Impacts of International Trade

International trade has the potential to greatly improve a countries welfare. Whether its through imports or exports, when a country trades they are statistically better off than those who do not. Trade promotes economic growth, efficiency, technological progress, and what ultimately matters the most, consumer welfare. According to the US Congress Joint Economic Committee, international trade has raised the average American's annual household by $10,000 or more. Trade also creates competition among businesses that create the same product that is being imported. This results in a reduction in price which allows consumers to buy more of the product. Trade not only benefits consumers but producers as well. According to the US Chamber of Commerce, 41 million jobs depend on international trade.

On the other hand, the grass isn't always greener because trade can also lower the real wage of a countries workers. By importing a cheap product, the real wage of workers domestically producing that product can decrease. This will only happen if the wage effect is greater than the consumption effect. In order for a household to have a net welfare loss, the decrease in wage must outweigh the increase of consumption. According to the specific factors model however, labor is able to move among industries. This means that those workers can find other work in industries that don't import a specific product.

International Trade and its Effect on Household Welfare

International trade reduces real wages in certain sectors, when that sector is a competitor to the imported products in a certain country. This reduction in real wages results in a reduction in income, therefore a reduction in consumption. However, in the presence of trade, imported products in that sector may be cheaper for households to consume, thus mitigating the loss of income felt by workers in that sector. The paper I have chosen to discuss is a study of how households can benefit from international trade as it lowers the prices of consumer goods, even in light of the unfortunate loss of income for some.

The author talks of many findings about how households are affected as consumers and producers in terms of international trade. Depending on the industry in which the households are “producers” they could experience many welfare gains from international trade. However, if the household is a worker in the local sector for the imported good, then their welfare effects will be determined by the reduction in price of imported good as it relates to the reduction in income. The article estimates that, in most cases, the consumption effect is larger than the wage effect. Meaning, if the reduction in consumption price is greater than the reduction in income, the household should experience net welfare gains. The author also found that geography can play a role in determining the consumption effect. Rural households may not experience as much of a reduction in price as the urban households do, since they are further from the trading centers.

To fully understand the income and consumption effects on the welfare gains and losses, we must first decide if labor is able to move among industries. In the case where labor is able to freely move between sectors, it is likely that international trade will always provide welfare gains for both countries, as the wage effect on these laborers should only be temporary as they move to a different sector (maybe the exporting sector or sector that doesn’t rival the imported goods). However, if labor is not easily moved between sectors, it is likely these workers will have to bank on the consumption effect being much greater than their loss of wages to experience welfare gains from the international trade. It is important for governments to keep an eye on this, as tariffs could cause the consumption effect felt by consumers to drop (meaning higher prices), but a countering positive wage effect as consumers move to the more local good. However, if the wage effect by the local consumption of the good is not enough to counter the reduction in the consumption price rising of the imported good, welfare could decrease. Governments must not look to increase their own terms of trade at the expense of their households’ welfare.

Deal or no deal?

The UK's Brexit fears are continuing to grow with Boris Johnson as Prime Minister, as a no-deal Brexit looms. A no-deal Brexit would see the UK leaving the European Union with no trade deals in place, this would, therefore, wipe out any tariffs (or no tariffs) that the UK are currently trading under with over 70 different countries. Brexit is set to take place on the 31st October with Boris Johnson adamant that he wants to leave with no deal in place, meaning that the UK would be free to negotiate and trade with whichever countries they want.
If this event were to take place then we would see many more potential trade deals taking place, such as trade deals that the EU have not exploited or been unable to negotiate deals with countries. However, the priority for the UK would be to replicate the current tariff-free deal that the European Union trades under, this would be crucial for the UK as it would prevent paying taxes on imports and exports for other countries.
If no agreement is to take place, could we see an impact on world prices? Absolutely, as we looked at the terms of trade in class we understand that small countries CAN  NOT change the world price of goods but large countries CAN. The UK may not be large by landmass but it has a huge presence in the world, therefore, the UK would have the potential to alter the world price of goods that they import/export. As they would be creating tariffs on theses goods we could expect to see the price of these goods decrease.
The no-deal Brexit UK would also lose out in certain sectors, for example, automobiles. The huge Nissan plant in the northeast would be the first to suffer, with tougher border restrictions through Europe, higher tariffs and trade costs.  A likely closure of plants in the northeast would cause all sorts of problems, however, we are more likely to see a tariff put in place for automobiles which would decrease the world price. 
In conclusion, if we see a no-deal Brexit, and we see tariffs put in place, then we will see an increase in the terms of trade for the UK, but a decrease in the terms of trade for the trading partners of the UK.

The Effects of Technology in Developing Contries

This week I decided to look at a paper written in the National Graduate Institute for Policy Studies. This paper was written by Yuqing Xing and Bo Zhang and it discusses the issue of technological advances in developing countries and the effects on developed countries with use of the Ricardian Model. I will summarize and explain the results of their research in the remaining of this  blog.

