their immigration status uncertain since, as an executive order, it is something that a subsequent administration can - and now apparently will - revoke. So the duration of the minor migrant's trip might be longer (because they are legal and do not face fear of ICE) or shorter (because since they are registered a policy reversal makes deportation almost certain). Hence, the immigrant trades one source of uncertainty for another.
Catalina Amuedo-Dorantes, a well-known immigration economist, along with her coauthor Thitima Puttitanun, find a negligible effect on apprehensions of minors to be attributable to DACA. Most of the recent rise in minors coming to the US comes from a 2008 law to help combat human trafficking and assist victims of trafficking, and from families fleeing increased in violence in Mexico.

More on the Robopocalypse

One more thing: there is some chance that in the long run human capital will adapt to the Robopocalypse and worker skills will complement the capabilities of our future new robot overlords. LinkedIn founder and executive Reid Hoffman sums it up well (trying a little too hard to be cool) in this interview with The Daily Show:

Trevor Noah: If robots are doing the jobs...what do humans do? What is our purpose?
RH: ...That's a possible universe, but there are many other possible universes...So it's not that the robots do all the teaching, but it enables [sic] people to be much more productive. 

Finally, we probably don't need to worry about robots killing us and ending human existence as we know it, because...

TN: Will Artificial Intelligence kill us all?
RH: Very unlikely...Asteroids may kill us all; nuclear weapons may kill us all...
...
TN: Why would the robot not want to make me not exist?
RN: ...Then you get to the whole question of the robot "wanting."... When do robots become fully wanting, sentient people, and what language of "want" describes them?

In other words, robot preferences will probably not be the same as human preferences, and will probably be less spiteful, hateful, and vengeful. Maybe a bit more like... homo economicus? At least our robot overlords might be programmed to have preferences that are complete, montonic, and transitive (even when we aggregate them!). 

Robopocalypse or Globopocalypse?

American Public Media Marketplace host Kai Ryssdal interviewed "Robopocalypse" author James Surowiecki about jobs this week. Here's the podcast of the conversation. I want to focus on a couple of passages. First, Surowiecki claims that the Robopocalypse is "a very, very, long way off." This is probably true. Artificial Intelligence does not really exist yet - "Machine Learning" is a more accurate summary of the current state of the art.
Second, Surowiecki claims, "economic evidence at this point suggests that trade and in particular trade with China since 2000 has been responsible for many, many, many more lost American jobs than automation has." He continues, "Really the jobs lost to trade is just an order of magnitude greater." The best research out there now does not support this claim. While Autor, et al. (2015) finds:

"Labour markets whose initial industry composition exposes them to rising Chinese import competition experience significant falls in employment, particularly in manufacturing and among non-college workers. Labour markets susceptible to computerisation due to specialisation in routine task-intensive activities instead experience occupational polarisation within manufacturing and non-manufacturing but do not experience a net employment decline."

In other words: trade, bad - technology, meh. But science doesn't just stop with one finding. Remember, until Autor and his colleagues began looking into trade, the prevailing hypothesis was that skill-biased automation had more to do with widening income distribution and stagnating wages. To falsify the hypothesis that technology matters (and possibly a lot) you need a lot more than that. So Acemoglu, et al. (2017) took a stab at it. They find:

The impact of robots is distinct from the impact of imports from China and Mexico, the decline of routine jobs, offshoring, other types of IT capital, and the total capital stock (in fact, exposure to robots is only weakly correlated with these other variables). According to our estimates, one more robot per thousand workers reduces the employment to population ratio by about 0.18-0.34 percentage points and wages by 0.25-0.5 percent.

Who's right? We don't know yet. I tend to favor the conventional view about technology until more than one or two papers come in from the other direction (and preferably not all of them by Autor and some combination of coauthors).

"Dealmaker" Trump to China: "Stop or we'll shoot ourselves!"

Donald Trump campaigned - in part - on his reputation as a deal-maker. While some have disputed his acumen for making business deals, and others have questioned the ethics of his tactics, he made a convincing case to some loyal supporters that he would make good trade deals. 

