US, EU considering world's biggest free trade pact

 U.S. and European officials are in talks to join together to create the world's largest free trade agreement.  The agreement would help boost both economies, but it is just in the preliminary stages right now.  Negotiations could begin as early as next year.  Two issues that are currently holding negotiators back are the EU's carbon trading scheme that could penalize airlines for not meeting EU standards, and also the EU restrictions on genetically modified foods and pesticides.  US labor unions are supporting this deal because the European social welfare and the environmental standards are better than those in the US.  They favor a trade agreement with the EU more than they would a developing country because American workers would be at a competitive disadvantage due to the lower wages and inferior labor standards in those countries.  In five years, this trade agreement could add up to $180 billion to both countries' economies.

I think it would be a good idea for both countries to keep moving forward with this deal.  It would help both countries when they are both struggling with their economies.  It says that it would help the US a little more than the EU, but both can use all the help that they can get.  I also think that since the EU has restrictions on genetically modified foods and pesticides that it could help make natural foods more affordable in the US and make it easier for Americans to eat healthy.

http://www.usnews.com/news/politics/articles/2012/12/11/us-eu-considering-worlds-biggest-free-trade-pact

Senate Passes Russian Trade Agreement

This article discusses how the senate agreed to pass a Russian trade bill that is expected to assist the United States in our struggling economy. Despite slow growth in our domestic economy, if Obama signs the bill then most analysts affirm that there would be a boost in American jobs. This is not the only benefit for the creation of jobs, but would also expand new markets and U.S. exports of goods and services to Russia would also increase and is expected to double over the next five years. This is a great chance for us to expand our economy and would greatly benefit American exports. Although many trade restrictions were eliminated between the U.S. and Russia, the main concern of this bill was condemning Moscow for human rights abuses. Moreover, this has infuriated Russia because the our government will freeze their assets and deny Russians visas if there were further implications of human rights abuse. This past summer Russia joined the World Trade Organization which was also beneficial to the United States because Russia then lowered tariffs for other member countries. As we have learned in class, by eliminating tariffs and quotas, or in this case lowering them, will decrease the amount of deadweight loss and increase consumer surplus. Personally, I believe this is great news for our domestic economy, but will come at a hefty price to Russians because they will ultimately lose a lot of revenue with increased imports. Not to sound selfish, but the fact that Russia has one of the strongest economies as of today, I believe they can ultimately suffer a small loss in export revenue. 

 http://www.nytimes.com/2012/12/07/business/global/senate-passes-russian-trade-bill-with-conditions.html?_r=0

The Solar Panel Industry

The solar panel industry is a very competitive market. The US as well as China see this industry as a valuable thing to have for different reasons. This lead them to a trade war with both sides passing tariffs and subsides in an effort to get an advantage over the other. The result is very cheap goods which is good for whoever is buying them but not so good for the 2 governments and the producers who have gone into debt to produce them.  It is this trade war that lead to prices being so low and it is irrational. Both countries should stop all government help to the industry and let free trade do its thing by letting markets pick winners and losers.


http://www.nytimes.com/2012/11/08/business/energy-environment/us-affirms-tariffs-against-chinese-solar-companies.html?_r=3&

Chinese Shop Abroad, Buying Luxury Products

The Chinese luxury buyers are the major group to help the bullish performance of the U.S. and the Europe luxury market over the past couple years. According to the report on China's luxury market in 2011 says China's luxury market is worth than $16.03 billion, is growing by about 25% a year, and soon replace Japan as the top luxury product consuming country by 2015.

On the crazy Black Friday in the U.S., you may notice that there are lots of Chinese consumers staying in line and waiting for buying luxury products at a cheaper price. Now, more and more Chinese luxury buyers go abroad, especially go to Europe . Chinese shoppers aren't spending money the same way they once were.

As shown in the article, "the Federation of the Swiss Watch Industry figures that in September's the total values of Swiss watch export was 2.7 percent lower than in the same month a year earlier in 2011 The biggest downturn in sales came from China, where sales are down around 27 percent, while in Hong Kong sales were down 19 percent.""Chinese payment processing company UnionPay recorded foreign transactions were up 33 percent from a year earlier, which is a sign that Chinese are making more and more luxury purchases abroad "

The export data of September show that the worst down of the whole luxury industry export not only just the Swiss Watch Industry, and the weakened Chinese luxury market. It has been cause by the China's export tariffs, product pricing strategies, Chinese desire of luxury goods make the huge difference on the prices of the same product in two different countries. "Sometimes in excess 300% up to four-fifths of Chinese luxury goods consumption reportedly takes place overseas", according to Why Are Luxury Goods So Expensive In China.

"Louis Vuitton's Speedy 30 handbag, for example, retails in China for 5,750 yuan (US$907) but costs US$763 in Hong Kong and US$632 in France. A 30 ml bottle of Estee Lauder's Advanced Night Repair Synchronized Recovery Complex sells for 1050 yuan (US$165) in China but for just US$52 on the company's official American website."

