The Effects on America from the China Trade War

This week I have decided to look at a study that analyzes the effects on American welfare and prices due in 2018 due to the trade war between the US and China. I found an empirical study done by Mary Amiti, Stephen J. Redding,and David Weinstein that was published in March of this year. They go into detail about the effects of these tariffs and what they are seeing happening. Through a few different regression models, they concluded that import protection leads to real income losses. They found  the cumulative deadweight welfare loss to be $7B, additionally, they found a cost of $12.3B to domestic consumers and importers in the form of tariff revenue transferred to the government. They also found that $165B was lost or redirected to avoid tariffs.

As for Prices, they found that the cost of these tariffs have all been passed on directly to the consumer. They also noted a competition effect, this meaning that domestic producers raised prices due to foreign competitors raising prices because of tariffs. After the authors ran a few different regression models and manipulated the numbers, with a few limitations in mind, they found that US prices were 1.1% higher in manufacturing due to these tariffs. They also pointed out a somewhat obvious but important note, that being that the more that is imported by the producer, the higher they find cost to be per product. The explanation they talked about was that with these tariffs, they found that a producer that imports 15% of its variable cost and has to face a 10% tariff, that producer raises its prices by 2.7%.

These effects make sense when thinking about the short term model we have discussed in class. This is because an import will make something cost more at home. This resulting in a home cutting back consumption. The gap between the price paid by foreign and home being the amount collected per unit. After going through the trade triangle discussed in class with parts A-D we can see that this gap is made up of the increase is made up of the increase in producer surplus, government tariff revenue, and net welfare loss. This making it clear that the foreign country lost in this case. This explaining why the consumer price is rising. This model does make it clear that this is hurting foreign harder though. However, this is only looking at one sided tariffs, when looking at a trade war like one that we are currently in, the results may be different and need to be weighed before acting. This shown by this study.

Why There Will be no more winners in the U.S./China Trade War(Blog X)

From the U.S. standpoint of this trade-war against China, if China does not come to terms with negotiating, the US government will raise tariffs on imports 10% to 25% on China.  This would impact China negatively due to the fact that it would raise prices for China consumers.  Many spectators of this trade-war believe, on each side of the spectrum, that the war isn’t about just trade but about economic and technology dominance as these two countries are torn by pride.  From China’s standpoint they are creating higher tariffs on imports of US companies; Apple and Dell, which in turn would create higher prices for consumers in the US.  Basically, this trade-war, is for supremacy and is hindering each other’s economy while they could be advocating their own and others countries’ economies by stopping this trade-war through creating a partnership.

https://theconversation.com/why-there-will-be-no-winners-from-the-us-china-trade-war-109822

FDI in Germany

A couple weeks ago, Britain lost out on its chance to house the first Tesla factory in Europe. Elon Musk decided to choose a location near Berlin instead, claiming that the uncertainty of Brexit made the investment too risky. Berlin’s minister of economic affairs claims the factory could create around six to seven thousand jobs in production with hundreds or thousands in other areas. This is just one of the many affects upon Germany from receiving this FDI; however, there is more to these effects than this. Which is why I would like to take a look at some of these FDI effects so we can understand the magnitude of what Germany is receiving from this investment, if it is truly a net gain for Germany, and how they can optimize this investment.

In the short-run, FDI increases capital causing the MPL to increase causing wages to rise. However, returns to capital decrease because wages rise causing the MPK to fall as less people can be employed for one piece of capital. The opposite is true for the sending country (the US). FDI in the short-run will cause the US’s MPL in the manufacturing sector to decrease as there will be less capital per worker (as the capital that would’ve been employed went abroad) and this will cause wages to fall. However, because wages fall, returns to capital rise. So, in the short-run, FDI will cause the output of the manufacturing sector and wages to increase in Germany, while returns to capital will decrease; conversely, in the US wages and MPL will fall, and returns to capital will increase. To Germany, this will be a net gain and would be beneficial for them to undertake this investment.

The aforementioned are the short-run effects of FDI which we know from class, but are there other affects of FDI? In an empirical paper’s findings which I looked at, it claimed that FDI, output growth, and financial markets are interconnected; these findings show us that the positive affects of FDI on economic growth will only be felt after a certain threshold of financial market development. While there is much potential for Germany to receive from this FDI, this research tells us that this investment may not be as beneficial as once thought for Germany as the external factors needed for this kind of growth may not be set up. Thus, in order for Germany to receive the full benefit of this FDI, it should focus on the growth of its financial market before it becomes too late to reap the full benefits.

Corn Prices

This week, I decided to look at something a little different than the usual. I found a paper by Bowen Chen and Nelson Villoria that presents an empirical study on the price of corn in a variety of net importing countries and relates the price to the climate instability. The way in which the authors approached finding the effect that weather and climate has affected these prices is through a regression model that takes into account a variety of different variables from both the importing and exporting country. The authors came to a variety of different conclusions. The first conclusions being corn prices are more stable in countries where imports make up a larger part of domestic consumption. I found this to be very interesting because it is basically saying that that when importing prices are more stable compared to producing yourself. I suppose this could be because there are more countries to import it from and because there are different options, it is easier to get ahold of and have a set price. The second being the authors expect that climate change will cause corn prices to rise by approximately 10% by midcentury because of the growing instability in climate in corn producing countries.