The key to it all has been trade with China. At first, it seemed Trump wanted a hard line and hoped to ensure that China would reciprocate our openness with more openness on their own part, and by stopping its alleged "currency manipulation" (an allegation with dubious support). Now, the goal is to coerce China into cooperating with sanctions against North Korea.
Tying US trade policy with China to China's own reciprocity, or to other factors ignores one important aspect of trade theory: When the US remains open to trade, it is US citizens who gain the most, and those gains are mostly independent of whether individual trade partners choose to reciprocate. This is the basic idea of the mutual gains from trade. Hence, threatening sanctions against China to try to get them to cooperate is a threat on a similar plane as telling the police, "Stop or I'll shoot myself!"

Protectionism and the Great Depression

Many fear that the current economic and political climate is pushing countries - especially the United States and many parts of Europe - towards protectionism. There are many reasons this might be a bad thing in general, but first, a little history. A recent episode of NPR's Planet Money discusses the debate in the US over the Smoot-Hawley Tariff Act. Aside from several hilarious reference to comical-economist-and-actor-turned-Fox-News-commentator Ben Stein's (also straight man to host Jimmy Kimmel on Win Ben Stein's Money) character in Ferris Bueller's Day Off, the article documents many similarities in the protectionist view between that time and today. The sentiments documented even includes a snide remark about academic economists, (or, "college professors who never earned a dollar" - ZING!).

The article is a good start towards understanding two big points in the course: 1. That trade is good overall; and 2. some groups are hurt by it. Here is a chart documenting world exports from 1900-1960 (using data from the IMF):

The drop from about 3,500 to about 1,500 occurs between 1929 and 1932, the beginning of the Great Depression in the US, and economic downturns throughout Europe. While correlation does not guarantee causation, most economic historians credit the drop in trade (which was largely caused by bad and protectionist policies) as one of the key factors in precipitating the global depression.

It also documents the political economy of trade policy: that the gains from trade are diffuse and unseen, whereas the gains from policy interventions are usually more concentrated and visible. 

So, so basic reasons not to be protectionist: 1. to avoid retaliation; 2. to make consumers of imports better off (and consumers in general better off); and 3. to make exporters better off. The third reason is generally the hardest to grasp, and one which has fallen out of discussion over the last 20 years or so, but one that policy makers understood pretty well in the aftermath of WWII. We can only see this impact on exporters by developing general equilibrium into our understanding of trade theory. 

Trade With China Has Hurt the US

I recently came across an article in Fortune magazine titled, Here's Why Donald Trump is Right About China. In the article, Chris Matthews talks about how trade between the US and China has decreased American innovation and as a result, the US has been worse off. He references a study done by the National Bureau of Economic Research that discusses how competition with Chinese exporters has diminished innovation in the US. The study was conducted by comparing research and development spending by US firms against increased import competition. The study showed that as import competition increased, R&D spending decreased in the US.

This study shows that US firms are finding problems in competition with the Chinese exporters, and that is reflected with the increased skepticism toward trade by the average American. While trade is beneficial in theory, something has to be said about the increasing skepticism toward trade by the American public. In a poll conducted by the Pew Research Center, 49% of the American general public said that trade is a "bad thing" compared to only 44% that said it is a "good thing". Imports from China have historically increased since the US opened to trade with them. In 2015, Chinese imports to the US reached an all time high. Could it be that lower and middle class Americans are no longer seeing any benefit from trade due to the increased Chinese imports?

Carrier to keep nearly 1000 jobs in Indiana

When Donald Trump won the presidency, he would not have done it for many reasons including carrying the rust belt states of Pennsylvania, Ohio, Indiana and even Michigan. This past week, the President Elect has reached his first deal to keep nearly 1,000 jobs here in the United States showing he knows what it takes to keep jobs in the United States. One reason as to potential for gaining the deal is roughly 10 percent of Carrier’s subsidiary United Technologies come from the federal government. The Pentagon being the single largest customer of theirs, and threats of losing government contracts could have been a major swing for the decision to remain in the United States. Other incentives include economic from the state of Indiana to further appeal them to remain here at home.

