Declining Global Trade

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

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

Does Offshoring damage the US economy

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

Using Common Sense When Talking About Trade

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

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

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

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

Following a Proven Model

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

Free Trade vs. Free Movement

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

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

Capital Abundant Vs Labor Abundant

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

Belgian's Influence on EU-Canada Trade Deal

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

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

The American Trade Debate

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

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

The Fallacies Behind Trade

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

Donald Trump's planned return to Mercantilism

Watching Monday night's presidential debate whilst studying for the first International Economics exam of the semester, meant that Donald Trump's brash claims about the economy and particularly the need to address the trade imbalance which he calls "the greatest theft in the history of the world" seemed even more absurd than usual. Trump has talked throughout the campaign about the fact that "Foreigners are killing us on trade" because the rest of the world spends far less on American exports than the American public spends on foreign imports. In short, he believes that economic success and gains from trade are made when a nation sells more to it's competitors than it consumers of theirs. Mercantilism as trade policy has been outdated since Adam Smith's Wealth of Nations and goes against the last 200 years of western economic orthodoxy. In fact, Trump is the first Republican nominee in a century to call for higher tariffs as a defence against low-cost imports.
According to I.M Destler of the University of Maryland, the last time a Republican rose to prominence on such a trade policy was Herbert Hoover. Everything that we have learned so far in this class supports the idea that such policy was rightfully left behind. Mercantilists fail to understand the concept of comparative advantage and the Ricardian model. Despite the fact that such a trade policy has been debunked by Adam Smith, David Hume, John Locke, David Ricardo and countless other economic thinkers over the past two centuries seems to be lost on Trump and those who support him. If Trump wins the election in November and succeeds in implementing the trade policy he has proposed, it could definitely be a step backwards for the US economy.

Voters Fail to See the Benefits of Trade

I recently read an article titled, “WhyVoters Don’t Buy It When Economists Say Global Trade Is Good” by N. Gregory Mankiw, an economics professor at Harvard. The article starts by referencing a poll conducted by CBS News and the New York Times where only 35% of registered voters think that the US has gained from international trade. The thinking of the voters in this poll is in direct contradiction with what we have learned in class. We have learned that countries that move out of autarky and open themselves to trade end up gaining overall. Through trade, countries are able to produce more product and improve the overall welfare of their country by moving up to higher indifference curves. The same poll also showed that 55% of voters think that the US actually lost as a result of trade. From what we have learned so far in class, this is not true.

                The article also provides two hypotheses as to why those voters felt that way. The first hypothesis was that voters feel like they have not gained from trade because not everyone gains from trade. In class we learned that workers in certain industries lose from trade, but overall the gains outweigh the losses. The hypothesis is that the voters who lose from trade are going to oppose it.

                 The second hypothesis from Edward Mansfield and Diana Muntz dismisses the first one and then concludes that people oppose trade for three reasons. The three reasons they found was isolationism, meaning the US should stay out of foreign affairs, nationalism, thinking the US is “culturally superior to other nations”, and ethnocentrism, thinking that their own ethnic group is better than others. In the end, Mansfield and Muntz conclude that people base their feeling toward trade on their psychological worldview rather than their knowledge of economics.

                While it is hard to determine individual preferences, there is no denying that opening up to trade is better than autarky. Through comparative advantage, countries end up gaining from trade and improving the welfare of its citizens. Despite what voters may feel toward global trade, it is important that our politicians understand the benefits of international trade for the country and do not let the general public try to persuade them otherwise.

The Effects of Globalization on the World

                Through this week of class we have been able to see and understand the clear advantages of free trade in comparison with autarky. In the article Put Globalization to Work for Democracies, Dani Rodrik analyzes 5 principles of globalization that has affected democracies all over the world. Rodrik points out that differences in laws between countries can cause and adverse effect among nations who favor of a less democratic nation as their regulatory laws may not be as stringent as other nations. In class we have used labor as our factor of production to show comparative advantage, however other less developed countries have less regulations in term of not just labor but environmental impacts. Rodrik continues to point out China was able to push exports by placing barriers on imports which allowed them to protect their employment in state enterprises.

                While this strategy may work well for Chinese employees we learned through comparative advantage this may not be the most optimal way on a global scale, because other countries may be able to produce products at a most cost effective level. Additionally, Rodrik points out that the goal of globalization should be to enhance democracies around the world. Stating that more global governance on countries such as increased requirements on transparency, public deliberation, broad representation and accountability will help lead to devising norms that overcome these obstacles. While globalization has helped people all over the world, it is time to refocus it goals by aiming to not just work for democracies but improve them.                                   

Productivity Between The US and France

In class this week we have looked at the Ricardian Model. Part of this model looks at how the productivity of two countries compare with certain products. At the end of the last class we looked at the graph that compared countries productivity to the US. This graph showed us how the different labor forced compared. In the article Which Country Has the Most Productive Workers, I found that the US are third in productivity out of all the different countries labor forces. However the US workers are second to Korea for the longest hours worked. France were ahead of the US with their GDP to hours worked, and this is surprising because of the vacation time the French workers take. The article talks about how more vacation times lead to a happier workforce and how that improves the Frances productivity, also the diminishing returns for the US of working 40 hour weeks. However looking at the Ricardian model we found that not only do the French take more vacation time, but they will get higher wages due to the fact their productivity is higher, which is seen as a producer problem for the Ricardian Model, because he believed that wages needed to be the same in all sectors otherwise nobody would work in the lower paying sector. however in real life not everyone can more to France and Germany for the higher wages.
     Also because of the difference in productivity, it could be said the the French have an absolute advantage to most products compared to the US. However what we discussed in class is that the US will have certain products where they have the comparative advantage over France and this is why we have trade between these two countries. If we didn't look at the comparative advantage, we would assume the the French just wouldn't trade with the US.