High duty is the major factor that keeping the luxury product at a much higher price than other countries. "According to HSBC's China Luxury Tax Report, there are three types of taxes on imported luxury goods in China: consumption tax, VAT and custom duty. For example, the current consumption tax, VAT and custom duty for cosmetics are 30%, 17% and 10%, respectively, which are high compared with elsewhere.""In China, imported gold, silver and jewelry attract a duty of 10 percent. Clothing and watches are levied at 20 percent. The highest tax rate is for cosmetics and liquors, 50 percent."

Now, very few Chinese will buy luxury product in China unless they are very rich and don't care about the huge differences of the price. Since the prices of luxury product in the U.S. and Europe are much lower than China, Chinese have spent lots of money on luxury goods when they go abroad. And then, the money goes abroad,too.

In conclusion, when a country put high duties on a imported good, it will hurt the country itself. There is not much possibility and not much help to reduce the duties. What China should do is to have its own luxury industry and luxury brand culture.

Source:

Luxury Watches and China's Slowdown
Written on November 1, 2012 AT 9:44 AM BY ADMIN

http://www.jewelryne.ws/luxury-watches-and-chinas-slowdown/

Why Are Luxury Goods So Expensive in China?
http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1502&MainCatID=15&id=20120321000001

Trade Deal Between U.S. and Europe May Come to the Forefront

There is a very promising possibility that a free trade agreement between the U.S. and Europe may be coming soon. While the U.S. and Europe are already on fairly agreeable trading terms, this has the potential to make trading between the two countries even better. Thus far; it was said that no one seems to believe that its a bad idea, and it has been talked about for some time now. However, because the two countries already trade well, they have been busy making agreements with other growing countries instead. Now it seems that it will finally be a serious topic that will make progress, and is coming closer to reality than every before. 

Even though having a free trade agreement will help both the U.S. and Europe, deciding on the terms and conditions of a free trade agreement, and getting the majority to agree on a position is not easy. The trade agreement between the two countries is going to take time. Some markets are worried that the free trade agreement will leave them out; for instance some of the agriculture groups in the U.S. are not allowed to export genetically altered corn or soy products or sell cheese with the name Parmesan, to Europe. However, everyone cannot always be made happy, and the free trade agreement will help many. The two countries are hoping that it will help to stimulate the economies. 

As we discussed in class, free trade is a good thing for the majority. Having free trade between Europe and the U.S. will make trading even easier, and it will help the economies, especially since free trade doesn't cost taxpayers anything. This is something that Europe and the U.S. should really work to get passed, and put into practice. There are sure to be many grateful businesses as well as individuals whom will benefit from this new agreement. 

http://www.nytimes.com/2012/11/26/business/global/trade-deal-between-us-europe-may-pick-up-steam.html?pagewanted=2

Skills Don't Pay the Bills

In this article it discusses how factories are in need of skilled workers to do the jobs that are there. Factory work is not like it used to be; before, one could get a good paying factory job right out of high school, now one needs a college education to work in the factories. The education required to work the machines that are in factories today include: metallurgy, physics, chemistry, pneumatics, electrical wiring, and computer coding. These are all skilled jobs that require college to get to, and yet the pay is only $10.00 an hour. The factories cannot afford to raise their wages in order to stay competitive globally, and potential employees go else where with there skills to receive higher wages for their work. 

The average factory worker at this time is 56 years old. This is a very serious problem; if the factories cannot bring in the workers they need then they may be forced out of business (causing even more jobs to be lost). It would be difficult to move the factories overseas due to the skill required to work the machines. If the factories in the United States are to survive they need to find a way to raise wages, yet be competitive in the global market. If this means finding ways to cut overhead costs, or perhaps making it easier to man the machines, then they should look into it.

These factories could be a way to help lower unemployment, with the jobs that they need. The question is how can we help both unemployment and the factories keep in the global market without leaving? Perhaps the answer lies within the past. If everyone else around us is still in the developing stage, then perhaps we need to find ways to lower the skill sets needed, but without lowering our standards, and technology (perhaps we need to make the technology even better). This way we can compete in the global market now, as well as be one of the best in the market later on when everyone else is at the stage we are at now. If the United States wants to help with unemployment then the avenue of the factory may be the way to look. There is a lot of work involved in a project like this, yet if it could be successful, the reward has the potential to be great.

http://www.nytimes.com/2012/11/25/magazine/skills-dont-pay-the-bills.html?pagewanted=1&_r=0

Smoot-Hawley Tariff

How many of you went shopping on Black Friday looking for shoes? I did! Ever wonder why shoes are so expensive in the US? It is because there is a depression era tariff on imported shoes that has raised prices by as much as 67.5% for the last 80 years. It is called the Smoot-Hawley Tariff. In an economy like this one it does not help American families to have to pay more for essential goods. While some very specific niche shoes are still made in the US a majority of shoes are not longer produced domestically, although these manufacturers still employ many US skilled laborers in marketing, research ect. The tax is also regressive so more expensive designer shoes have a lower tax then mass produced sneakers. The text discusses dumping tariffs in which a foreign firm is exporting goods at a price below its average cost of production. The home firm will then respond by tariffing imports and are calculated as the difference between foreigns local price and export price. Is this what is going on here? Raising prices by 67.5% seems a bit excessive if this was the case in my opinion. What do you guys think? Is this protecting or hurting the typical American consumer?