I believe this deal is a revolutionary deal for Mr. Trump because he brings precedent to future companies who want to leave the United States. Creating a tax on companies leaving the United States had been floated and rumored to be nearly 35% and would be able to cause many companies to relocate. If the export tax was being used as payment insurance for the employees losing their jobs this could be a revolutionary idea for the many manufacturing jobs harmed due to trade. We have learned the winners and losers of trade, and while there are about 1000 people winning right now, it could be at the cost to 300 million. Additionally, if this is treated to other companies such as Caterpillar whom also benefit with government contracts, we could see many more saved at the added costs to millions of others. 

Outlook of Brexit Effects

The article I read was on Bloomberg about the U.K. economy showing no signs of Brexit effect due to the rise inspending. Household spending rose about 0.7% from the second quarter and business investment grew 0.9% over the time frame per the Office of National Statistics. In a separate report was that retail sales grew at their fastest annual rate in more than a year in November, reasons being the holiday season coming up when consumer spending tends to increase. The Office for Budget Responsibility on Wednesday decreased their annual forecast to 1.4% down from 2.2% stating “uncertainty will lead firms to delay investment while the falling pound squeezes consumers by pushing up the cost of imports.” Alan Clarke of Scotiabank in London stated “In light of Brexit there was case for uncertainly holding back investment … However, things are never black and white. Projects to build planes, ships, buildings etc. will have been singed off 12-18 months ago, and that actively won’t shut off overnight.”

I found this article interesting due to the impact of the Brexit vote and the effects it has placed on the British economy. As the article mentioned there is a rise in the cost of imports which should lead the government with a couple options one being a decrease in an import tariff. This would allow consumers and business’ the ability to get cheaper products, as we have learned in class the taxing of a foreign monopolist can benefit the home country, the imports for Britain may not necessarily be a foreign monopolist and the reduction in tariff can benefit their country greatly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Export Subsidies in International Trade

In class we talked about the effects or tariffs and subsidy's on a country and the overall outcomes were quite surprising to us all. I wanted to look more into the outcome of giving a subsidy to a large country involved in international trade. I found this scholarly article Export subsidies and international market share rivalry.
     The authors of this article brought up the idea that we all assumed at the start of class which was that why wouldn't a subsidy be good for a country's welfare? The initial improvements to the home firms outputs in production are positive, however this is without competition from foreign firms. As the authors commented "A subsidy changes the initial conditions of the game firms play." With the subsidy the number of exports increase and producers surplus increases also, these are the only preserved positives of the subsidy. With the increase in supply of the subsidised product the price that the home country can sell the product will decrease, this means that the home country are basically helping out all the home countries by selling them their exports for cheaper prices. The only ones that lose out are the home country because they lose profits selling the product at a cheaper price. The decrease is price then leads to a decrease in the terms of trade for the home country and welfare is reduced.
   Government intervention in trade never seems to have a positive impact. We need the government their to support our firms, however tariffs and subsidies  need to be limited.

The article, China Halts Export-Subsidy Program After U.S. Challenge by William Mauldin, talks about how the United States acquired $1 billion in three years while China made $482 billion last year. As a result, the Obama administration wants to make a new trade agreements because of the alleged trade violation by China. The World Trade Organization also ended a program that aided small exporters throughout China. Americans employed in seven diverse sectors won because of this. This also showed Beijing taking initiative to easy trade tensions. Trump wants to continue to hit China because he wants the United States to, at least, be second to China.

We learned that subsidies encourage domestic firms to produce more in a given industry. China has the labor to do so and they found a way to use the smaller firms as a way to be considered a "small country." Like Ryan said in his post, It will not have a effect on small country, but will  hurt big countries instead. One of the sectors is fish, and we lost this impact of an export subsidiary because fish is more dominant in Asian than the United States.

Export Subsidies as a Revenue-Seeking Activity

Recently in class we have talked about subsidies and what they do for the home economy. It is stated that export subsidies are only paid on goods that are exported. This will have no effect on a small county, but will result in losses of efficiency and worsen the terms of trade in a large country such as ourselves.

I discovered a journal article written in 1999 by Paul Pecorino titled "Export Subsidies as a Revenue-Seeking Activity: Some Implications for the Evolution of Protection" Click to Read (This is a JSTOR article, you may need to log in to see it)

He discusses the output market and how "firms in the export industry costly overcome the free-rider problem lobbying for an optimal export subsidy". (Export Subsidies, 1999) This is relevant when discussing the optimal subsidy, which will have little if no effect on a small country.

