Politics and the Economy, Series I: International Trade

[smockers83]

With the recent stimulus package with "buy American" provisions and the recent debate of protectionism, I thought I would begin a series of topics that deals with politics and the economy. The first one, as you can see, is appropriately titled to coincide with the recent discussion. I would welcome any discussion to follow each of the series. Some of you may learn new things, some of you may have a hard time grasping some concepts (I'll try to keep it as simple as possible with very little math), and some of you may downright disagree because of the preconceived notions that you hold dear. Just remember, these aren't my own views of the economy, but the basics of the study of economics and what it tells us about it. Nor in no way do I claim this as completely my own work, but a compilation of works of other people organized with my own words.

So here, we, go!

Series I: International Trade

For starters, international trade is not a zero-sum contest, meaning that there is no winner or loser. In order for trade to occur and to make sense, both sides have to have something to gain from it. To make this point clear, if I were a country on a sunny day with two baseball hats and you were a country with two pairs of sunglasses, we both can benefit if we traded so that we both had a baseball hat and a pair of sunglasses. One country has something it wants and can offer as does the other country, resulting in trade.

When NAFTA was enacted in 1993, there were predictions that jobs would be sucked out of the US to Mexico because of the lower wage rates. In reality, US jobs increased afterwards and unemployment fell over the next seven years. In Canada, the same happened over the same seven years as well.

How is this possible and so different from what was predicted? If a country was completely autonomous, meaning it was completely isolated economically with no international trade whatsoever, what would happen if it became more prosperous? It would buy more because it has more to buy with. What happens when it buys more? More jobs are created in order to produce the additional stuff. Apply that to two countries or any number of countries and the principle remains the same.

After 1993, jobs did increase by millions in Mexico. However, at the same time jobs increased by the millions in the US.

The basics of international trade are not difficult to understand. What is difficult are all the misconceptions and the misleading and emotional words used to describe and confuse things.

For example, an export surplus is described as a favorable balance of trade and an import surplus as unfavorable, which goes back centuries. Reason being this all came about was because it was believed that importing more than a country exported impoverished a nation because the difference had to be paid in gold, and the loss of gold was seen as a loss of national wealth. In 1776 with Adam Smith's The Wealth of Nations, he argued that the real wealth of a country is its goods and services, not its gold supply.

During the Great Depression, the US had an export surplus--a "favorable" balance of trade--in every year of that decade. But what's more relevant is that both imports and exports were much lower than they had been in the 1920s. This was because of the barriers to trade in countries around the world as they tried to save jobs in their own economies.

This has been regarded by many economists as worsening and prolonging the Depression. When national income is going down, the last thing needed is a policy that makes it go down further by denying consumers the benefits of being able to buy what they want at the lowest price available.

During 2001, the US's trade deficit was narrowing by record amounts, which was reported in the news as a good thing. However, you will also remember that during 2001 the stock market falling, unemployment rising, profits were down, and total output of the economy declined. Imports were decreasing because of the shaky times.

Going back to the Depression and how we had trade surpluses every year, we should look at the booming 1990s where we became a record "debtor nation".

The Basis for International Trade In economics, there are three reasons why countries gain from trade: absolute advantage, comparative advantage, and economies of scale.

Absolute Advantage Bananas. It should be obvious why we as Americans import bananas. Bananas grow in tropical climates. If we were to try and grow bananas here in the US, we would need vast amount of resources that we would have to pay for in order to grow bananas, such as greenhouses and other artificial sources of warmth. Whereas in tropical countries, where bananas are native, nature provides warmth for free. Therefore it pays for Americans to buy bananas grown in the tropics rather than grow them in the US.

This is considered an absolute advantage. Growing coffee, as another example requires very unique conditions. In the early 21st century, more than half of the coffee in the entire world was grown in just three countries. This doesn't mean that other countries weren't completely able to grow coffee, it's just that the amount and quality that most countries could produce would not be worth the resources it would cost, when coffee can be bought from the three countries at a lower price.

Lets go to India. India is about 12 hours difference in time than that of the US. So that means when it's night here, it's day there. If a US company wants 24 hour computer service, it can get an Indian company to have Indian technicians available when it's night in the US. Since India puts out many computer science grads and educated people in India speak English, this gives it an absolute advantage over other countries in competing for computer services in the US market. Similarly, South American countries supply fruits and vegetables that grow in the summer in North America when it's winter because it's summer in South America.

Absolute advantage simply means that one country can produce some things cheaper or better than another. Foreigners who buy that country's products benefit from the lower prices because they now have more income. The producer country benefits due to the larger market to sell its products.

Comparative Advantage Suppose that a country is so efficient that it can produce anything more cheaply than any other country. Is there now any benefit that could be gained from trading with another country.

Yes. Because being able to produce anything more cheaply is different from being able to produce everything more cheaply. Producing more of one product means producing less of another due to the resources used, such as labor. If we have TVs and chairs, it no longer becomes how much money it costs to produce TVs or chairs, but how many chairs does it cost to produce TVs when resources are shifted from producing one over the other. If the trade-off between two countries is different, then the country that can get more TVs by foregoing the chairs can benefit in trading with the country that gets more chairs by foregoing the TVs.

I said no math but a numerical example is needed at this point. The US and Canada. The average American worker produces 500 chairs/month while the average Canadian produces 450. The average American worker can also produce 200 TVs a month while the average Canuck produces 100. The two countries both allocate 200 workers to chairs and 300 to TVs. The US then produces 100,000 chairs and 60,000 TVs while the Canucks produce 90,000 and 30,000 respectively.