KRUEGER, B. (1012). A shoe tariff with a big footprint.WallStreet Journal , Retrieved from http://online.wsj.com/article/SB10001424127887324735104578123523795505336.html?KEYWORDS=tariff

How much does it cost to save a U.S. worker?

Last month we spent a long time to analyze tariff, quota and subsidy. Let’s talk about a real case about tariff-----“tire safeguard case”.

The U.S. International Trade Commission suggested to levying Chinese exports tires for three consecutive years to 55%, respectively, 45% and 35% ad valorem special tariffs on June 29, 2009. According to the procedure, Sept. 4, the Office of the U.S. Trade Representative submitted the final recommendations of the report on China's exports to the U.S. tire special safeguard case to U.S. President Barack Obama. On September 11, Obama agreed this suggestion.

 

American claimed that Chinese tires disrupted the U.S. market. In addition, it was Chinese tire exports caused the U.S. tire workers unemployed. Moreover, Consumer tire imports from China, the volume increased by 215%, and the amount had a 295% growth from 2004 to 2008. Chinese tire damaged the tire industry in the United States. By imposing this sanction, employment in the U.S. tire industry grew by 1,200 jobs (Gary Clyde Hufbauer and Sean Lowry atthe Peterson Institute).

 

However, it also brought side effects. How much did those 1,200 jobs cost? About $1.1 billion and that’s about $900,000 per job. After we learned the theory in class, we knew that it is rational and normal to lose money and efficiency if you want to set a high tariff to protect your industry. In short term, it did help the workers. But as soon as this tariff expired in 2012 US workers would lose their jobs again.

 

What Chinese did to fight back? On September 13, the Ministry of Commerce in accordance with Chinese laws and rules of the WTO started Anti-dumping and countervailing review process of automotive products and chicken products imported from U.S. Just like what we played in class most people chose to be hawk rather than dove. Nobody can be better off from this game.

 http://www.forbes.com/sites/kenrapoza/2012/01/25/obamas-half-truth-on-china-tire-tariffs/

http://www.ixgw.com/2012/09/us-china-tire-special-safeguard-measures-expire-a-lose-lose-worth-the-candle/

Gloomy Forecast for Russian Suppliers

Russia's entry into the WTO in August has some economists worried, as pointed out by Vladimir Putin last Wednesday. For years, Russia has used import duties to protect its industries from lower world prices. While consumers will benefit from lower-costing imported goods now made available, firms that have been able to succeed through artificially high prices and a lack of competition will now be vulnerable. This isn't exactly great news for some consumers, however, as their jobs may be at risk. Russia has managed to maintain a lower unemployment rate than the US that has been continuously falling. However, that trend may change as Putin mentions the fact that many of Russia's cities are specialized in one single industry. Worker mobility across sectors is therefore limited.

Putin goes on to say that they need to take measures to prevent the employment rate from falling. My question is what can Russia do to prevent this without using subsidies or tariffs that violate WTO rules?

http://www.chicagotribune.com/news/sns-rt-us-russia-putin-wtobre8ak14w-20121121,0,4780718.story

http://en.ria.ru/business/20121121/177640103.html

Natural-Gas Exports Could Lift U.S. Trade and Economy

Demand for liquified natural gas in Europe in Asia is very high, but the price for it is $10 to $16 per million British thermal units.  It is much cheaper in the US right now at 3.70 per million British thermal units.  The problem however is that the US does not have the needed facilities to liquify gas for exports.  This presents a good opportunity for President Obama to add billions of dollars to the US economy, create thousands of jobs, and narrow the trade deficit.  The price of natural gas in the US has fallen so low that many companies no longer think of it as profitable to drill, and the number of drilling rigs gas fallen by almost half this year.  If the US starts exporting it, it would drive the price up a bit and make it more profitable for companies.

Even though drilling for natural gas poses the threat of contaminating land and water, I think it is a good idea to start exporting the liquified natural gas.  It could help boost the economy and also help those looking for work by providing about 60,000 long term jobs and around 8,000 temporary construction jobs for the new facilities.

http://www.bloomberg.com/news/2012-11-25/natural-gas-exports-could-lift-u-s-trade-and-economy.html

A FTA Between South Korea And Turkey

Recently I read a news online that Turkey and Korean signed a Free Trade Agreement on August,2012[i], which will expand bilateral trade between the two countries.

However, it seems that this FTA is not likely to bring significant benefits to the Korean economy. According to the report by the Korea Institute for International Economic Policy, an FTA with Turkey would translate into a 0.01 percent increase in South Korea's gross domestic product in the short term but tariff tax income will decline by 26.44 billion won ($24.25 million) on average every year.[ii]

As we learned on the class, large country gains from tariff in the free trade environment since when the increase of the tariff income outweighs the deadweight loss then the country gain in the net effect. Apparently Korea is a large country so it lost its benefit in tariff income by this FTA. In another hand, a free trade agreement is a good policy to prevent tariff war between countries and promote the expansion of trade. At the same time, home consumers benefit at the expense of home producer’s profit since the price of products will decrease and home producer will be faced with a more competitive market environment.

