chapter 13 Flashcards
Why does trade makes us all better off
because it is voluntary: any time two people make a voluntary trade, each person feels that what they get is of greater value than what they give up
80% of Canadian trade is with
the United States
Absolute advantage
the ability to produce a product or service at a lower absolute cost than another producer
Mutually beneficial gains from trade depend on
comparative advantage
Comparative advantage
the ability to produce a product or service at a lower opportunity cost than another producer
Terms of trade
quantity of exports required to pay for one unit of imports
Gains from trade improve
standard of living and it happens without anyone working harder or without any improvement in technology or new inputs
key to mutually beneficial gains from trade
Comparative advantage
For a trade to have mutual benefits, terms of trade must be
between each trader’s local opportunity costs
What did the Candian Pacific Railway do?
connected previously separate markets in Canada, which brough lower transportation costs, allowing farmers and businesses anywhere in Canada to sell across the country → opens new possibilities for specialization and trade
New connected markets also bring new competition
Globalization and Creative Destruction
- Because businesses are developing new technologies of production and inventing new products to cut competition, over time these competitive innovations improve living standards and product choices for consumers → leads to creative destruction
- Gains from specialization, trade, competition and innovation have the downside of the destruction of less productive, higher cost and less popular products and businesses; Structural unemployment
Winners from International Trade
- consumers gain from lower prices and greater product variety that result from new imports
- If imports sell successfully in Canada, there is a comparative advantage to the country selling to Canadians
- Canadian exports businesses gain from access to new markets and new customers; if they sell successfully in the ROW, there is a comparative advantage to those Canadian businesses
Losers from International Trade
- Canadian businesses that cannot compete with the new imports lose
- Face increased competition and lower prices, as businesses in the ROW have a comparative advantage in selling to Canadian customers
- Workers in import-competing businesses also lose, as jobs disappear and wages fall with shrinking sales in Canada
Tariff
tax applied to imports
The Canadian business importing the product must pay the tariff to the Canadian government
How do tariffs affect consumers
Tariffs are a business cost, which is passed on to consumers, increasing the price of the product
Tariffs are attractive to governments because
- Tariffs raise revenues for the government to spend
- Tariffs win votes and campaign donations for politicians from businesses and workers in import-competing industries
- Because tariffs are a tax on non-Canadians who don’t vote, there is little political damage from raising tariffs
Consumers and voters usually do not blame the government for the higher import prices
What did the General Agreement on Tariffs and Trade (GATT) do in 1947
- began an ongoing process of reducing tariffs around the world
- GATT turned into the World Trade Organization (WTO)
What do tariffs do now?
- protect domestic producers competing with imports
- Competing domestic producers win from higher prices and profits, while Canadian consumers lose from higher prices
Import quota
limit on the quantity of a product or service that can be imported
Who wins when there is import quotas?
- Canadian import-competing industries win as there are higher prices and profits for the businesses and more jobs with higher wages for workers
- But Canadian consumers lose from higher prices
Subsidies to domestic producers
government payment to domestic producers of products and services
Why does Canada give large domestic subsidies
to protect the dairy industry
Domestic Subsidies winners
businesses and workers being subsidized
Domestic subsidies losers
consumers lose by paying higher prices
A large number of consumers gain from freer international trade, but
the gain for each consumer is small
A small number of businesses and workers in import-competing industries lose from freer trade
but the loss for each is large
What does the unequal distribution of the gains and losses of trade create
political pressures for protectionism to help those who lose from international trade
1994 Trade Agreement
Canadian provinces signed the Agreement on Internal Trade to prevent provinces from creating new trade barriers and to reduce existing ones
What is a barrier to international trade negotiation
Political pressure in many countries from import-competing industries
In trade
What do developed countries want
freer access to markets in the developing countries for the products and services they export
But developed countries don’t want to remove domestic protectionist measures, especially domestic subsidies, from their agricultural and textile industries
What do developing countries want
to access those protected markets, but Canad is reluctant to remove subsidies even if they are supportive of freer trade
Arguments for Protectionism
- Serving Canadian Jobs
- Necessary to compete with cheap foreign labor
- Valid, limited protectionism arguments
Arguments for Protectionism
Serving Canadian Jobs
- Tariffs, quotas and subsidies can save jobs in Canadian import-competing industries, but freer trade creates jobs in Canadian export industries
- Imports also create jobs in Canada for those businesses that sell and service the imports
- While eliminating tariffs, quotas, and subsidies will cost jobs in Canadian import-competing industries, freer trade creates more jobs than are los as was seen in the NAFTA agreement
Arguments for Protectionism
Necessary to compete with cheap foreign labor
- Because of the NAFTA in 1994, many tariffs and quotas were eliminated among Canada, the United States, and Mexico
- Total number of jobs in Canada increase because of greater exports to expanded North American markets
- All countries benefited from the mutual gains from trade because of comparative advantage
Arguments for Protectionism
Valid, limited protectionism arguments
- Freer trade leads to increased specialization and reliance on other countries to supply products and services
- Canada does not want to rely entirely on another country for strategic products like military equipment, energy, and other essentials
- That’s why governments protect strategic domestic industries
- Another non-economic risk of freer trade is the threat to a country’s cultural identity
Powerful argument against Protectionism
