Chapter 13 | Globalization and Trade Policy Flashcards
Gains From Trade
Opportunity cost and comparative advantage are key to understanding why specializing and trading makes us all better off
With voluntary trade
each person (or country) feels that what they get is of greater value than what they give up
Canada is a trading nation
30+ percent of Canadian GDP is from selling exports to the rest of the world
Absolute advantage
ability to produce at a lower absolute cost
Comparative advantage
ability to produce at a lower opportunity cost
Opportunity Cost
= Give up / Get
Comparative advantage key to
mutually beneficial gains from trade
Trade makes individuals (or countries) better off when each
Specializes in products and services with comparative advantage (lower opportunity cost)
Trades for other products and services
Even if one individual has absolute advantage in producing everything, differences in comparative advantage allow mutually beneficial gains from specializing and trading
Terms of trade
quantity of exports required to pay for one unit of imports
- Must be between each trader’s local opportunity costs
- Different terms of trade will split gains differently
Protectionism and Trade
Freer trade creates winners and losers from the competitive process of creative destruction. Concentrated losses in import-competing industries create political pressure for protectionism despite overall gains.
Freer trade increases competition, creating opponents to freer trade
Connections to new markets bring new competitors
With creative destruction
gains from specialization, trade, competition, and innovation destroy higher-cost, and less popular products and businesses
Gains are increased productivity and higher living standards
Losses are structural unemployment
technological change or international competition make some worker’s skills obsolete
Trade opening new international markets creates winners and losers in Canada
Winners - Canadian consumers, Canadian exporters and workers in exporting industries
Losers - Canadian businesses and works in import-competing industries
Government responses to protect losers from freer trade include
Tariffs - tax on imports, raising price of products to consumers
Import quotas - limits on the quantity that can be imported
Subsidies to domestic producers - government payment to domestic producers of products or services
Tariffs
tax on imports, raising price of products to consumers
Import quotas
limits on the quantity that can be imported
Subsidies to domestic producers
government payment to domestic producers of products or services
Unequal distribution of gains and losses produces
political pressure for protectionism to help the losers
Many consumers gain from free trade, but gain for each is small
Few businesses and workers in import-competing industries lose from free trade, but loss for each is large
Protectionism leaves Canadians as a whole worse off
Protectionism leaves Canadians as a whole worse off
Freer trade could benefit more people than it harms, but political pressure form import-competing industries slows international trade negotiations
Freer trade could benefit more people than it harms, but political pressure form import-competing industries slows international trade negotiations
Why do people argue for protectionism?
limited arguments BUT
- Cultural Identity
- National Security
Protectionism creates risk of
retaliation, triggering trade wars that make all countries worse off
Cites research by economists (Dani Rodrik and others) showing
Industries more exposed to Chinese import competition since 2000 — the year China joined the World Trade Organization — were hit hard and have not recovered. Workers in these industries don’t go to better jobs, or even similar jobs in different industries. They shuffle between low-paid jobs, never recovering the prosperity they had before Chinese competition.
Globalization and Sweatshops
While anti-globalization critics view sweatshops as the outcome of globalization and free-market policies, economists ask whether workers are better off or worse off with international trade.
Economic globalization
integration of economic activities, across borders, through markets
Speeding up due to falling transportation and communication costs, elimination of government barriers to trade
Anti-globalization groups view
international trade as causing problems in developing countries and target World Bank and International Monetary Fund (IMF)
World Bank and IMF, during 1990s, attached
“free market” hands-off conditions to assistance to developing countries
Sweatshops
historical consequence of globalization going back 200 years – provide low-wage jobs, often under poor working conditions
- Anti-globalization critics view sweatshops as exploitation for corporate profits
- Economists ask the opportunity cost question – are workers’ lives better off, or worse off, compared to a situation without globalization, trade, and factory jobs?
- In each sweatshop country, history of rising wages over time and movement of production elsewhere
Governments and Global Markets
On the role of government in global markets, the hands-off position views government failure as worse than market failure; the hands-on position views market failure as worse than government failure.
Joseph Stiglitz and hands-on economists support
a limited role for government
Want social safety net to support those left behind by trade and markets
The Economist magazine and hands-off economists worry
that allowing governments in will result in protectionist policies
Argue that the harm poor countries suffer from globalization is caused by government protectionist policies, not by market forces
In trade negotiations at the World Trade Organization, power struggles over tariffs and subsidies between rich and poor countries affect ____
terms of trade
terms of trade
how gains are divided
Hands-Off position -
Leave markets alone to produce economic growth that eventually benefits all
Risk is losers in import-competing industries get no assistance in adjusting
Believe government failure worse than market failure