---

[i] http://www.arirang.co.kr/News/News_View.asp?nseq=134445&code=Ne2&category=2

[ii] http://www.koreatimes.co.kr/www/news/nation/2012/11/120_124465.html

Analysis of the U.S. and European Union Dairy Export Subsidies (make-up post)

We know from our class discussions that export subsidies cause losses in consumption and production efficiencies for small countries, and for large countries, they cause both losses in addition to losses in tax revenue for the government. When looking at the recent U.S. dairy export subsidies, numerous member countries of the World Trade Organization claimed that the subsidies were a 'dangerous retreat' into protectionism and that they would cause subsidy wars. Well, the term 'subsidy war' is not very accurate because unlike a trade war with an optimal tariff, no terms-of-trade benefits are realized by any countries after export subsidies are put in place. Thus, assuming the member countries in the WTO understand the negative consequences of an export subsidy for the U.S. , they would have less of an incentive to engage in more retaliatory subsidies against the subsidizing country than it would in a trade war with an optimal tariff. This is mainly because with partial equilibrium, an export subsidy would hurt the U.S. more than it hurts each of the small WTO countries. Thus, even though the dairy subsidy makes everyone worse off, it would actually make the small countries relatively better off than the U.S.. In criticism of the dairy subsidy, Peter Grey, Australia's WTO ambassador, said "Subsidy wars only drive prices even lower, thereby delaying economic recovery further. They punish those trying to compete without the help of subsidies, and particularly damage unsubsidized farmers in the developing countries, jeopardizing their agricultural production, food security and their most competitive export sectors". Grey is right about subsidies delaying economic recovery further, and yes, subsidies (or 'subsidy wars') do drive down the world price, but only when a large country implements them. However, domestic prices rise above the world price by the amount of the subsidy, so Grey is only partially correct about subsidy 'wars'.

At the heart of the U.S. dairy subsidies is the Dairy Export Incentive Program. The DEIP was designed within the Department of Agriculture (USDA) to help dairy producers sell at prevailing world prices by giving cash handouts to producers as bonuses. These bonuses for the dairy producers would have been beneficial in any way other than in the form of export subsidies. Thus, in the case of dairy export subsidies, or any other subsidies for that matter, government handouts, contrary to popular belief, do not improve welfare, and they do not even improve the welfare of the producers at the government's expense/demise, but they are lose-lose situations for everyone involved. I can't think of any other instance where a bonus could actually HURT you, wow. So why did the European Union do the same thing in implementing dairy export subsidies? Perhaps because officials within its CAP (Common Agricultural Policy) felt pinched by the weakening demand for dairy and because the debt crisis was heating up. What Europe's CAP has essentially done is disproportionately put an excessive amount of attention towards the dairy sector while diverting more attention away from other sectors like pork and sugar beets. Even with all this new popularity, ironically enough, European dairy farmers aren't happy for the most part because the subsidies didn't help enough and in part because of milk production limits contained within the dairy subsidy rules. All in all, the U.S. and European dairy export subsidies have limited  the options that producers and consumers have in terms of maximizing their welfare and they have allowed U.S. and European governments to distort how competitive dairy producers really are.

Sources researched:

   http://en.mercopress.com/2009/05/28/us
   http://www.fas.usda.gov/excredits/deip/deip-new.asp
http://online.wsj.com/article/SB125594282440993761.html

Cigarette Consumption Tax

In April 2009, Obama signed a 62 cent consumption tax increase on cigarettes.  This tax increase was not done to decrease the consumption of cigarettes, but to raise government revenue.  As we have learned in class, the introduction or increase in a consumption tax will reduce production of the good which will increase its price.  The increase in price, however, do not go to producers, it goes to the government. This was the real purpose behind raising the consumption tax on cigarettes.  They wanted to raise funds for the expansion of healthcare for children.  A positive side effect was that the number of smokers decreased, but the spending on cigarettes increased $18 billion in three years proving that a consumption tax does indeed decrease the quantity bought, increase the price and increase the government revenue.

The Strict U.S. Sugar Quota: Supporters and Opponents and Why It Isn't Working

Sugar protectionism has been a contentious issue in the U.S. since close to the beginning of our nation's history in 1789. The sugar quota, which was established in 1934 via the first Sugar Act, is no less contentious. We know that quotas are bad because they are limit consumer choices, raise prices consumers pay and lead to more volatility in the market, so let's look at who supports and opposes the U.S. sugar quota, the degrees to which they support or oppose it, and how high the opponents want the quota raised numerically. One strong supporter of the sugar quota (specifically a lower one) is the federal government (specifically the Department of Agriculture) largely because of its own sugar program but moreover because the quota is effectively tax revenue for it stemming from higher sugar prices domestically due to the limited sugar quantity and the fact that tariffs (although low within the quota amount) are paid on imported sugar. One of the large incentives for the government that stems from the production is quota rents, which we discussed in class. In this case, the government does get quota rents in the form of specialty sugar certificates, which are effectively quota licenses. U.S. sugar farmers and the American Sugar Alliance also support a relatively lower quota (although not as strongly as the USDA)  because they don't believe that the supply of sugar is facing a shortage, and because of their general belief that the USDA's actions have shown that the U.S. sugar program is feasible. Food and beverage manufacturers are the leading opponents of the quota and want the quota's impact to be lessened by persuading the USDA to raise the sugar quota amount. Their primary reason for opposing the quota recently was the fact that U.S. sugar supplies were down by 2.8% last year. They recommended that the quota amount should have been increased by 961,000 tons so as to provide a comfortable supply for sugar consumers. The Sweeteners Users Association also opposes the quota and this year it wanted the quota amount increased by between 728,000 and 961,000 tons because of its reasoning that an increase would help to improve sugar stocks in U.S. markets.