 To determine the effects of technological bias growth in a developing country, the authors assume there are two countries. Country One is developed and specialized in good one(comparative advantage). Country Two is developing and specialized in good two(comparative advantage).  At this point, if these two countries trade, they will both gain from trade and overall welfare will rise in both countries. We have seen this in class with how the indifference curve shifts out. Next, the Authors assumed that Country two has a technological advancement in good one that now allows them to produce both goods. At this point, the welfare of Country One is a decreasing function of the production of good one in Country Two. The authors then made it clear that even before Country Two completely catches up to the production of Country One in good one, the welfare of Country one is falling. The Authors next talk about how the size of the countries can play a part in the effect on welfare in this situation. If Country One is a smaller country and Country Two is large, Country Two can have a less significant advancement and still have a large effect on Country One compared to if Country Two was small and Country One was large. This is because with a larger population it is easier to produce more than if you have a smaller population.

To better illustrate their finding, I will briefly explain why this happens in terms of what we have discussed in class. As one country has technological advances, the PPF shifts out. With this shift they can produce more. When they can produce more, it puts more of the product on the market. If this happens, they can produce enough of the original good to use themselves as well as export while at the same time producing the good they were importing. This would lead to a trade imbalance with the country they are exporting to and lead to a drop-in welfare of that country because the amount exported drops thus leading to a decline in the production, this leading to the production curve becoming closer to the original PPF without trade and the indifference curve shifting to the left.

Overall, this was a very informative paper that shines light upon the issues and threats that a technological advance in developing countries could cause. This could be very useful with analyzing somewhere like India and its effect on the American welfare. An area I believe the paper could have done a bit better in was presenting data. The article brought forth a lot of equations to explain the results, but it didn’t exactly show any physical number or data. I also wish the paper had shown graphs for to better illustrate the results.

References

Xing, Y., & Zhang, B. (2018). Population, Technological Progress and the Welfare of the North-South Trade: A Revisit of the Classic Ricardian Model (No. 18-10). National Graduate Institute for Policy Studies.

Oil futures prices have jumped more than ten percent due to a recent drone attack in Saudi Arabia that has stopped the production of over fifty percent of the oil that comes out of the country. For more information on the attacks, visit https://www.cnbc.com/ 2019/09/20/oil-drone-attack-damage-revealed-at-saudi-aramco-facility.html. The effects of this devastating attack will be felt for weeks, but Saudi Arabia expects to have repairs complete and full production re-established by November. While Saudi Arabia is not the primary oil supplier for the United States, these attacks will have an impact on the short term oil supply and costs in the United States and in markets around the world.  A fifty percent drop in Saudi Arabian oil exports represents an immediate constriction of 8% of the total worldwide oil exports.  For a list of oil exporters and their production levels, see http://www.worldstopexports.com/worlds-top-oil-exports-country/.  The immediate impact to the U.S. markets was an 11% jump in oil prices while the world markets experienced a 13% increase.  Additionally, the immediate loss of 8% of worldwide oil exports for approximately two months is the threat of retaliation against Iran by either Saudi Arabia or the United States.  In response to the attack, the United States is sending troops to Saudi Arabia in hopes of deterring further attacks and has taken the extremely rare step of placing sanction on Iran’s central bank (https://www.wsj.com/articles/u-s-imposes-sanctions-on-iranian-national-bank-11568990939).  Even though many experts do not expect Saudi Arabia to retaliate militarily due to the weakness of Saudi Arabia’s military compared to Iran’s, the oil market is extremely sensitive to world events and any potential for supply disruptions.  Since the United States has become a net exporter of oil, ranking as the eighth largest oil exporter, U.S. internal oil prices will not see as significant of price variations as when the U.S. still imported oil.  However, the increased demand for U.S. oil may lead to additional oil being exported versus remaining in the U.S. market.  This will result in an increase in prices for oil in the United States.  To combat this, President Trump has authorized the release of oil from the U.S. Strategic Petroleum Reserve.  This creates interesting movements when applied to the Ricardian trade model.  Because of the reduction in the global availability of crude oil, the PPF for oil production in Saudi Arabia is going to shift away from the curve.  Supply shocks, the aftershocks of quick reductions supply, have caused prices of products that are intertwined with oil to jump.  Additionally, the non-tangible impact of the fear of further oil supply interruptions has led to speculative increases in oil prices.  By allowing the release of the oil in the United States, President Trump is hoping to minimize the impact to the United States supply curve in order to maintain stable markets in the United States.  The Ricardian model helps us understand the multi-market impacts of this sudden supply reduction as well as the impact on the U.S. markets with the target increase of supply in the internal U.S. market.