Now notice that the American worker can produce twice as many TVs as his fellow Canuck while only 10% more chairs. Here is where the trade-off is different and gains from trade occurs. The US and Canada figure out that the US is much better than Canada at producing TVs while Canada is comparable to the US at chairs. They figure that the US should solely produce TVs and Canada chairs. Devoting the same amount of workers as before, 500, the US produces 100,000 TVs and the Canucks produce 225,000 chairs and they now trade between the two, the US trades TVs in exchange for chairs and vice versa. Before, a total of 90,000 TVs were produced and 190,000 chairs were produced. In this case we would say the US has an absolute advantage in both, but Canada has a comparative advantage in chairs. Now, if the US produced everything more efficiently than Canada by the same percentage, there would be no gain from trade because there would be no comparative advantage, but this case is impossible to find in the real world.

Economies of Scale Sometimes a particular product requires such huge investments that the resulting output can be sold at a low enough price to be competitive only when some enormous quantity of output is produced. A good and appropriate example for NICO is cars.

It is estimated that the minimum output of cars needed to achieve an efficient cost per car is somewhere between 200,000 and 400,000 cars per year. This isn't a serious problem ina country of the size and wealth of the US. But in a country with a smaller population such as Australia, there is no way to sell enough cars within the country to be able to develop and produce them from scratch and sell them at prices low enough to compete with ones produced in larger quantities in the US or Japan.

There are cars that are manufactured in Australia you might say. But much of the cost in engineering and development has been taken out. These cars are just Australian-built American or Japanese cars, just as Honda, Toyota, and Subaru engineer cars in Japan and build them here. Australia is a prosperous and productive nation, but its population size limits its national income.

To further illustrate this point, exports allow some countries to achieve economies of scale that would not be possible from domestic sales alone. Some businesses make most of their sales outside of their home country. Heineken doesn't depend on Holland for its sales as it sells beer in 170 countries. Nokia doesn't just sell phones in Finland but all over the world. The Economist magazine out of Britain sells three times as many magazines in the US than it does in Britain. Toyota, Honda, and Nissan earn most of their profits in North America.

International trade is necessary for many countries to achieve economies of scale that will enable them to sell at prices that can compete with the prices of similar products in the world market. It also creates greater efficiency by allowing more economies of scale around the world, even in countries not large enough to absorb all the output of mass production all the while by taking advantage of each country's absolute or comparative advantage.

We can see the benefits of a particular way of doing things by seeing what happens when they are done differently. India, for many years, encouraged small businesses and maintained barriers against imports that could compete with them. At the end of the twentieth century and beginning of the 21st changed all that. The Far Eastern Economic Review wrote: The nightmare of the Indian toy industry comes in the form of a pint-sized plastic doll. It's made in China...and costs about 100 rupees ($2). Indian parents have snapped it up...across the country, leaving local toy companies petrified. Matching the speed, scale and technology involved in the doll's production--resulting in its rock-bottom price--is beyond their abilities...In areas such as toys and shoes, China has developed huge economies of scale while India has kept its producers artificially small. The most serious problems created by the import restrictions in India are that they forced hundreds of millions of people in a very poor country to pay needlessly inflated prices for numerous products because of policies protecting small-scale producers from competition of larger producers.

That's enough for now. Some talking points in the form of trade restrictions are that high wages render a country's products uncompetitive, which is a fallacy. There is also saving jobs, infant industries, dumping, and the kinds of restrictions. I can discuss these as the discussion moves along, so I'm not going to into them now.

[OriginalWheelman]

Good read. I learned a few things.

[smockers83]

The High-Wage Fallacy A fallacy that sounds very plausible in a country such as the US, is that US goods can't compete with goods produced by low-wage workers in poorer countries, some of whom are paid a fraction of what American workers are paid. Both history and economics refute it. Historically, high-wage countries have been exporting to low-wage countries for centuries. The Dutch Republic was a leader in international trade from the 1590s to the 1740s while having some of the highest-paid workers in the world. Britain was world's greatest exporter in the 19th century and its wages were much higher than the wages in many, if not most, of the countries to which it sold its goods.

On the flip side, India has had far lower wages rates than those in more industrialized nations such as Japan and the US, but for many years India restricted imports of cars and other products made in Japan and the US because domestic producers could not compete in price or quality. After easing trade restrictions, even the leading Indian industrial firm, Tata (they've bought such companies like Aston Martin), has had to be concerned about imports from China, despite the higher wages of Chinese workers.

The flaw in the high-wage argument is that it confuses wage rates with labor costs and labor costs with total costs. Wage rates are measured per hour of work. Labor costs are measured per unit of output. Total costs include the cost of labor, capital, materials, transportation, and other things needed.

When workers in a prosperous country receive wages twice as high as workers in a poorer country and produce three times the output per hour, then it is the high-wage country which has the lower labor costs. Therefore, it's cheaper to get a given amount of work done in the more prosperous country simply because it takes less labor, even though workers are paid more.

Some reasons why countries are more prosperous than others in the first place is because they're more efficient at producing and delivering output to market.

Saving Jobs During times of high unemployment, politicians are under pressure to come to the rescue of industries that are losing money and jobs, by restricting imports that compete with them. One example is the Smoot-Hawley Act of 1930 during the worldwide depression and the resulting increase in restrictions around the world. The net result was that world exports in 1933 were 1/3 of what they had been in 1929. Just as free trade provides economic benefits to all countries simultaneously, trade restrictions do the exact opposite simultaneously, lowering standards of living, without producing the increased employment that's hoped for.

The spark set by the US and the Smoot-Hawley tariffs created a firestorm around the world as politicians in other were under pressure to do something as well and retaliated and did what seemed plausible. This is exactly what more than a thousand economists who signed a petition against the tariffs warned about.

They also predicted that the majority of American farmers, who were some of the strongest supporters of tariffs, would lose out. This was also fulfilled as unemployment grew worse and farm exports plummeted along with a general decline in international trade.