After more thought about the issue, I came up with this question: Why is the sugar quota not working?. Well, the sugar quota is not working because the sugar industry is not an 'infant industry' in the U.S. since it was active since around the time of our country's beginnings in 1789 and prior to that point in time. Also, large domestic sugar producers have not represented the interests of consumers or many investors, but have lobbied the government for minimum prices and lower quotas through special interest groups instead. Thus, since the quota is still in place, making the supply of sugar more limited, they have directed a substantial amount of capital away from smaller sugar producers, and thus have limited the small sugar producers' ability to raise capital from a broader range of investors. This distortion of capital movement that the quota has created has allowed a small influential number of sugar producers to keep the labor force in the sugar industry low. This, in turn, keeps the amount of capital low and thus holds down the net welfare in the U.S.. While many investors view an increase in the sugar quota as  a precursor to more volatility in the market, sugar prices are only more volatile with a lower quota left in place than the volatility that would result from just a flat across-the-board tariff. As we can see, quotas create even more instability than tariffs, and the tariff-based nature of the sugar quota added onto the quota makes for an especially negative combination. The sugar quota, if left unchanged from now on, would take away potential tax revenue that the government would have been ensured to collect had a tariff, and only a tariff, been in place. Thus, in practice, quotas and tariffs are not equivalent in practice, but the two compounded together only makes problems worse.   

Sources Researched:

http://www.reuters.com/article/2012/03/28/usa-sugar-quota-idUSL2E8QS1SO20120328

http://online.wsj.com/article/SB10001424052702303816504577314034112332296.html

http://www.tampabay.com/opinion/columns/end-the-import-quotas-on-sugar/1081947

http://edis.ifas.ufl.edu/sc019

A Tariff Battle In Solar World

Yesterday, the U.S. International Trade Commission made a final arbitration   that have identified the solar panels and cells and other modules imported from China as a category of goods that make substantial damage to related industries in the United States. The U.S. anti-dumping and countervailing duty ("dual") tariff will be levied on such products.[i]

‘Anti-dumping Duty’ is  protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. In the United States, anti-dumping duties are imposed by the Department of Commerce and often exceed 100%. They come into play when a foreign company is selling an item significantly below the price at which it is being produced.[ii]

As we learned this week from the textbook, when we tax the import goods, the solar panels and cells, since the amount that we import is remarkable we can assume U.S. is a large import country, the supply of solar products in China will decrease because of the higher cost. The world’s price will increase. The solar producer in USA will produce more solar products to get profit while the consumption decreases. In this way this anti-dumping duties protect the Home country’s polar industry so that save domestic jobs. In addition, the reduction in the amount of imports led to the reduction of foreign exchange payments which can also improve the U.S. international trade balance of payments.  However, a tariff war could break out if China retaliates for the tariffs. 

---

[i] Sourced fromhttp://www.oregonlive.com/washingtoncounty/index.ssf/2012/11/post_25.html

[ii] Sourced from  http://www.investopedia.com/terms/a/anti-dumping-duty.asp#ixzz2BhMAO8CO

Opening Trade with Latin America

In recent presidential debates, Mitt Romney has discussed in his plans as president that within the first 100 days in office that he will launch vigorous public democracy and trade promotion effort with Latin America.  What economic benefit will this give the United States?  What impact would it have on the United States?  Is this something that the United States should be considering no matter which one becomes president?

I can see how it would allow us to trade products at a closer locations (in turn reducing cost of transporting) then what we may be currently doing if trading at a further location.  This leads to make me also wonder that if we were to choose to trade with Latin America over the current locations would that cause tension/issues with the current location?

Details of Mitt Romney's Plan

US and Latin America Trade: Recent Trends and Policy Issues

Euro effect on world trade

After this big financial crisis that has been happening in  Europe their currency value has been depreciating and that in many ways will affect world trade, because Europe does a lot of trading with many other countries and Europe is a fairly large continent. But the depreciation of their currency does affect all parties involved in 2 ways. Firstly other countries purchasing European goods will be able to get more quantity per good at the same price which has a negative impact on European producers who end up worse of in the trade although they will probably export more. But parties buying European exports will come off with the longer end of the stick and keep buying more because they are getting it a cheaper price so they will keep buying more and more. However European countries trading with each other will see no benefit when trading with each other and possible in some manner will suffer a negative impact on them and even more countries that import to Europe will suffer  because with a weaker Euro they buy less from other countries which will hurt those countries that export to Europe.