Why Europe should take the lead on trade

Europe is a global commercial trading commodity for imports and exports, that being said all or most of their countries are connected, helping imports and exports flow better for trade than say the US due to the lower population of consumers.  The suggestion of Europe being at the center and top of trade could maybe favor most countries than USA or China being the lead on trade.  The article talks about Trumps imposition of tariffs on European steel and aluminum is posing a threat to national security, says Cecilia Malmstrom.  Europeans, specifically Cecilia Malmstrom, feels as though the US should be more fair about trading and not to be accused as a threat to national security.

            After a few altercations in tariff reductions that caused protests against Transatlantic Trade and Investment Partnership between European countries that effected World Trade in 2014.  By this the drawbridge-up tendency has surged having wins for nationalists, Brexits vote from Britain, and Trump being elected. 

https://www.economist.com/europe/2019/09/12/why-europe-should-take-the-lead-on-trade

Weakening Demand for Work Increasing Prices for Final Consumers

Job growth in the United states is slowing, as interpreted from the nonfarm payroll data which came out in the past weeks. What could be the problem? In the subsequent discussion, I’ll cover the topic of labor in the current US environment and relate it to trade policy.

The payroll data reveals the number of hours worked has decreased due to less supply of labor—however, that’s not to say the economy doesn’t have jobs for them. Firms are looking for labor but can’t seem to find the quality they’re looking for. This could be due to firms not giving workers the right incentives to supply labor, or we’re dealing with a bunch of lazy people!

What does this mean for final consumers? Decreasing the labor supply will affect the prices of products because workers will then have a higher aptitude of working overtime—increasing the price of the product. In applying the Ricardian model, the price of a product is MPL • Ḹ = P. In a competitive market, wages are equivalent to the output of a worker. Firms hire workers until the value of one more hour of labor is equivalent to the amount of a good produced­ (from econ textbook). Let’s assume that the law of diminishing marginal productivity applies, i.e., marginal productivity decreases as production increases. If this were the case and they used less workers—with hours worked remaining constant—those workers’ outputs would be marginally less than if they hired more workers. This then increases the product prices because employers would pay marginally more for less output. In other words, if the workers are overworked, and fatigue causes them to be less efficient, they won’t produce as much.

In the sectors of retail and nondurable manufacturing we see this happening in the greatest scale. To reduce the effects of these two sectors we can rely on trade. If there are people leaving these sectors (either not working or switching sectors) then there would be no worry of negative trade effects. Employers could entice them to move to a different sector in which a greater allocation of resources can supply excessive output which the US can trade. This could be incentivized by export subsidies. However, this would worsen the TOT because the price of the exports would decrease--although it might get some talent working again.  

In conclusion a decrease in the average hours worked over a few sectors should, by applying the Ricardian model, predict that consumers will see a rise in the price of goods, resulting from less labor supplied. This, most likely will be passed onto final consumers in a couple of sectors which showed a decrease in the average hours worked this past year: retail and nondurable manufacturing. If this increases world trade due to government incentivized sector switching, then consumers will see a greater increase in prices because the goods exported will cost more domestically. All-in-all, consumers will have to break the bank or break the economy (save more).

Boston Tea Party and its Effects on Terms of Trade

Rather than looking at a trade war that is currently happening, I would like to look back at the night of the Boston Tea Party in 1773 and see how the colonists actions had effected not only Massachusetts terms of trade, but as well as the rest of the colonies and Great Britain. To understand the actions of the colonists, you have to know the events leading up to that night. Great Britain had been forcing all vessels leaving the Boston harbor to have a pass. So not only did Boston ships have to pay a fee to leave the harbor, but they also had to pay an import tax on any goods that were coming in from Great Britain such as alcohol and even on slaves.

These tariffs hurt the colonies economies because they were forced to have lower prices for British goods while still having higher prices for every other colony in order for them to have net growth. Terms of trade is defined as the relative price of exports in terms of imports. So, since more money is leaving the colonies than is coming in, then the terms of trade is less than 100% and therefore not ideal. This was good for Great Britain for a while until the colonies got fed up with what they called "taxation without representation".

This would eventually lead to the Boston Tea Party. The result of this was the complete shutdown of the Boston Harbor until all the tea was paid for. This placed an embargo on any export coming out of Massachusetts. This backfired in a way on Great Britain because by closing this port, it caused the supply do decrease and as a result, prices would have been raised. Rather than hurting the colonies' terms of trade, the embargo was helpful because the price of exports increased while the price of imports stayed the same. For Great Britain, although they controlled what the colonies traded, their terms of trade was hurt by this act as well. The price of their exports was not increased as much as the price of their imports causing their terms of trade to decrease.