I used this example in another thread already, but will repeat it for argument's sake. In the steel industry during the 1980s, employment went from 340,000 to 125,000, which led to regulations limiting the importation of steel. This reduction in the supply caused prices to rise for everyone else. It is estimated that that the restrictions put in place in the 1980s produced $240 million in profits to the US steel companies and saved 5000 US steel jobs. On the flip side of that, due to artificially higher steel prices, other American companies using that steel have lost an estimated $600 million in profits and 26,000 jobs have been lost. So, as a nation, what did we really gain in closing up our economy slightly from international competition? Absolutely nothing. We lost 21,000 jobs and lost $360 million. This is only one example and it can be said that very exact opposite is true, in that opening up to freer trade creates jobs, including NAFTA.

[Armelius]

Ok. I read it. You leave out three main middlemen. The governments, the banks, and Wall Street.

And on the examples you leave out a third player the one producing the raw material for the ones with the hats and sun glasses.

Japan is a good example because they get their raw material from foreign countries. Using it to produce cars and electronics.

Technically the oil embargo before WWII to Japan was a protectionist measure. Since it would be a matter of time that their society would ground to a halt especially their war machine in China.

Another protectionist measure was to keep low exports to Japan while it was at war with China by only selling it small amounts of rubber, oil and refined low octane fuel.

In the 50's the US was on top of the world and protectionist measures were not in our best interest especially if other countries adopted those policies.

Like I said before a nationalization of oil mining is also a protectionist measure.

If you have foreign companies owning power companies (Germany), steel companies (again Germany), car companies (Germany and Japan, television companies (used to be France), and all these others http://www.sec.gov/divisions/c...c.htm. I would sincerely doubt if having tariffs or buy american is going to do much at all.

But like I said, if there are no protectionism then those other countries that import to the US will not increase it's wages or benefits to it's workers because everyone is content. Raise some barriers and the workers will either get laid off or they will demand more hours/pay forcing their government or employers to raise their hours or wages.

Didn't we just have a minimum wage increase or am I just imagining things again?

[smockers83]

Ok. I read it. You leave out three main middlemen. The governments, the banks, and Wall Street.

The first section and very last part of the first post and all of the 2nd post deals with governments. Explain yourself on banks and Wall St.

And on the examples you leave out a third player the one producing the raw material for the ones with the hats and sun glasses.

Japan is a good example because they get their raw material from foreign countries. Using it to produce cars and electronics.

You're finally getting the idea of trade. Japan gets their raw materials from foreign countries because they either have absolute or comparative advantages. Taiwan makes computer parts that are then shipped elsewhere like China to be assembled as computers and what not.

Technically the oil embargo before WWII to Japan was a protectionist measure. Since it would be a matter of time that their society would ground to a halt especially their war machine in China.

Another protectionist measure was to keep low exports to Japan while it was at war with China by only selling it small amounts of rubber, oil and refined low octane fuel.

Wars present a unique situation. A nation would logically and rationally not deal with the enemy or potential enemies during war. Most advocates of free trade make a couple of exceptions and one of those is national defense.

In the 50's the US was on top of the world and protectionist measures were not in our best interest especially if other countries adopted those policies.

Like I said before a nationalization of oil mining is also a protectionist measure.

And your points are? Protectionist measures are ideally never in our best interests.

If you have foreign companies owning power companies (Germany), steel companies (again Germany), car companies (Germany and Japan, television companies (used to be France), and all these others http://www.sec.gov/divisions/c...c.htm. I would sincerely doubt if having tariffs or buy american is going to do much at all.

Again, your point here is what? A company can be listed on an American stock exchange in order to get access to international investment markets. This doesn't mean they own anything in America.

But like I said, if there are no protectionism then those other countries that import to the US will not increase it's wages or benefits to it's workers because everyone is content. Raise some barriers and the workers will either get laid off or they will demand more hours/pay forcing their government or employers to raise their hours or wages.

What makes you say this and what backing do you have in order to say this, because it's entirely not true.

Didn't we just have a minimum wage increase or am I just imagining things again?

Minimum wage has nothing to do with trade. Minimum wage is in fact a price control, which is something that will be in another series.
Modified by smockers83 at 2:47 PM 2/5/2009

[Armelius]

Quote »Taiwan makes computer parts that are then shipped elsewhere like China to be assembled as computers and what not.[/quote]That would be interesting.

Quote »What makes you say this and what backing do you have in order to say this, because it's entirely not true.[/quote]The quickest thing I could come up with is a product like Red Bull. It's expensive and it's smaller than a cola yet people get addicted to it or thinks it tastes good. The US puts a tariff on it to keep people from consuming it or take out some of the profit while US companies think up comparable energy drinks to sell.

World wide Red Bull gets more sales but not as much as the US for more amercans have the disposable earnings to waste on Red Bull. But the government doesn't stop the increasing demand. It artificially keeps the product at inflated prices so that the US products can compete at a fair price though they might taste like crap as well and have market lag time to get the demand in.

Red Bull increases production and hires workers then due to tariffs or competition catching up to the fad the company announces a slow down in sales. Union leaders might see it as a lay off coming so instead decides to strike. Union then accepts some firings for a rise in pay, then production continues.

Now this could happen in places like China where we see an economic crisis lagging behind the rest of the world. Start erecting trade barriers to China and you will see a large scale mass protest. They will get change in either hours or wages.

That is about as simple as I can put it.

[smockers83]

That would be interesting.

Well it happens in real life, so the correct wording would be, "That is interesting."

The quickest thing I could come up with is a product like Red Bull. It's expensive and it's smaller than a cola yet people get addicted to it or thinks it tastes good. The US puts a tariff on it to keep people from consuming it or take out some of the profit while US companies think up comparable energy drinks to sell.