Ireland FDI

Ireland, during the Celtic Tiger, experienced a very large amount of FDI from countries across the globe.  After the collapse of the tiger, the amount of FDI declined, but this year, McDonald’s made the announcement that it plans to add 700 jobs to the Irish economy within the next three years.  If three years is considered the short-run, according to the specific- factors model, this inflow of capital should increase wages, decrease the returns on capital, land, and overall increase in the PPF for Ireland.  If three years is considered to be the long-run, according to the Heckscher-Ohlin model, the only change in the economy would be an outward shift in the PPF.  One thing neither of these models takes into consideration is unemployment because both assume full employment. I wonder if there would be similar effects as the model if unemployment was variable.  I would think that there will still be an overall increase in the PPF regardless of the time period. In the short-run, FDI would create an increase in wages only in the sense that it will create jobs and those who did not have an income now will earn one.

http://www.reuters.com/article/2012/11/01/us-ireland-growth-idUSBRE8A01CG20121101

The Differences Between Offshoring and Outsourcing, and Offshoring's Benefits

Outsourcing and offshoring have become important topics of contention in this Presidential election season. A few months ago, President Obama criticized Mitt Romney's campaign for saying that Bain Capital outsourced its services instead of offshoring. While criticizing Romney, Obama said "What Governor Romney and his advisers don't seem to understand is this: "If you're a worker whose job went overseas, you don't need somebody trying to explain to you the difference between outsourcing and offshoring." Here, Obama is implying that the worker learns that outsourcing and offshoring are the same thing by their experience of being laid off due to his/her job moving overseas. On the contrary, outsourcing and offshoring are not the same thing. Yes, offshoring and outsourcing both involve the movement of jobs from one place to another. However, outsourcing is more broad than offshoring. Offshoring is the movement of a business process performed at a company in one country to the same or a different company in another country, whereas outsourcing is an occurance in which a business process is contracted out to an independent organization or outside business unit. President Obama is right in the sense that any differences between outsourcing and offshoring would probably not be relevant to the worker who lost his/her job because regardless, he/she is out of work. Thus, the worker would probably not care what the difference between the two is, or about the fact that there is a difference. As for the Romney side, Romney's senior adviser Eric Fehrnstrom was on the attack, depicting outsourcing as "what the Obama campaign does when they hire an outside telemarketing vendor to provide telemarketing services" and that outsourcing "is done by companies every day. They take functions and they allow vendors to do it instead of handling it in house. Offshoring is the shipment of American jobs overseas. And in that Washington Post story, which the president is using now to attack American companies by name, there are no examples of jobs being taken from the United States and shipped overseas." Fehrnstrom was referring to the Washington Post story which said that Bain Capital invested in companies that pioneered the outsourcing of jobs to low-wage countries. Fehrnstrom is correct in his assessment of offshoring and in his examples he uses to illustrate the difference between offshoring and outsourcing. His implied claim that there has been no evidence of negative effects on the U.S. from outsourcing or offshoring is complimentary to what we learned in class. In class, we learned that offshoring results in an expanded PPF because producers can produce more with the same amount of resources. We also learned that a new isoquant is created above the original income line, and the slope (ratio of low-skill wage to high-skill wage) is flatter; thus the wage ratio of low-skilled workers to high-skilled workers declined. However, output increased along with overall income in accordance with the new isoquant so there are net benefits from offshoring. Another key net benefit from offshoring is the increased demand for skilled workers, and since the U.S. is abundant in skilled labor, it actually benefits. Clearly, Obama makes outsourcing and offshoring out to have negative connotations, while Fehrnstrom points out that the Obama campaign outsources all the time by using outside telemarketing vendors. I noticed that neither Obama nor Fehrnstrom explicitly defined outsourcing or offshoring, which is why I felt that defining and further-outlining them would be important. Ultimately, offshoring is more specific relative to outsourcing because when it occurs, the entity receiving jobs in the different country must be either the same company or a different company. Outsourcing, however, because of its definition, can apply to any business unit or organization within the same country or to a different country, thus outsourcing is more general. Overall, both sides of the Presidential race pose legitimate arguments about offshoring and outsourcing, but at the end of the day, regardless of how much Obama and Romney might speak out against outsourcing/offshoring, they both use and encourage them whether they know it or not.      

Sources researched:

http://content.usatoday.com/communities/theoval/post/2012/06/obama-jabs-romney-over-outsourcing-offshoring/1#.UJHguMXhomU

http://www.washingtonpost.com/business/economy/romneys-bain-capital-invested-in-companies-that-moved-jobs-overseas/2012/06/21/gJQAsD9ptV_story.html

      

A lesson from Japan: Chinese must say no to appreciation

I started to think about something after reading Salazar’s post ‘Do tariffs work?’

 

In 1978, Friedman claimed that lower the tariffs toward Japan could benefit America. However, we saw something worse happened to Japan. Besides the economical issues U.S government concerned about, I think they also wanted to weaken Japanese overall power.

 

Japan's inexpensive and good quality goods earned a lot profit from the international trade. And they acted arrogant in the world to buy assets, such as buying a symbol of the U.S. economy - the Rockefeller Center. US government already felt the threat.  To reverse this situation, the United States and other Western countries asked Japan to appreciate their currency. The Japanese had to promise because the U.S. military presence and political penetration.So they signed Plaza Accord. Japanese economy was severely destroyed, the so-called Lost Decade.