              To relate this back to our class, we can think about this price increase of 10% due to climate change because of corn supply shocks. When thinking about this in terms of a short run model, you can see exactly why this price rises by so much. Assuming that the climate causes a decreased yield, we get a supply shock. When not open to trade, a supply shock will shift the supply to the left, thus raising the price of the corn. America is a net exporter of corn, so because we are trading it we know that once opened to trade, the price will rise because we still have the same amount and demand will increase. So, with the already increased price from opening to trade and then a 10% increase due to climate change and disasters, the government may look for a way to make it more affordable in the United States because corn is a base product in many foods. One way that the government could ensure that this food is still able to be produced and at a consistent price is through a quota on the amount exported. This quota would limit the amount exported leading to a more stable price in the US because there would be more to go around and not as much of a demand. As for the global market, this quota may drive the price of international corn up further though. This indeed may hurt the overall welfare of the world; however, it would benefit the US welfare.

The Effects of a Trade War

In class we have been talking a lot about tariffs and the effects of them: the costs, the benefits, and the reasoning behind implementing them. To begin I’d like to assess the gains from trade, then assess why someone would impose a tariff and the consequences of said tariff, to finally analyze if the effects of a trade war are beneficial.

Ralph Ossa states that the gains from trade account for around one-quarter of worldwide real income; the gains from trade can be thought of as the division of labor, which allows for specialization and thus efficiency. Trade is exactly this—it specializes the output of countries pendent on their endowments, technologies, and capital, to increase the welfare of and production of a country.

Why would someone put a tariff in place? For many reasons: it can be political, it can be a form of revenue for a country’s government, it can be to incentivize production of goods, to incentivize the consumption of domestic goods, etc. In a study by Ralph Ossa, he found that tariffs put into place for 30% approximately reduced the gains from trade by one-eighth. He goes on to say that this would affect the real income of China and the US by minimal amounts. However, if the US started a trade war with the EU (e.g., on automotives), they would triple their losses to about -1.2%. We know, that when a large country places a tariff on goods, it can have a net gain if the revenue and TOT is greater than the deadweight losses. However, with the information posed by Ossa, we can see that getting into a trade war is not good for the country overall. He subsequently adds that these calculations were done in a long-term model and he thinks that in the short-term a trade war would be much more damaging than the evidenced calculations here—all-the-more justifying the costs of a trade war.

The Importance of Tech in the U.S.-Brazil Relationship

High technology has helped increase global economic growth, development, and social interaction.  This article talks about the future of the U.S. and Brazils economic integration going forward.

Brazil is committed to reducing communication technology tariffs, which would help the U.S. increase business access to the Brazilian market.  This sequence would help digital technologies more open to Brazilians in all their industries, overall improving their Welfare.  By the U.S. having increased business access in the Brazilian market would help economic growth in America.  This article also talks of the increase of cybersecurity with digital technologies in Brazil, with the U.S. offering the best practices to help Brazil.  With this trade agreement it will help enable economic growth, innovation, and competitiveness all to due high technological industries.

https://www.itic.org/news-events/techwonk-blog/the-importance-of-tech-in-the-usbrazil-relationship

Japan's Consumption Tax Hike

     Japan has recently raised its consumption tax from 8% to 10%. This hike in sales tax comes after it had been pushed back from 2015 to 2017, then ultimately ended up taking place on October 1, 2019. The tax increase was originally pushed back due to uncertainty in domestic and global economic conditions. It is predicted that this tax increase will weigh heavily on the outlook Japan’s well performing economy. In the past, sales tax increases have caused detriment to consumption in the economy, but this time around, it is predicted to not be as bad. This may be due to the fact that the Japanese will be eligible for a 5% rebate when using electronic payment methods at some smaller retailers to mitigate the tax increase.

     We’ve shown in class that this consumption tax is less favorable to consumers. As their budget line is decreased. Say Japan consumes apples and bananas (Bananas on the vertical axis and Apples on the horizontal axis). Before the sales tax increase, consumers budget line had a slope of P_a^w/(1+.08)P_b^w. So, the Japanese consumers have a less than favorable budget line than if they were consuming at world prices. After the increase, the slope of their budget line is dropped to P_a^w/(1+.10)P_b^w. You could argue that the consumers are worse off with this consumption tax, because they are no longer able to afford to consume at the world prices with their income. This rise in sales tax, has caused Japan’s household consumption to go down across the board. The big question is, is that helping or hurting the economy? While the government may be collecting more in tax revenue if consumption were to stay the same, is the consumption tax hike worth it if consumption drops as a result of it?