World wide Red Bull gets more sales but not as much as the US for more amercans have the disposable earnings to waste on Red Bull. But the government doesn't stop the increasing demand. It artificially keeps the product at inflated prices so that the US products can compete at a fair price though they might taste like crap as well and have market lag time to get the demand in.

Red Bull increases production and hires workers then due to tariffs or competition catching up to the fad the company announces a slow down in sales. Union leaders might see it as a lay off coming so instead decides to strike. Union then accepts some firings for a rise in pay, then production continues.

Now this could happen in places like China where we see an economic crisis lagging behind the rest of the world. Start erecting trade barriers to China and you will see a large scale mass protest. They will get change in either hours or wages.

That is about as simple as I can put it.

That's actually a good attempt. However, I would like to point out a couple of things if I may.

First, the US government putting a tariff on Red Bull is non-beneficial to both American consumers and Red Bull. It prices people out of the Red Bull market into other, cheaper brands, regardless of how popular Red Bull is. Even with Red Bull being more expensive, it is a well known name brand, another series that we could get into. This artificially high price causes us as Americans who consume it to pay an artificially high price for it. This reduces our real income. For Red Bull, this reduces sales and profits.

But for as long the tariffs are in place, Red Bull won't increase production for the US market. They may increase production as a result for higher demand in the US market and around the world, but as long as the US tariff is there, US demand is artificially low due to an artificially high price. When Red Bull increases supply in order to finally meet demand, as long as they don't supply in excess, they won't have to lay off anyone. If they do layoff people, they are not going to raise wages at the same time either. Wages are effectively paid based on productivity levels (along with supply and demand, but country to country it can be an indicator of productivity) and the productivity of Red Bull's labor force hasn't changed, just the size of it. When a union is forced to lay off its members, it hardly ever asks for a raise at the same time. A union may ask for a pay cut in order to keep its members employed, which is actually in the best interest of the union rather than have more of its members unemployed. Also by supply and demand, the price of labor, wages, will fall when production decreases because the demand for labor decreases and there is oversupply until layoffs occur. Layoffs bring this back into equilibrium and wages will actually continue to fall as expectations are deflationary until Red Bull demand shows signs of picking back up, such as a reduction/elimination of the US tariff. When that occurs, wages will rise due to the increase in demand for labor.

They may protest for more hours or wages, but the economy doesn't allow for them to be paid more or work more as production slows down, so they won't get them. Hours worked only increases as an economy rises with the need for more output and wages rise with productivity. In any economic downturn, an increase of hours worked has never been seen, but in every economic upturn, an increase in hours worked has always been seen.

[smockers83]

Another thing to consider in terms of how unions act in the face of slower production is to look at recent union actions.

In the automotive industry, they have been laying people off left and right. You don't hear to many people protesting that. The UAW also has taken pay cuts over the years in some measly attempt to bring their workforce inline with non-unionized ones that work at Honda plants in the US. There was also a steel union I think it was that was facing layoffs by a company and what they did instead was took a pay cut in order to save everyone's jobs. These are only two examples. Protests in the form of strikes usually come about when contracts are being highly debated or something may actually have a hint of being wrong. How many people do you see protesting today for more hours and higher pay? None.

[Armelius]

Quote »US demand is artificially low due to an artificially high price. When Red Bull increases supply in order to finally meet demand, as long as they don't supply in excess, they won't have to lay off anyone. If they do layoff people, they are not going to raise wages at the same time either.[/quote]Prices are artificial to begin with. Cokes can sell for 25 cents a can to about anything someone would pay. If people are addicted to coke then they don't pay attention to prices when they go into a restaurant and order a meal. Maybe McDonalds lose money on their cups.

I am not sure what Red Bull is floating at but with tariffs it wouldn't be that much to keep people off the stuff. The fact that there isn't any tariffs means the government is encouraging people to drink it. There is excise taxes on cigarettes, gasoline and there used to be luxury taxes on luxury cars costing over a certain amount.

People still bought despite the taxes. Some might have been discouraged but that meant the price would have to come down by the manufacturer so as to appear a better deal.

Cigarettes are practically nothing but taxes.

The tobacco farmer in other countries haven't stop producing because of the tariff or taxes. The US is still producing tobacco and is in high demand where there are even greater taxes than the US.

And workers do strike when there are times of impending layoffs. It's a tactic for the workers to demand cuts in pay by management or to readjust production in order to meet lower demands.

You have to remember that in other countries people are hired for much longer periods than the US. In the US you can be fired for practically any or no reason in most states. In places like France there are many strikes because few people are fired. Same goes for places like China. If a foreign corporation fires a worker then it has much more paperwork and has to have valid explanations as well as compensation that make our unemployment insurance look outdated. Quote »As experience had shown, steelmakers typically increased production tremendously in the runup to negotiations, creating a stockpile as a hedge against a strike. If the strike did not happen, then the employers laid off employees to reduce the glut of unsold steel. Similarly, customers often placed orders elsewhere when the contract's expiration date approached in order to reduce the likelihood that a strike would prevent the employer from filling their orders.

The parties entered into the ENA, which provided for arbitration in the event that the parties were not able to reach agreement on all of the terms of a new collective bargaining agreement through negotiations, as an alternative to striking. The ENA was very controversial within the union, since it compromised the union's right to strike.

U.S. Steel and the other employers terminated the ENA in 1984. In 1986 U.S. Steel locked out thousands of its employees when it shut down a number of its facilities as a result of a drop in orders on the eve of a threatened strike that never came about.