 

This is a really great historical example for China. Japanese recession was because Yen appreciated from 250 to U.S. $ 1 into $ 1.00 about 120. A direct result was Japan's exports greatly reduced while imports surged. However, some experts argue that the sharp appreciation of the yen provides Japanese a good opportunity for large-scale expansion overseas, promote industrial restructuring, and ultimately contribute to the healthy development of the Japanese economy.

 

But this fortunately consequence can never happen to China. Chinese make livings by manufactory. The Industrial restructuring is not that easy due to the current technology standard in China(As we learned in Chapter 5 the effective R&D scientists ratio in China was just 7% ) Appreciation makes countless Chinese workers lose their jobs and may lead to turmoil. As a result,Chinese government will try its best to keep the currency low.

 

China-U.S. trade war would hurt California

 A trade war between the US and China would really hurt California because it exports the most goods to China out of all the states.  They exported $14.2 billion in goods and services to China last year.  California is also the nation's leader in solar jobs.  The International Trade Commission is making a decision whether or not the US solar cell manufacturers is hurt by the imports from China.  There are already tariffs of up to 250 percent on Chinese made solar cells.  The tariffs, however, only protect 2 to 3 percent of the jobs in the solar industry.  California companies have already lowered prices to compete with other energy forms such as natural gas.  They will be hurt even more by punitive tariffs.

http://www.sfgate.com/opinion/openforum/article/China-U-S-trade-war-would-hurt-California-3976011.php

U.S. Oil Boom Upends Nigerian Exports

         To summarize this article, Nigeria’s economy has taken a hit this past year because the United States has increased their production of crude oil. Because of this increase in oil production, we have become less dependent on foreigners for oil which caused us to sharply decrease the amount of lighter-sweet crude oil from Nigeria. This is a major concern for Nigeria because 95% of their exports are oil based and much of their supply was shipped to the U.S.  Moreover, the U.S. has also given licenses to Shell and Vitol to export some of their oil for the first time because supply is relatively high compared with prior years.
          In relation to Nigeria, it could be hard to find new buyers because the relative supply of oil has been increasing because Libya is back on the oil market and many other countries have dominated the industry. With an increase in supply from foreign markets, Nigeria cannot charge higher premiums in excess of cost on their oil which is now $1.70 a barrel compared to $3.65 just a year earlier. We can illustrate this on a production possibility frontier. If oil production is on the horizontal axis and is compared with the other exports on the vertical axis, then I believe Nigeria needs to shift some production to the other industries (moving up along the PPF). It would be beneficial to produce more of other commodities because the world prices of crude have decrease because of an increase in supply. When looking at the PPF, this would be shown by a shift in the price line that has a flatter slope which represents a lower world price when compared with other goods.
          Seeing that Nigeria is the big loser in this trade because most of their exports are oil and the price has decreased, there must be someone benefiting.  Some countries in Europe have been importing Nigerian oil because the prices dropped which has increased Europe’s gains from trade if exports remain fixed.  Another concept comes into play is the Ricardian Model from chapter 2 in the text. Nigeria produces a lighter-sweet crude oil which can be refined easily. On the other hand, many countries have invested in capital and increased their refining technology so that they can refine heavier, sour grades of crude. These heavier sour grades of crude are much cheaper than the lighter sweet based crude from Nigeria. That being said, this technology increase from other countries, decreases the demand for Nigerian crude and gives them less of a comparative advantage because other countries have less opportunity cost when refining oil because it is relatively cheaper.

Why Apple Will Never Bring Manufacturing Jobs Back to The U.S.

On the second presidential debate, CNN’s Candy Crowley asked both candidates “How do you convince a greater American company to bring that manufacturing back here?” President Obama said it is impossible to bring the jobs back because of its low-wage and low-skill. I agree with him.

According to the latest news, Apple opened up its latest Chinese retail store in the capital. The new store is the largest one in Asia, as it is three-stories, which is located at the Wangfujing shopping district, near the Forbidden City in the middle of Beijing. This latest one is the third retail store in Beijing, its sixth one in China. This new store employs 300 staff. Now Apple’s total retail store employees in Beijing is 800.

However, this is just part of employment. In the article we can know that Apple “directly employs thousands of its own workers in China, and about 700,000 assembly workers at manufacturing contractors like Foxcoon put together Apple products.”

The main reason Apple choose China is large labor force and cheap labor. Apple former global supply manager Jennifer Rigoni  said that Foxconn can recruit 3,000 people one night. It is impossible in the U.S. Foxconn workers live in dormitories and suffer tough working conditions including cheap labor. People can't image that how cheap it is. According to the New York Times reported in Jan, 2012, workers in Foxconn factories earn less than $18 daily, working 6 days, 10 to 12 hours a day. Sometimes they work overtime without paying extra salary. In the article, a typical salary is U.S. $400. Its parent company Hon Hai Precision minimum wage is only $138 in Oct 2010.

Another surprising reason I know from this article is that China has many more skilled engineers than the U.S. does because of education system. They can't hire 30,000 industrial engineers needed in the U.S. I don't know why this happen because of education system. However it is true that engineers in China are more efficiency, skillful and work harder.