He goes a little more in depth with the problem and talks about the lobbying problem. This is introducing the politics and special interest into the equation. That is really the driving force behind a government deciding to put an export subsidy on goods. The consumer will stay pay the same price as a foreign consumer would because we assume that the producers are acting logically. It would not make sense for them to charge consumers on the domestic end less than what they could get for it in the foreign market. This in turn would increase the price of that good due to the extra supply. All in all there is little evidence to support that an export subsidy would be good for the domestic economy and a tariff would be a better option, but still, not a very good choice.

Many problems can arise from export subsidies one of which being investment. Firms can invest in markets with subsidies when they normally wouldn't causing an imbalance in the market directly attributed to the subsidy. Also, there is no telling how long the subsidy will be in place. It is up to the ones making the decision and special interest groups to keep the subsidy going or nix it. The special interest groups would most likely rather keep it in place because it was intended to help them out to begin with and taking it away may change the landscape of business they are operating in.

Will Trump's Trade Policies Benefit India?

On Tuesday night, many Americans were shocked to hear that Donald Trump would become the 45th president of the United States of America. As a result, stricter trade policies will be a big part of President-Elect Trump's first 100 days. In the article, Here's how Donald Trump's win will impact India, Satyam Sharma talks about the possible gains and losses for India under a Trump presidency. He explains how lowering the corporate tax rate from 35% to 15% would encourage companies to move back to the US from India. This would of course cause India to lose both jobs and exports.

The possible gain for India could outweigh the possible loss mentioned above. Trump says he plans to classify China as a currency manipulator, which would allow him to impose large tariffs on imports from China. This could create an opening for India to become a trader of labor-intensive items to the US, in the same way that China has for many years. By imposing large tariffs on China, the US would heavily decrease their Chinese imports. This could lead to India becoming a substitute for China.

With the election of Donald Trump, along with a republican House and Senate, many policy changes are headed to Washington. If Trump is able to get his way, the US trade policies will see a significant change. The next 4 years will be filled with interesting new changes, hopefully for the benefit of the American people.

Declining Global Trade

The article A Little-Noticed Fact About Trade: It’s No Longer Rising points out that global trade is in fact declining over this year, remaining relatively flat in the first quarter and has fell about .8 percent over the second quarter. These numbers per statisticians in the Netherlands which happen to keep the best data. Trade in the United States has fallen by more than $470 billion for American imports and exports over this year, and fell by more than $200 billion in the previous year. The result of the sluggish growth is pointed towards a global slowdown in which is now becoming structural per Binyamin Appelbaum. With both presidential candidates opposing the Trans-Pacific Partnership it is a sign in which global trade will continue to decline. Christine Lagarde of the International Monetary Fund stated “Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades.” The decline in global trade can be pointed to china for they can make more of what they consume, and consume more of what it makes, and making themselves less dependent on foreign direct investment. China’s ever changing role in the global economy has led to these changes in global trade.

I found this article as something that shines a light on how the global economy truly is around the world. China’s GDP growth hovers around 6 % which would be amazing here in the United States (2%), however is far lower than where they were at nearly 12%. With China being able to now support themselves this can cause harm to the United States as seen by our imports and exports have gone down over the past 2 years. This decline would benefit factory workers as there would be less imports however harms them on the same token because of less exports. We then can reasonably assume the United States and other countries are not able to operate at equilibrium on the Heckscher-Ohlin model because of the clear winners and losers of trade.  