Effect of Quotas and Tariffs on U.S. Steel Imports and Exports

Quotas, which are defined as a limited quantity of a particular product that can be produced, imported, or exported, are generally used to provide support for domestic producers. This can be seen in the U.S. steel industry in which there are not only quotas but also tariffs. Quotas set by President Trump are supposed to discourage imports and encourage exports and domestic consumption. They are, however, doing the opposite. According to the article, the U.S has imported 15.9 million tons of steel from January through August, a 4% increase from the full year of 2018. With these protectionist measures in place, some companies are moving out of countries that are subject to tariffs, i.e. China, to countries that aren't, i.e. Vietnam or Malaysia. According to John Anton, an associate director with IHS Markit, China and India are creating a global surplus of steel and the oversupply won't be corrected unless these two countries cut their output. This is beneficial to steel buyers but bad for steelmakers. 

Meanwhile, the domestic market for US-made steel isn't performing well. After an original increase in price from $600-$900 per ton of hot rolled steel, prices have fallen to less than $500 a ton. Immediately after the tariffs by Trump were enacted, U.S. producers began creating new capacity. This caused the prices to increase to levels that weren't sustainable over a long period of time. This caused imports to increase. Demand has faltered in 2019 and domestic steel price is now lower than import prices for many of the products it creates. 

Scrap metal is also hitting a roadblock. Used as a key raw material for U.S. mini-mills, scrap metal demand has decreased exceptionally. Rising scrap prices would justify price increases for finished products, but this just isn't happening. These tariffs and quotas are causing U.S. companies to lose business. Jimmy Lyons, CEO of the Alabama State Port Authority, says that "there's no question we've lost business and the state of Alabama has lost export markets due to U.S. steel tariffs. Some of this loss was initially attributed to the tariffs against Mexico and Canada, but even with those duties now lifted, the business doesn't seem to have come back". 

Immigration vs Robot impact

In this blog post, I am going to look at and compare the theory of immigration in comparison to 'robots' or essentially new technology. Although data and theory on new technology is still a rather fresh concept, I am going to make my views and assumptions based off of immigration theory, however, the assumption that technology is fixed and identical will be adjusted for.
With immigration, we assume that labor and capital are mobile across countries and that all factors are mobile across sectors. As well as this, there is one country that is abundant in labor and one that is abundant in capital, with the capital abundant country having lower wages than the labor abundant. The final assumption is that there is no trade-in good and services, to prevent wages equalizing without factor movements.
With immigration enhancing the spectrum of the population, the production of the factors across the economy increase as there are a larger workforce and a larger range of low to high skilled workers. This impacts the economy in the short and long run. The theory would essentially be supply and demand with low skilled labor, as all sectors and countries are mobile, workers moving from one country to another to work has a simple supply and demand effect.  In the short run, we see a decrease in low skilled labor wages as the supply increases and in the long run, we see don't see a great effect on wage and it remains relatively similar.
Now, as we looked at in the test, how can this compare to increases in technology and the replacement of human labor to robots. We have to rule out the Heckscher-Ohlin model for this as that assumes all technology is the same between the countries. So, if we see a development in technology whereby human labor is replaced, the negative effects of immigration would be multiplied. The influx of robots into our economy would cause a significant change to the employment and wages of low skilled workers.
The marginal productivity of a robot has to be greater than that of the low skilled worker, an automatic, systematic, repetitive type of production that is replaceable. This means that one robot is not going to just replace workers at a one to one ratio, it would more likely be a one to three or so ratio, whereby we will see wages and employment decline even more rapid than we would see if low skilled migration increased significantly. So this leaves the question of, is it worth producing technology to replace low skilled labor given the negative effects it will have on the economy?

Emigration Effect on Wage

We have recently looked at the impact that immigration has on the home countries wage as well as employment. I have decided to look at the other side of things and see what the effect of emigration on the home country is. I found an empirical study done by P. Misrha that discusses this in great detail as it analyzes the effects on the wage in Mexico due to emigration to the United States.  They concluded that there is a strong positive correlation between emigration and wage in Mexico. This is further dug into and examined by schooling group. The conclusion of this was that a 10% decrease in the supply of labor due to emigration lead to a 4% increase in the wage for that specific schooling group. Emigration that occurred between 1970 and 2000 increased the average wage in Mexico by 8%. With the largest impact being on the high school graduates’ group, whose wage increases by 15% after controlling for other variables. It then goes into talk about the census in Mexico from 1990 to 2000. This census indicated that where the impact on citizens with some college education was double that of people with only a high school education. Misrha then suggests the increased emigration is leading to a larger and larger wage gap in developing countries. This is a rather interesting suggestion and something that could be very bad for Mexico in the short run. We can see that obviously emigration is helping those of higher education much more than those of the lower class. So, indeed the wage gap is widening as emigration is increasing.
As we have talked about in class, the effects of immigration to the United States are positive in the long run especially for the United States. When thinking about purely the benefits on wage in Mexico, they are benefiting from emigration as well. So, you would think that there is no downfall. However, as they are emigrating the wage gap is widening in Mexico. This increasing wage gap is then leading to decreased overall welfare for those in the lower classes. The faster growing wage for those with education makes sense as those with higher education in developing country are harder to find so the amount that they make will grow to attract more talent.  When thinking about this in terms of the Ricardian Model where labor is immobile we can see that because the citizens of Mexico are unable to switch industries in the short run, the overall welfare of the lower class will drop.