U.S. Steel and other producers demanded extensive concessions from their employees in bargaining in the early 1980s. The steel industry has likewise sought to spur the federal government to take action to counteract dumping of steel by foreign producers, that is, sale at less than the cost of production made possible by subsidies from those steel producers' governments. Neither concessions nor anti-dumping laws have, however, restored the industry to health.[/quote]http://www.economicexpert.com/a/USX.htm

[smockers83]

Prices are artificial to begin with. Cokes can sell for 25 cents a can to about anything someone would pay. If people are addicted to coke then they don't pay attention to prices when they go into a restaurant and order a meal. Maybe McDonalds lose money on their cups.

Prices are not artificial unless there is some sort of amount added to it by some institution, causing economic inefficiency, or what's called in economics, dead weight loss. Granted, most states have a sales tax, so that artificially inflates all prices affected by that tax. But ignoring the tax and looking at prices quoted pre-tax, many prices are not artificial. Well, I should take that back because many inputs can have government-inflated prices, such as all agricultural products, steel, foods with sugar, among other things. This causes a loss in consumer and producer surplus. Coke's price is what it is for a few reasons. A bottle of Coke is so much now due to all the vendors involved with machines and what not. But Coke is at a price that meets supply and demand. The price of Coke is actually considered a sticky price. For decades, a Coke was $0.05 due to the fear of raising its price due to sticky prices. Coke's price is slightly inflated though because of the cost of sugar which is controlled by the government. The fact that some people can be addicted to it due to the caffeine can bid up the price as it causes an increase in demand.

Restaurants make tons of money on their drinks.

I am not sure what Red Bull is floating at but with tariffs it wouldn't be that much to keep people off the stuff. The fact that there isn't any tariffs means the government is encouraging people to drink it. There is excise taxes on cigarettes, gasoline and there used to be luxury taxes on luxury cars costing over a certain amount.

People still bought despite the taxes. Some might have been discouraged but that meant the price would have to come down by the manufacturer so as to appear a better deal.

The government encouraging it if there aren't tariffs on it is one way to look at it. That's what makes analyzing public policy so interesting. Another way to look at it is the government participating in free trade.

There are taxes on things such as cigs and alcohol because governments wants to try and discourage their use due to their public health risks. People do still buy when these taxes are in place because they still value what they're buying more than the money that they pay for it. That is the basics of a trade, you have to value what you're getting more than what you're going to give up.

When taxes go up on things, prices have to come down because it causes a shift in the demand curve. The demand curve shifts in while the supply remains unchanged. This shift causes the price to fall. Companies don't necessarily do it to make it look like a better deal, they're responding to market activities. But I have a feeling that we both know this and are kind of thinking along the same lines.

And workers do strike when there are times of impending layoffs. It's a tactic for the workers to demand cuts in pay by management or to readjust production in order to meet lower demands.

That's not what you said before. Before it was to strike in order to get more hours or to increase wages in the face of economic slow down. But unions strike when they feel that they can get something in return that the company has been trying to deny the union the leaders.

You have to remember that in other countries people are hired for much longer periods than the US. In the US you can be fired for practically any or no reason in most states. In places like France there are many strikes because few people are fired. Same goes for places like China. If a foreign corporation fires a worker then it has much more paperwork and has to have valid explanations as well as compensation that make our unemployment insurance look outdated.

This prolonging the firing process or making it even harder in other countries and various industries in the US (education for example) causes many inefficiencies in the labor market and in business. It causes inefficiencies in the labor market because someone is using their resources to do a job that someone else could be better at. In business, this causes them to spend money on someone they don't want and can get someone who performs much better. This causes a needless delay in the movement of labor into efficient places.

I'm not exactly sure what point you're trying to make with the quoted article you posted but it is right, but I'd like to comment on it. Unions, when pushing for wage increases, especially today, render businesses to be uncompetitive. Some unions create a large disparity in wages compared to what the company could get in the free, non-unionized labor market. Anti-dumping laws, I'll get a post on that, but they don't work for reasons I'll get into later today.

[Jacko3]

Dear Smockers:

Interesting write up! Trade cannot be discussed these days without talking about labor intensive and capital intensive nations. The US is a capital intensive nation and so it must produce goods of high value and net worth, which requires a higher level of skilled labor force, and thus higher wages. In places like China, the opposite is the case----this is a labor intensive nation. On the basis of these classifications, relative efficiency, as opposed to absolute efficiencies in the theory of comparative advantage, is automatically an inherent aspect of these classification based on what a capital intensive or a labor intensive product means. Producing sattelites is a capital intensive endeavor and thus, the US with its educational stature and resources, is able to produce quality and better sattelites than China. In turn, China can produce supposedly better toys because of their proximity to cheap and plentiful labor. In a way, this may sound like a comparative advantage theory, but it is not, simply because, the idea has nothing to do with absolute efficiencies of production. Far from it, the US may actually be more inefficient at such an endeavor than China could be, for other reasons to include, strategic reasons, national security reasons, political reasons, etc.

We must design trade deals in the future that allow for free trade and yet protect our industries in both key manufacturing and service sectors. Simply letting the forces of globalization go where they may, is a dangerous proposition for America especially when the technologies and market competitive forces available to this nation are at par with what can be obtained elsewhere, which is what contributes to the stiff global competition in the first place. I used to love the idea of unfettered redistribution of resources as a result of globalization, until I began to see the negative sides of globalization. Globalization isn't a bad idea so long as you can gain more than you loose from it. So, the challenge in the 21st century for america is, how do we gain more than we loose from globalization? What will be the immediate indicators towards this end so that we can identify more quickly scenarios such as we are experiencing today in the current financial crisis?

Globalization isn't exactly what it is cut out to be. It swings extremely violently to one end and then to the other. Benefits of globalization will remain spurious until such a time as moderation of the effects of gloabalization---extreme wealth and extreme poverty is addressed, in addition to its effects on energy supplies and the environment.