Does Offshoring damage the US economy

I wanted to look into whether the increase in firms in the US offshoring over the last decade has had a impact on the US economy. One article that I found Economic damage to US economy from offshoring jobs may be exaggerated, argues that offshoring hasn't had that large of an impact on the economy. His argument was that offshoring has actually made the US firms more efficient because the savings made from offshoring get redirected into new products, research, and development. The article talks about how offshoring hasn't taken as many jobs as the public would think also.
         Only around 0.60% of the 60 million jobs have been lost due to offshoring. One more argument that can help people relax is that Americas largest industries such as catering, tourism, retail, hotels and restaurants cannot be off shored, therefore that is millions of jobs that the US labor force cannot lose out on as firms continue to offshore to other countries to reduce costs.
      Compared to a lot of the world the US have a fairly well educated labor force and this is another reason not to be worried about offshoring, the majority of jobs that are off shored are unskilled jobs that anyone could do, the high skilled jobs are more difficult to offshore and these are the ones most American citizens want as they will generally pay a higher wage. In my opinion offshoring is needed for the world economy as is help developing countries build their economies, and improves their welfare with increase technology, jobs and training.

Using Common Sense When Talking About Trade

An article I read recently titled: Let common sense, not fear, dictate trade policy, talked about how people tend to let fear cloud their views on trade. The author, Deb Keller, talks about how people have been fed bad information about trade. She starts the article by listing three truths about trade: isolationist policies (autarky) never end well, agriculture has benefited from trade, and foreign governments don't always follow the rules. She then goes on to explain why the agriculture has benefited from free trade in the past, and why it would benefit from TPP (Trans Pacific Partnership).

According to Keller, incomes in America are 9% higher because of trade and that eliminating trade barriers would increase incomes by 50%. We have seen this in class, as free trade benefits the participating countries and increases wages in the winning sectors. While some industries lose, the gains outweigh the losses. With agriculture becoming a capital intensive industry recently, it benefits from being in a capital-abundant country. Free trade increases the return to capital and the return to land for farmers in the agriculture sector.

While reading the article, The politics and economics of offshore outsourcing, N. Gregory Mankiw and Philip Swagel talk about offshoring outsourcing and the effect on the United States. They gathered data, from about 1990 to about 2004, regarding the Bureau of Economic Analysis and comparing employment and income to United States and foreign corporations. 

In class, we learned that there are different industries that use offshore outsourcing and that both countries can gain, as a result, of this. Technology can also play a part in offshoring outsourcing because of the example used in last class and given that technology is ever changing. 

Following a Proven Model

           As talked about in class many times, we all know that Apple outsources the production of their phones and does not do it in house. Blackberry is soon to follow suit, also focusing on software as Apple has been doing. This can provide many benefits to the company that can lead to increased sales and a cut in production prices, but it also comes with a risk.
            In an article I read on Phys.org Outsource, the author explains how and why Blackberry has decided to outsource the production of its phones. "BlackBerry, which a decade ago was among the world's largest smartphone makers, has seen its global market share slip to less than one percent as Apple and Android devices have dominated." (Phys.org) I get the feeling that Blackberry is taking a good hard look at their business model and trying to pick apart the pieces that are leading them to their immanent failure. One of their moves is to bring outsourcing into the equation by enlisting Indonesia to complete that task.
          Blackberry doubled their software revenue in the last year which leads me to believe that that is why they want to make software the main focus of the company. Although, the risk associated with outsourcing the production can include a greater number of defects in the product or less skilled workers completing the good, they still feel that it is a necessary risk to take. This will be in the form of a contract and will surely reduce production costs across the board freeing up more money for factors such as research and development.
         On the other hand, this can have a negative viewpoint from a lot of Americans because they will see it as jobs going overseas. We know from class that this is a very complicated issue and doesn't just consist of a "lose a job here, gain a job overseas" approach. In the end, the company has to do what they believe is relevant in order to survive in a competitive market in which they are bringing up the rear. If the company goes out of business a lot more jobs would be lost including to those in the production plants.

Free Trade vs. Free Movement

When the British public voted to leave the European Union in June of this year, the principle debate waging amongst the Brits, was between the movement of people and free trade. Whilst Britain enjoys the benefits of the free trade with the larger economies on the continent - the likes of Germany and France - many in the UK begrudge the open border policy in Europe which allows large immigration from the smaller economies of Eastern Europe.
It is this issue which has dominated the exit negotiations as the Conservative government seeks to strike a compromise whereby they are allowed access to the single market, or at least the large economies within it, without accepting the open border policy which has seen British services pushed to breaking point. An article in todays Wall Street Journal talks about the negotiations in greater detail: http://www.wsj.com/articles/theresa-may-wants-continued-british-trade-with-eu-post-brexit-1477054148