- In an attempt to protect U.S. jobs and businesses during the Great Depression, the U.S. government introduced many tariffs
- Other countries quickly retaliated with their own tariffs, and international trade collapsed, worsening the Great Depression
Example of fallacy of composition
World Bank and the International Monetary Fund (IMF)
- Were created as the world struggled to recover from war
- Their mission was to support countries’ economic growth and development through trade
World Bank Abbreviation
International Bank for Reconstruction and Development (IBRD) and the International Development Agency (IDA)
- The IRBD focuses on reducing poverty in middle-income countries, while the IDA focuses on the world’s poorest countries
Hands-Off Policies for Developing Countries
- free-trade policies based on comparative advantage are best for helping developing countries achieve rising standards of living
- Using the hands-off view of the role of government, policymakers at the World Bank and IMF set “free market” conditions on loans and assistance to developing countries, especially during the 1990s
- Those conditions require governments to enforce contracts and property rights
- Other hands-off conditions include removing regulations from labor markets, eliminating protectionist tariffs and quotas to allow imports from developed countries, lowering taxes on businesses to encourage private investment, and privatizing state-run industries
Joseph Stiglitz
- Became chief economist at the World Bank but left the bank after 3 years and was awarded the Nobel Prize in Economics in 2001
- Published a bestselling book in 2002 titled “Globalization and Its Discontents”
- His criticisms of the strong hands-off policies of the World Bank and the IMF along with the responses from other pro-trade economists helped to reconcile the contradiction between pro-trade arguments that gains for trade are the key to rising living standards and the anti-globalization accusations that global trade causes so much harm
def
Economic Globalization
integration of economic activities, across borders through markets
Reason for globalization
- voluntary trade being motivated by self-interest
- profits from innovation
- mutually new opportunities for gains
- new competitors
- new threats of creative destruction
Why is globalization speeding up
- falling costs for both transportation and communications technologies
- the elimination of government barriers to trade
It’s becoming cheaper and easier to connect markets among countries
Economists ask this opportunity cost question about sweatshops
are workers’ lives better or worse compared to a situation without globalization, trade and the factory jobs that follow?
Sweatshops in the UK
- late 1700s, people with few opportunities moved from farms to the original sweatshop cities
- Working conditions and pay were terrible, but better than the alternative
Sweatshops in the US
- In American cotton factories in the 1800s, the same thing happened were French Canadians worked
- In all of these countries, standards of living and working conditions improved over time; Some of those improvements came from governments playing a hands-on role, and some happened when the government took a hands-off position.
British textile industry and creative destruction
Globalization connected the original British textile industry to new markets and new competitors, so less competitive textile industries in older countries declined → creative destruction
Global markets
Hands off: role for government
none
Global markets
Hands on: role for government
limited to maintaining social safety net supporting those left behind by trade and markets
Global markets
Hands off: risk of chosen role for government
losers in import-competing businessess get no assistance in adjust
Global markets
Hands on: risk of chosen role for government
government gives in to political pressure for protectionism
Global markets
Hands off: which failure is worse
government failure is worse than market failure
Global markets
Hands on: which failure is worse
Market failure is worse than government failure
hands off or on
Stiglitz position
hands-on: “important, if limited, role for government to play.”
He contrasts his hands-on position with the free-market, free-trade policies supported by the World Bank and the IMF in the 1990s, the hands-off position criticized by anti-globalization protestors
Global Markets
what does the hands-on position believe
believes the government has a responsibility to maintain a social safety net to support citizens left behind by trade and markets
Examples
Canada government programs to assist those who lose from expanded trade
There are employment insurance benefits for the unemployed, job retraining programs, social assistance payments, and health care benefits that do not depend upon a person having a job
What happens because developing countries don’t have a social safety net
competitive forces of creative destruction can lead to poverty and misery as jobs disappear in import-competing industries
Hands-off for the Economist Magazine
- The Economist’s hands-off position on globalization is that the harm poor countries suffer is not caused by market forces, but by governments giving in to political pressure for protectionism
- The Economist supports free markets and globalization, and generally opposes government “interference” in economic or social activity
Quota of 0
- A law in 1701 banned all imports of calico cotton (quota of 0) into england
- The profit-seeking forces of creative destruction led to English entrepreneurs to set up industrial cotton factories in England that eventually crushed the sales and political influence of the wool industry
Limited Role for Government – Stiglitz
- Stiglitz’s hands-on position sees an important but limited role for government
- Governments in developing countries should maintain a social safety net to support the economic welfare of citizens left behind by trade and markets
Why does the hands-off position sees bad globalization outcomes resulting from government interference in markets
Because they create unfair terms of trade and disadvantage industries and workers in the poorest countries
Travels of a T-shirt
Business professor at Georgetown that traveled to follow the production of a T-shirt and concluded that the harmful outcomes we see from globalized trade have less to do with market forces and more to do with governments protecting domestic industries and workers
Travels of a T-shirt and government protecting domestic industries and workers
- tariffs, quotas, and domestic subsidies force prices below subsistence levels for producers in poorer countries
- The unfavorable terms of trade and poverty are due to government protectionist policies