Modified by Jacko3 at 8:28 AM 2/9/2009

[Armelius]

My points are that they are shifting the burden of taxation on the individual in the US rather than the outsiders pushing their products for final sale in the US.

An example of taxes or tariffs not affecting the producers would be the tobacco industry. You could probably raise the price through the roof yet someone in some prison would be smoking a cigarette in the US.

I would also point out the the Russians are implementing tariffs to protect Lada and to keep foreign manufactured cars high so to keep demand high for their dismal cars.

If protectionism doesn't work then pharmaceuticals should be available from places like Canada where they are cheaper. Instead we pay higher costs but it protects the profits of US companies like Eli Lilly CEO's to retire with 42 million bux.

To look only at the tariffs in the 30's and say that it caused the Great Depression to last longer is entirely short sighted.

[smockers83]

My points are that they are shifting the burden of taxation on the individual in the US rather than the outsiders pushing their products for final sale in the US.

An example of taxes or tariffs not affecting the producers would be the tobacco industry. You could probably raise the price through the roof yet someone in some prison would be smoking a cigarette in the US.

I would also point out the the Russians are implementing tariffs to protect Lada and to keep foreign manufactured cars high so to keep demand high for their dismal cars.

If protectionism doesn't work then pharmaceuticals should be available from places like Canada where they are cheaper. Instead we pay higher costs but it protects the profits of US companies like Eli Lilly CEO's to retire with 42 million bux.

To look only at the tariffs in the 30's and say that it caused the Great Depression to last longer is entirely short sighted.

I have always kept my analyses broad when studying economics, sometimes too broad as I was told many times by professors to narrow my research even though I wanted to know everything else and explore every possibility. But the reduction in world trade severely limited the abilities of countries to economically recover. It's not the only cause or policy that lengthened, but in the name of trade, it is the root cause.

Also, all of what you say is true. One can tax the hell out of tobacco and some guy in prison may still smoke, but you also price people out of the market. If people still smoke with higher taxes implemented, they still value their tobacco products more than the cash they handed over for them. It's as simple as that. It's a trade. If they didn't value the tobacco more than the money needed to pay for it, they wouldn't buy it because it wouldn't be a beneficial trade.

Unfortunately with the Russian policy, the Russian people are being forced to buy what would normally be uncompetitive products. This means they are getting inferior product as well as paying an inflated price for it, decreasing the country's income levels. It also allocates resources inefficiently. The resources used in producing those cars could have been used more effectively somewhere else, whether it's assembly line workers, steel, iron, engineers, whatever.

As for pharmaceuticals, why protect the select few who will profit from it when more than 95% of the rest of the people in your country will not?

Jacko, nice to see you entering the Politics forum. Since I just figured out what you do for a living, you may know a lot more about this stuff than I do. But comparative advantage doesn't explicitly say that in order to have an advantage you need to have an absolute advantage, which is something you're eluding to with your satellite example. The US has the capital resources to build satellites at a much higher quality than China as China doesn't have all the necessary technology or education to do so. This gives the US an advantage over China in highly-complex satellites in terms of being able to produce satellites better than China. China may be able to produce satellites but can they produce satellites with the quality, technology, and scope that the US has? I would say no. To produce the exact same satellite, I would bet the US would be much better at it than the Chinese. This gives the US an advantage, at least in the engineering of a satellite. At the same time, the US government may not want to go to China to have them produce satellites due to national security, which as I have said, many free trade advocates say should be taken into consideration and is an exception.

As for capital vs. labor intensive labor forces, a capital intensive country is generally more productive than a labor intensive country, thus higher wages. A more educated, skilled country is also more productive, thus higher wages.

I would also advocate the protection of certain industries in manufacturing in the name of national defense, such as core manufacturing industries for trucks, tanks, planes, and their respective inputs.

[Jacko3]

I have always kept my analyses broad when studying economics, sometimes too broad as I was told many times by professors to narrow my research even though I wanted to know everything else and explore every possibility. But the reduction in world trade severely limited the abilities of countries to economically recover. It's not the only cause or policy that lengthened, but in the name of trade, it is the root cause.

Also, all of what you say is true. One can tax the hell out of tobacco and some guy in prison may still smoke, but you also price people out of the market. If people still smoke with higher taxes implemented, they still value their tobacco products more than the cash they handed over for them. It's as simple as that. It's a trade. If they didn't value the tobacco more than the money needed to pay for it, they wouldn't buy it because it wouldn't be a beneficial trade.

Unfortunately with the Russian policy, the Russian people are being forced to buy what would normally be uncompetitive products. This means they are getting inferior product as well as paying an inflated price for it, decreasing the country's income levels. It also allocates resources inefficiently. The resources used in producing those cars could have been used more effectively somewhere else, whether it's assembly line workers, steel, iron, engineers, whatever.

As for pharmaceuticals, why protect the select few who will profit from it when more than 95% of the rest of the people in your country will not?

Jacko, nice to see you entering the Politics forum. Since I just figured out what you do for a living, you may know a lot more about this stuff than I do. But comparative advantage doesn't explicitly say that in order to have an advantage you need to have an absolute advantage, which is something you're eluding to with your satellite example. The US has the capital resources to build satellites at a much higher quality than China as China doesn't have all the necessary technology or education to do so. This gives the US an advantage over China in highly-complex satellites in terms of being able to produce satellites better than China. China may be able to produce satellites but can they produce satellites with the quality, technology, and scope that the US has? I would say no. To produce the exact same satellite, I would bet the US would be much better at it than the Chinese. This gives the US an advantage, at least in the engineering of a satellite. At the same time, the US government may not want to go to China to have them produce satellites due to national security, which as I have said, many free trade advocates say should be taken into consideration and is an exception.

As for capital vs. labor intensive labor forces, a capital intensive country is generally more productive than a labor intensive country, thus higher wages. A more educated, skilled country is also more productive, thus higher wages.