My argument here is that the movement of people to the UK is probably not a price worth paying for the British economy. The Heckscher-Ohlin model essentially says that countries will export products that use their abundant and cheap factor(s) of production and import products that use the countries' scarce factor(s). An increase in the size of the labour force in Britain due to immigration will make labour a more abundant factor and thus drive down demand and price. Britain currently has one of the highest minimum wages in Europe and the lowest unemployment, they have a service based economy which is the 5th largest in the world. As labour becomes more abundant, the economy will begin to export labour intensive products which may be a step backwards for the British economy.

Capital Abundant Vs Labor Abundant

In class we have been looking at the Heckschler Ohlin Model. Part of this model is looking at countries that are either capital intensive or labor intensive. The article I found China VS The US economy the writer looks at the difference in the two economies of the two countries. The article talks about how China has a more labor intensive economy. although both countries have similar unemployment rates China's labor force is much larger than USA's due to size of China's population. It would therefore be safe to assume that China has the stronger economy. However the article then discusses how the USA is way ahead with its income over the Chinese and how quality of life is better for the individual in the US. USA are a more capital intensive economy and because of this its productively is high and its labor force is more specialized. Due to the huge population in China, the workers incomes there are very low due to the high supply. The US workers get a much higher income and this seems to link to an increase the productivity of its workers. Because of the income differences between the two countries the US labor force are much more willing to work than the Chinese and this can be seen in the increase in unemployment that China has seen in the last few years.  
    However the article talks about how China's economy is growing faster than the USA's and if the US are not careful China will soon be ahead. With China's labor force size, once they invest more into capital they could have a higher utilization of capital which will increase the countries productivity massively. At the moment it seems like being capital abundant is better for a countries productivity, yet if a country such as China was willing to put its huge number of workers to use on new capital and better technology it could easily dominate in productivity and trade.

Belgian's Influence on EU-Canada Trade Deal

I read an article on the BBC about why the Belgian province may sink the EU-Canada trade deal. Belgium’s government stats that it is likely to block the deal due to fears that “it could lead to a flood of cheap imports.” This relationship has a lot of influence on the United States because the failure of this legislation, CETA, could throw a spanner on ongoing negotiations for the US and Japan and can place some doubt on the post-Brexit Britain can negotiate a favorable and speedy deal with Europe. This deal puts heavy pressure on Canada as they are UK’s largest trading partner and puts them in an “unexpected quandary” says Christopher Sand of the Canadian Studies at John Hopkins University.

                I found this article very interesting because each week we have been able to build upon the idea of free trade benefits both countries. I find this article very interesting because in class we are not able to show ramifications of other counties negotiating trade deals or even say Brexit happening. However, it still baffles me when the article they state cheaper imports and make it sound like a bad thing. Belgian is afraid that by opening their country to Canada and allowing cheaper imports would harm and take away their manufacturing jobs. 

The American Trade Debate

In the article, Free Trade Vs. Balanced Trade by Raymond Richman, Howard Richman, and Jesse Richman, there is a debate between Hilary Clinton and Donald Trump regarding trade. The authors state that Hilary Clinton wants to support the expansion of free trade, whereas, Donald Trump wants to renegotiate trade agreements to balance trade. Our growth rate has been declining since around 1970 and has yet to bounce back, along with our trade balance. Both are seen on the graph, in the article, and Our trade balance is on a slow rise. Things that effect these include, the subtraction from demand for American products, loss of manufacturing jobs, less investment in new factories, less technological development, loss of economics of scale, and slow recoveries.

The article then goes into talking about mercantilism and how the American economic profession is ignoring trade deficits. The article ends by saying how Trump, and his chief economic advisor, want to put together a plan to balanced trade. On the other side of the argument, Hilary Clinton wants to keep trade free and Raymond, Howard, and Jesse think that the growth rate will continue to decline. Based on what we have learned in class, do you agree with their statements? Does Trump know what he is doing after all?, Does Hilary? What type of trade do you think we should be in, balanced trade or free trade? 