Tariffs and Effects on Terms of Trade

To follow up with a post by Trae Shubat last week, I would like to talk about the China trade war and how it is affecting the American consumers as well as the terms of trade for the United States and China. A recentlypublished article discusses the new round of 15% tariffs that went into effect on $112 billion of Chinese goods will be affecting school supply shopping for years to come. Of the many, the tariffed imports include pencils, crayons, sneakers, overcoats and windbreakers, calendars, and ball-point pens. This effect of the tariff, though the impacts won’t be felt until next year, will be a big dampener on American parents’ already tight back-to-school budget. Economists from the Federal Reserve bank of New York even predict American Families will spend about $831 extra annually due to the tariffs on Chinese imports.

To illustrate how these tariffs have impacted the terms of trade and the two countries welfare, I will use the U.S. import (school supplies) and the U.S. Export (medical instruments). In a perfect world between the U.S. and China, the U.S. would produce medical instruments along its PPF, its consumers would consume medical instruments at a point, above the PPF, along the income line. The right triangle between the utility maximizing point of consumption and the point of production would form a trade triangle showing how much school supplies need to be imported and how much medical instruments are able to be exported. In this scenario, we assume China has the inverse of this, as they are importing medical instruments and exporting school supplies. In a perfect world, where no tariffs exist, China and U.S. are both well off, as we are both able to use the income, we get from our exports, to pay for our imports. The problem is, when relative prices of what the U.S. imports rise, there is a worsening terms of trade effect and a worsening U.S. welfare, because as the income line becomes more horizontal, point of consumption gets closer to the PPF, and the trade triangle gets smaller. Tariffs restrict trade, and when tariffs are put on our imports from China, the prices will rise and the U.S. is not able to reap the benefits from free trade.

Another factor affecting the U.S. terms of trade would be import-biased growth in China. The U.S. China trade war with tariffs has caused China to retaliate against the U.S. and grow in domestic production of what it imports from the U.S. To use our example above, say that China has decided to produce more medical instruments, thus decreasing its production of school supplies. With the increase in relative supply of medical instruments, the world price of medical instruments declines. This will also increase the world price of the school supplies, already being tariffed, as the relative supply has decreased. These factors cause a negative terms of trade effect on the U.S, as the price of its exports goes down and the price of imports goes up. China will be still be realizing some sort of gain from trade, as it is still exporting, but with the high prices of its exports and the tariffs, it is not the most optimal trading situation for them.

Latest tariff hikes kick in, and U.S. consumers will likely see higher prices

            I am sure that all of you are aware of the trade war happening between the United States and China. A recent report claims that more than two thirds of Americas consumer goods imported from China face a tariff. Many companies have come out and said that these tariffs will be passed onto the consumer. A recent study done by JP Morgan found that it will be costing consumers over $1000 per household (Associated Press, 2019). Trump has announced that the already existing tariff of 25% on some goods will increase to 30% in October (Associated Press, 2019). Also, in December he will impose another round of 15% tariffs on 160B worth of imports and China has announced that in December it will apply tariffs on 75B worth of goods.

I have decided to take the time to examine what this mean by applying it the Standard Trade Model that we are discussing in class to see the effects of a tariff on supply and demand. With the 15% tariff on many consumer goods this will of course mean that the internal price of these goods will rise. As the relative price of these imported goods increase, this will cause the isovalue to change, this causing US companies to focus more on the production of goods that currently have tariffs on them from China. As US companies do this, the supply of goods they are currently slowing production of will drop as they focus more on the production of goods that have tariffs. As this drops and consumers see the price rising of the tariffed goods, demand rises for the goods that are not tariffed. As supply drops and demand rises, we get a price hike. So, with imposing these tariffs, not only will the price of the actual tariffed goods rise, the price of non-tariffed rise as well. Another area that must be noted is the effect on American exports. As American production changes in accordance with the current tariffed goods, production of goods that are typically exported drops as producers are now producing the tariffed good and selling domestically. This along with China hitting back with tariffs of its own would cause a drop in US exports because as Chinese see the price of the American imported good they want rise, they will stopping buying as much and produce more domestically. Please keep in mind this example is ignoring many other factors and is just a basic application of what we are learning  in class.

With this said, I really hope that China and Trump are being honest when they say that they are open and willing to negotiate this September before even more tariffs take effect. I personally think this will be tough because neither of them is willing to back down. America has a very large trading deficit with China as they are making a killing off us and we are getting the short end of the stick so I do understand where the President is coming from, however where will it stop if China will not give? Is he right when he says this will be best in the long run? Is it worth it for consumers to take a hit now? Hopefully they can come to an agreement soon before this gets worse.

References

Associated Press. (2019, September 1). Latest tariff hikes kick in, and U.S. consumers will likely see higher prices. Retrieved from https://www.marketwatch.com/story/latest-tariff-hikes-kick-in-and-us-consumers-will-likely-see-higher-prices-2019-09-01?mod=mw_theo_homepage