The third reason is China's relatively weak environmental regulation. China ranked 116 among 132 countries in the 2012 Environmental Performance Index ranking, published by Yale University. According to the U.S. technology website iFixit wrote recently, the other important reason except cheap labor is China has mastered the 95% to 97% of the world's rare earth supply. The iPad manufacturing process need to use a large number of rare earths. Rare earths will result in serious environmental consequences if it is not properly managed. Apple never said what kind of rare earth they used in their products.

As Job Steven said to Obama, "Those jobs are't coming back." Now President Obama said he want high-wage, high skilled jobs.

By David Goldman @CNNMoneyTech October 17, 2012: 2:27 PM ET

http://money.cnn.com/2012/10/17/technology/apple-china-jobs/index.html

Do tariffs work?

Recently China has started to become important topic in the election. Each candidate promising they they will be the hardest on China. They are trying to convince that China is cheating or not playing by the rules and their reasoning for this is that China can provide a cheaper good than our industry but isn't that competitive advantage. By putting tariffs on China's imports really improve our standard of living in this country.

In class an article was presented in class that got me thinking about this question. In this case President Obama a special tariff on imports of tires from China. This looks like a very important step in getting our economy back on track and that is what President Obama and most of Americans think. In reality this is not true. As individuals we are producer of only one good but consumer of thousands and by tariffs only help the producers of that product create inefficiencies in our economy, actually increase unemployment and our standard of living drops. The article states that consumers spent $1.1 Billion more as a result of these tariffs. Money that should have spurred economic growth but didn't. It lead to more unemployment because it created a problem of inefficiency. Since resources are tied up in the production of tires it can't be used in our industries that we are competitive in, our exports and that foreigner buy. 

We have a free trade market which I see it as being if you can produce something at a lower price you should and then introduce it to the market. If the other producer cant match the price he should go into another industry or risk the chance of going out of business. 

I also see a lot of similarities to this to a similar situation that US producers were in back in the 1970s and 1980s. Japan  back then was the one getting accused of unfair trading policies and the US acted in the same way as today. Here I found a video on YouTube where Dr. Milton Friedman talks about international free trade and I agree with him.

Fight Over Tech Worker Visas in Congress

The House of Representatives are intending to increase the number of visas issued for skilled labor such as engineering and science and this has exploded into an election issue for the candidates. Specifically, the idea presented by Republicans is a new type of green card specifically for science, technology, engineering, and math graduates who have received doctorates from US universities. Republicans and Democrats are of course both fighting over this bill as each one wants its own version imposing its own values into the proposition. For example, Democrats have written their own version that is similar but includes a diversity visa program.

We know from class that in general in the short run with fixed capital and land immigration tends to lower wages but while wages fall, specific factors like capital and land rise which in turn increase their rentals. In the long run however firms tend to move around their capital which can change the effect of immigration on both wages and rentals. In fact additional labor may find itself absorbed entirely and the K/L ratio may not change. What do you guys think about this? These points on wages seem to be to be more focused on mass amount of unskilled labor and not small amounts of skilled labor. Will the amount of educated individuals getting these new visas be enough to make a dent in wages? What difference, if any, does it make that these are skilled labor instead of unskilled? According to the Rybczynski theorem immigration will lead o an increase in the output in the labor intensive industry and a decreasing in the capital intensive industry. Would this be the opposite because these immigrants are skilled?

Hughes, S. (2012, September 17). Fight over tech worker visas in congress. Retrieved from http://blogs.wsj.com/washwire/2012/09/17/fight-over-tech-worker-visas-in-congress/

China's Currency Manipulation Facts

Recently a lot of discussion in the news about China has come from the presidential debates and labeling China a currency manipulator. But there are some things to look at before doing such a thing.
First is what we discussed in class that ending this would create a weaker dollar and thus hurt us as well. Manipulating the currency keeps the dollar high so by having the manipulation stop it could have reverse effects on the United States. Second is that China is not the worst currency manipulator. Singapore and Taiwan both manipulate their currencies worse than China. As well as Switzerland and Japan who could arguably be worse than China. There are also countries who aren't as bad as China but still manipulate their currency. So this is more a world-wide-spread issue than just the United States versus China. (below is a table of countries who manipulate their currencies)

Third is that China is getting better by not manipulating it so much. They have let their currency gain value quite a bit in recent years. Fourth is that just calling them a currency manipulator is not going to do anything to make them stop. If we were to pur tariffs on China they would do the same to us and thus be no help. Lastly, the Chinese have shown they sometimes run a pride-based foreign policy. If the United States and the rest of the world want them to do something, they would most likely just refus to do it. So if we are going to call China a currency manipulator we should give them a better idea. So all this talk about getting tough on China and labeling them a currency manipulator is not necessarily a good idea. 

Though at times Americans grow frustrated with the Chinese they are also keeping the dollar high with what their doing and we also partake in a lot of trade with them so it's important we keep positive ties with China and instead od just labeling them a currency manipulator find a way to help them find better ways to have such a trade surplus that they desire. Which in all actuality they have probably tried to do but found this is a good way for them. Either way it's important to start any problems with China by labeling them a currency manipulator.