The Fallacies Behind Trade

The ordinary person may believe that trade is hurting our economy especially in regards to trades with China. This is a false statement that is said too many times in a day not to be addressed. Anyone who watches the presidential debates can clearly hear the candidates knocking the trade policies that we have with foreign countries insisting that we are getting swindled by these countries and it needs to stop. This couldn't be any further from the truth.
In an article I read called "Trade is Win-Win" click to find the truth it breaks down how these candidates and politicians alike are spreading lies in order to garner votes from the unknowing voter. In 1776 two very important things happened. The lesser known of these two is a publication by Adam Smith called "The Wealth of Nations" and the theories in this publication are still being used by economists today. The most dominant statement from this is that trade enhances the wealth of trading nations. How can this be? Does this mean that the candidates are lying directly to every citizen watching the debates?
It's almost simple logic if it's broken down. There has to be an agreement between each nation to trade. Why would a nation agree to trade its good if it's going to worsen the nations terms of trade? To me, it's cut and dry that if trades are occurring, both nations are benefiting from said trade.
The biggest issue arriving from the trade argument is that of American jobs. I can understand how one would assume that if we are importing a product from China that can be made in America it is putting a hard-working American citizen out of work. There are many factors that tend to lead to the diminishing manufacturing jobs in America. The least talked about one is the advances in technology. If a machine can produce what a human can, wouldn't the company rather have the machine do it? This way the company isn't paying a wage and benefits, but only a price to buy the machine and its upkeep. I'm all for generating more jobs in America, but the solution that the candidates have proposed is insane and almost surely to fail if implemented.

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.

In this Econtalk podcast, Russ Roberts interviews David Autor on the impact of trade with China on US workers. The interview discusses Dr. Autor's research showing that there are distributional consequences of trade with China.
It is important to stress that Dr. Autor supports free trade for the reasons we will discuss in the opening weeks of the class: it improves allocation of resources, it improves competition, it improves innovation, and so on.
The basic idea that these gains from trade are based upon is comparative advantage. For example, New England Patriots head coach Bill Belichik majored in economics, but his ability to coach football far exceeds his advantages in analyzing economic issues (and in fact he has applied economics to his coaching philosophy!).
Trade clearly creates winners and losers in the short run. Russ Roberts argues that even though some people lose in the short run, many people (even the losers) would take that trade because trade also leads to competition and innovation and growth that makes everyone better off in the long run (even if some groups might be relatively worse off). Autor Challenges this claim by arguing - and supporting with data - the view that trade has had dramatic long-run consequences. Importantly, he has shown that some groups have not only lost in the long run in relative terms, but also in absolute terms.
A policy implication of this is that when we look at things like trade adjustment assistance it might be the case that it would be unwise to make this assistance "temporary." More permanent wage subsidies may be more necessary to maintain the political feasibility of free trade. Whether taxpayers will foot the bill is an open question.

The Gains from Trade to Britain

The article, "Collateral Damage," from the Economist, reinforces the argument that the gains from trade are large to Britain, overall. A summary of the empirical evidence by Nick Crafts pegs the growth effects of the UK's membership in the EU estimates the growth effects of membership in the range of 8-10 percent. Importantly, these growth effects almost completely ignore the gains to consumers.
The article from the Economist also reinforces the flip side to trade, which is that the gains from trade are very unevenly distributed, and even leads to some regions, sectors, firms, and individuals losing out from trade. Most research supports the claim that employment and wages have suffered for manufacturing workers in the UK. Moreover, there have been impacts to mental health, and the UK has not done well to mitigate the effects of globalization through trade adjustment assistance. 
We will discuss in class how under certain "fairly reasonable" assumptions, free trade will lead to greater aggregate welfare than the alternative of highly restricted trade or autarky. However, the standard trade model we will start with, and even the Ricardian model we will continue with in Chapter 2 of the textbook, may mask the distributional consequences of trade. In Chapter 3 we will see some of the distributional consequences of trade in the short run with the "specific factors" model, and we will see how some of these consequences may persist in the long run with the Heckscher-Ohlin model in Chapter 4.

CAFTA turns 10 (...almost)

This coming June marks the 10^th 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.

 

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 )

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.