Links for September 19-September23

Here are some links generally related to the class in some way. I'll try to link some articles each week. Read ones that you find interesting and leave the rest.

Dani Rodrik: Should we roll back globalization? A response (not rebuttal) by Chris Blattman.
Tyler Cowen: Internal globalization? This summary of academic work claims that internal globalizers globalized more externally over time.
WSJ on Trumponomics: Very bad things will happen. Don't get me started.
The effects of cheap oil: More consumption spending, less investment (especially in oil-related sectors)
A history of globalization.

China Threatens Britain with International Trade

Thursday, September 15, 2016

In the article Collateral damage, Britain has stated that it will leave the EU and some of Britain's counties are being effected by world trade. One specifically is Blackburn and they are getting a lot of imports from China, as seen on the map in the article. Britain is also facing a collapse in manufacturing employment, as a result of imported goods. I will be focusing on pareto optimal, export-biased growth and import-biased growth from last week's discussion. 

Is it possible for Britain to become pareto optimal? In the article, it states that Blackburn has had a decline in employment of about one-third. It also stats that the gambling rings and pawn shops are more dominant than restaurants and bars. Blackburn was also for leaving the EU, among other Chinese heavy traders, in Britain. After looking at these facts, I believe Britain can become pareto optimal. First, I believe Britain can try to generate more restaurants and bars in Blackburn’s center to get its employment back up. In order to accomplish this, they will need to follow through training employees and they need to make Blackburn a more attractive place to live and work. In this pareto optimal, Britain will become better off with its own economy. China will be getting hurt from this because they will not be trading as much with Britain colonies as it once was.

Is it possible for Britain to have an export-biased growth? As of now, Britain has been import-bias heavy because of China. Three colonies have already been become import-bias, two of which are near the water. Is it possible for Britain to become export-bias, or, will Britain become even more import-biased with even greater trade from China? I think Britain will become more export-biased because of their hurt economy, the immigrants that they keep accumulating, and their lack of trained workers despite all their “rapid response service.”

The Current Oil Market

         
          During class this past week we have discussed many topics that can be related to an article in the "Wall Street Journal" New Reality for Oil. These topics consist of terms of trade: maximizing a countries' welfare: small Vs. large countries and the welfare gains from trade. In the article it is said that it is now easier to stop and start production of oil regulating the risk of oversupply, much like what happened in 2014.
         What happens if their is an oversupply of oil? A variety of things could potentially take place. The first of which being the price for oil falls which would hurt the terms of trade of countries who export the oil such as Saudi Arabia who is the biggest oil exporting country. Is it safe to assume that the preferences concerning oil are monotonic? In terms of it being a commodity that does potentially have an end it would be in the best interest of everyone to have an oversupply on hand. Although, this may hurt the oil companies such as a car dealership who has too many cars on the lot that aren't selling. They don't stop or slow the production of cars, instead they offer discounts on the cars to free up space on the lot.
        If oil companies were to do this would that have an effect on the world price? As stated earlier there was an oversupply of oil in 2014 and by looking at this graph, you can see how that directly related to the world price of crude oil. This directly effects everyone in the oil market especially the likes of Saudi Arabia whom we can consider to be a large country.
        A large country can use its power to influence the terms of trade. In this instance, Saudi Arabia exports nearly sixty percent of the worlds crude oil. A decline in the world price of crude oil such like that that occurred in 2014 can have lead to deterioration in the terms of trade of the country exporting it. This can also contribute to export biased growth if the country exports an abundance of oil than the price of the oil may fall leading to a decline in the terms of trade. This can be directly tied to the marginal utility of that product.
        In the article it stated that economists believe that the oil price will stay steady at $47.02 for the next few months which is a significant cut from 2014 which was around a hundred dollars at that time. Is the oil market stabling out? Will our importing of oil help our terms of trade in the coming months? I suppose we will have to wait and see.

We have talked a lot this week about the gains from trade. A recent summary of new research by Nigai (2016) shows that differences in consumption across different consumers within a country are an important source of differences in public perceptions about the gains from trade. For example, in countries where many consumers may already spend large portions of their budget on food, trade involving large amounts of agriculture exports may have harmful consumption effects on poor households. The article uses a simulation technique (using theory-based predictions calibrated to observed data) to show that the gains from trade may vary greatly across the income distribution of a country, and the errors of assuming a "representative consumer" may vary across countries as well.
The article exposes two problems with common claims about the gains from trade that we have discussed in class. The first is that preferences can be easily aggregated. Even if preferences are not too different for different consumers, differences in income may result in differences in outcomes in terms of households' responses to price changes. This is because households' preferences are not homothetic, i.e. households do not spend a constant proportion of their income on primary goods (like food or energy) as they do on manufactured goods (like electronics or cars) - the poor tend to spend a lot higher proportion on food.
Even more importantly, since different consumers have different incomes, price changes impact them differently. We mentioned this with respect to the gains from trade: Households that spend a lot on the exported good will "lose" in their consumption (even if their income remains constant), where households that spend a lot on the imported good will "win" in consumption. The reverse is true for households involved with production of exports and imports. The worst case scenario, of course would be to consume a high proportion of your income with exported goods, but work in a sector that competes with imports.

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

The Gains from Trade to Britain

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