I would also advocate the protection of certain industries in manufacturing in the name of national defense, such as core manufacturing industries for trucks, tanks, planes, and their respective inputs.

Exactly! Excellently said! In fact, and to Regan's credit, american engineering and production skill, was far more instrumental in helping to defeat the Soviets during the cold war more than just the insane amount of money Regan spend on his Star Wars program. Russian equipment was far less potent and precise than american equipment. All our military weaponry was far more superior than theirs, eventhough, the russians, through forced and cheap labor, could produce more of the same type of equipment we challenged them on. So, in essence, to make up for lack of quality, they produced an obscene amount of equipment, which have been curently making their way to rogue nations all over the world.

[smockers83]

Glad we're on the same page, you and I. You're more than willing to contribute more to any of my economic series. The next one will be prices and price controls and their effects, not sure if this is up your alley or not.

[smockers83]

I know I said almost a week ago that I'd have an argument against anti-dumping laws, but I've been busy with a new job. But I have a little time so here it is.

When a company accuses another company of "dumping", it is saying the other company is participating in predatory pricing, meaning that they are selling their products at a price that is uncompetitively low and below cost in an attempt to drive out other competitors in order to take control of a market and take the benefits associated with a monopoly.

In international trade, the argument is that a foreign firm is participating in this predatory pricing to take over the domestic market. In order to do this, the foreign firm has to be selling at prices less than what it costs in their own domestic market. It is very difficult for a government or anyone to figure out production costs for a domestic company, no less a foreign company.

For example, the EU charged a Thai company that made mountain bikes and selling them in Europe was dumping in the EU. The reasoning behind it was that the company was selling below cost of production because he charged less for the bikes in Europe than such bikes had been selling for in Thailand. However, since we are a little educated in economies of scale, the Thai producer's costs when selling large numbers of bikes in Europe were unlikely to be as high as the costs of other producers selling much smaller numbers of bikes within Thailand, where there was far less demand for such a luxury item from a poorer and smaller population. The producer's costs for selling bikes in Thailand were likely to be just as high as other companies in Thailand, but due to economies of scale, they were able to charge less in Europe.

When a government applies these anti-dumping laws, there really is no serious basis of determining the costs of producing these things and government agencies rely on the best info available which is usually supplied by the companies asking for protection. All the domestic companies know is that they are losing customers, they really have no idea.

Predatory pricing has been a theory for a long time and is very hard to prove or disprove, domestically or internationally. If I recall correctly, not one case has actually been proven.

[Armelius]

The dumping is on the domestic manufacturers of bikes. All the sudden you have a Wal-Mart size choices of bikes which is good compared to having on Schwinn and JC Penny bikes or whatever crap they are selling in K-Mart.

Doesn't really matter how cheap these bikes are unless they are made with quality components. If people are attracted to the cheaper bike with crappy components then the domestic market could suffer if the bikes last over five years. If like a cheap lawnmower they crap out after two seasons then less people will buy from those dealers or manufacturers.

The good bikes built by domestic manufactures might have to adjust their prices downward to meet consumers expectations on what a bike should cost in order to sell more bikes.

If there was a tariff on these cheap bikes that fall apart then they either would have to drop their profit expectations or drop out of the market all together.

I am not saying tax the crap out of them only saying that a tariff would make sense in keeping domestic bike manufacturers competitive with an influx of crap bikes.

There is also a used market for these bikes. Quickly the crap bikes approach zero while a quality bike can still get what a crap bike costs new.

Tariffs could easily make domestic bikes cost more especially without the foreign competition. That might not be bad but there could be a bigger demand for the pre-tariff used bikes driving up their prices too.

Tariffs though would bring more funds to the government and would benefit those who have no interests in bikes.

One would only have to look at our tobacco taxes and what they charge (in tariffs or taxes) for that same pack of cigs in Europe to see we need tariffs on their goods since we are a consumer economy and would benefit more from tariffs. As it stands now the foreign manufacturers are getting a free ride by not paying any or nearly no taxes to sell their products to us.

[smockers83]

And you completely missed the point and definition of dumping. That doesn't that surprise me.

The bikes in your situation are priced less because the quality is less, which means the cost of production is less. That doesn't mean they've been dumped. Reread the definition of dumping/predatory pricing.

We as a consumer economy would not, in any way, shape, or form benefit from import tariffs. Draw out a supply and demand curve and figure it out. If you can't do that, then you have no business arguing with me further about it.

[smockers83]

I should also mention that your arguments have very gross assumptions built into them.

[Armelius]

And you completely missed the point and definition of dumping. That doesn't that surprise me.

The bikes in your situation are priced less because the quality is less, which means the cost of production is less. That doesn't mean they've been dumped. Reread the definition of dumping/predatory pricing.

We as a consumer economy would not, in any way, shape, or form benefit from import tariffs. Draw out a supply and demand curve and figure it out. If you can't do that, then you have no business arguing with me further about it.

We would and we have. We have had tariffs all the way up until the 50's. After this free trade started kicking in not only did we lose manufacturing to low labor nations but we also lost the ability to fund our government on products going in or out of the country.

Instead the burden is placed directly on the backs of ourselves. If there has been a direct benefit with free trade then point it out and explain how corporations like GM said if they saw an opportunity to make a buck off of German labor then they were going to do it.

Many of those other countries have VAT built into the final cost and it's unknown to the consumers in those countries exactly how much they are paying for anything. You could by a five bux pack of cigs that really only has the value of less than 50 cents. The rest is taxes.

If we taxed outgoing tobacco we could force them either to pay more or reduce the taxes that their governments are bring in.

They could refuse our cigs anyways therefore reducing the cost to americans or allowing for increase in taxes for the same goods.

Right now all the burden is placed on the American consumer for just about everything. If you want the most expensive medicine then come to America. If you want quality furniture at a great price then forget about driving to North Carolina and getting it or having it shipped. You can get the cheapest crap partical board straight from IKEA or China.

Notice how meat, corn and wheat prices went up with the costs of gasoline and the housing bubble. If we kept those prices high through tariffs. Then much of the world would have to pay higher prices for food. To them that it unsustainable. Instead we are giving most of the world a break while prices still are relatively high as they were when the markets peaked. Milk barely went down too. Gas is also artificially high and the excuse is that the refineries are retooling.

http://query.nytimes.com/mem/a...39EDE

Here is an example of the Federal Reserve intervening on stock market prices or futures.

[smockers83]

I'm honestly not sure if I should be taking this post seriously or if this is a joke.

Instead the burden is placed directly on the backs of ourselves. If there has been a direct benefit with free trade then point it out and explain how corporations like GM said if they saw an opportunity to make a buck off of German labor then they were going to do it.

Haha. Really? The burden has been placed on the consumer's back? In what way?

GM probably doesn't go to Germany for labor because Germany is highly unionized and their labor is just as expensive as ours is, if not more. So where would the gain be from that? Free trade doesn't mean you can go anywhere in the world and gain from it. Far from it.

Many of those other countries have VAT built into the final cost and it's unknown to the consumers in those countries exactly how much they are paying for anything. You could by a five bux pack of cigs that really only has the value of less than 50 cents. The rest is taxes.

And the same goes for here with cigs. Same can also be said for gasoline.

If we taxed outgoing tobacco we could force them either to pay more or reduce the taxes that their governments are bring in.

What kind of logic is that? Wouldn't happen in the real world. Sorry. This is where some of your gross assumptions come in.

They could refuse our cigs anyways therefore reducing the cost to americans or allowing for increase in taxes for the same goods.

Initially, if they refused our cigs, yes prices would be lower to Americans because of the sudden increase in supply. However, tobacco firms would cut back on supply and wouldn't be able to execute on economies of scale, forcing prices higher for Americans.

Right now all the burden is placed on the American consumer for just about everything. If you want the most expensive medicine then come to America. If you want quality furniture at a great price then forget about driving to North Carolina and getting it or having it shipped. You can get the cheapest crap partical board straight from IKEA or China.

Not because anything has to do with the fact that American consumers wanted that or anything? If people didn't want it, they wouldn't buy it. Not all stuff from IKEA is particleboard and their stuff is world renowned.

Notice how meat, corn and wheat prices went up with the costs of gasoline and the housing bubble. If we kept those prices high through tariffs. Then much of the world would have to pay higher prices for food. To them that it unsustainable. Instead we are giving most of the world a break while prices still are relatively high as they were when the markets peaked. Milk barely went down too. Gas is also artificially high and the excuse is that the refineries are retooling.

First off, wrong thread.Second, meat, corn, and wheat prices aren't connected to the housing market in a way that would affect their prices.Third, we do keep all agricultural products' prices high through tariffs and price floors. The top three industries around the industrialized world that are highly taxed through tariffs are agriculture, textiles, and clothing. Again, you don't know what you're talking about.Fifth, gas prices is in the other thread. Go start that debate over there.

http://query.nytimes.com/mem/a...39EDE

Here is an example of the Federal Reserve intervening on stock market prices or futures.

That article had what to do with the stock market again? Did you read it or did you misread the word cotton as stock?

[Armelius]

I am picturing you working for the IRS.

To me you seem to be in some sort of an agreement with Europeans, China and who knows who else that the US shouldn't have any trade barriers and that all taxes should be upon individual citizens.

Stark contrast with Thomas Jefferson.

[Armelius]

http://www.cbsnews.com/video/watch/?id=4803915n

From 60 Minutes Buy American.

[smockers83]

I am picturing you working for the IRS.

Nope, not at all.

http://www.cbsnews.com/video/watch/?id=4803915n

From 60 Minutes Buy American.

Listen to the Caterpillar CEO, he knows what's up. The steel guy got mad because he lives in the same world you do, that no one will retaliate against us. Remember the last time we did something with steel, back in the early 2000s? Remember what other countries did? We put up tariffs on steel so that the steel industry could reorganize. Other countries said fine, you do that and we're going to do this to your products.

He had to cut back production because the frickin' economy is down. Nearly everyone across the globe is cutting production and/or laying people off. When the economy is down, people demand less. When people demand less, there's less to produce. When there's less to produce, there's less jobs. When there's less jobs, there's less money. When there's less money, there's less demand. When there's less demand, the economy is down.

See how I did that, how it came full circle?

[Armelius]

Nope, not at all.

Listen to the Caterpillar CEO, he knows what's up. The steel guy got mad because he lives in the same world you do, that no one will retaliate against us. Remember the last time we did something with steel, back in the early 2000s? Remember what other countries did? We put up tariffs on steel so that the steel industry could reorganize. Other countries said fine, you do that and we're going to do this to your products.

He had to cut back production because the frickin' economy is down. Nearly everyone across the globe is cutting production and/or laying people off. When the economy is down, people demand less. When people demand less, there's less to produce. When there's less to produce, there's less jobs. When there's less jobs, there's less money. When there's less money, there's less demand. When there's less demand, the economy is down.

See how I did that, how it came full circle?

I used to work with Steve Owens. Can you say the same?

[smockers83]

I used to work with Archie Griffin. I hate to say it because I'm a Michigan man, but I've tried to sneak a Michigan hat on him for a picture.

I've also been with Charles Woodson, Rodger Federer, Magic Johnson, Steve Mariucci, Tom Izzo, Lloyd Carr (been to his house), the Ford family, and shaken hands and shared a few words with British royalty.