International Economics Day 2 Douglas J Young Professor Emeritus MSU djyoung@montana.edu
Goals/Schedule 1. How does International Trade affect Jobs, Wages and the Cost of Living? 2. How Do Trade Barriers (Import Tariffs, Quotas, Regulations, FTAs) work (or not)? 3. What are Exchange Rates, How are they Determined, and How do they affect Trade? 4. What are the Causes and Consequences of International Financial Crises, eg Asia 1998? 5. How does Immigration Affect the 2 Economy?
Principle of Comparative Advantage If Individuals (States, Countries) Concentrate on Producing Relatively Low Cost Products and then Trade, Both Sides of the Trade can be Better Off. Contrast with: Subsistence Farming Self-Sufficiency Autarky
Even if the USA Gains, Does Everyone in the USA Gain? No. Winners: Industries (Companies, Investors, Workers) Who Produce Exports Consumers of (Lower Priced) Imports Losers: Industries (Companies, Investors, Workers) Who Compete with Imports
Millions of Hours Hours Worked in Manufacturing 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000-1950 1960 1970 1980 1990 2000 2010
Billions of 2009 Dollars Real Value Added in Manufacturing 2000 1500 1000 500 BEA 0 1997 2002 2007 2012
2009 Dollars per Hour Worked Productivity $140 $120 $100 $80 $60 $40 $20 Goods Services $0 1950 1960 1970 1980 1990 2000 2010
Luddites Technology Destroys Jobs! Smash the Looms!
Do Productivity Increases Harm Workers? Common Sense Theory Fewer Workers Required => Fewer Jobs Higher Unemployment and/or Lower Wages
Productivity in Economics (1) Firms Adopt New Technologies because: Lower Cost of Production Initially, Increase Profits Eventually, Competition reduces Profits and Lowers Prices Examples: Most Agriculture, Apparel, Most Manufactured Goods (TVs, etc.) Eventually: Higher Real Wages (P )
Productivity in Economics (3) Workers displaced from one sector find employment in other sectors 1900: 41% of employment in agriculture 2010: 1 or 2% are farmers/ranchers Yes, transitional unemployment But no change in unemployment in the long run
Two Theories Common Sense Higher Productivity => Higher Unemployment And/Or => Lower Wages Economic Theory Higher Productivity => No Change in Unemployment And Higher Wages
160 Productivity and Unemployment 140 120 100 80 60 Productivity 1992 = 100 40 20 0 Unemployment (%) 1890 1910 1930 1950 1970 1990 2010
Employment 1950-2000
Real Wages (1) 1901: 5 lb. Flour cost approx. 30 min of work, or Real Wage = 10 lb flour per hour 2003: 5 lb. Flour cost approx. 6 min of work, or real wage = 50 lb flour per hour
Real Wages (2) 1971: 25 Color TV cost approx. 174 hours of work 2003: Much Better 25 Color TV cost approx. 23 hours of work 2015: 40 Vizio 1080p TV cost $278 Average Payroll Wage: $21.32/hour TV Cost = $278/21.32 = 13 hours work Sources: Costco, BLS
Real Wages (3) Time Well Spent: the Declining Real Cost of Living In American http://dallasfed.org/assets/documents/f ed/annual/1999/ar97.pdf One Hundred Years http://www.montana.edu/djyoung/317/ One%20hundred%20Years.pdf
Summary Day 1 4. Workers with High School Education or Less Have Fallen Behind College Educated Workers since 1980 Trade Played Some Role Technology Played a Larger Role Even without Trade, 1950s-60s Jobs are Not Coming Back
Krugman s Conundrum The Economist, April 19, 2008 Krugman: Trade accounts for 15% of the growth in the wage gap between skilled and unskilled workers since 1979. Katz: 5% Lawrence: Wages of low skill increased relative to those in middle since late 1990s when China entered. (Rich incomes rose.) Conclusion: Only 0-15% of growth in wage gap is a result of expanded trade.
Day 2 Trade Policy Tariffs, Quotas, Voluntary Export Restraints Free Trade Agreements Trade Adjustment Assistance
Import Quota Limit on Quantity of Imports Winners: Domestic Producers Losers: Domestic Consumers Typically: $ Losses Exceed $ Gains
US Sugar Quota
US Sugar Data: 2012 Total (B Lbs) Per Person (Lbs) Consumption 23.6 75.2 Production 17.0 54.1 Imports 6.6 21.0 Excess Cost* $2.9 B $9.15 Excess Cost* = (Domestic Price Foreign Price) * Production = ($0.434 - $0.265) * 17.0 B
Subtler Costs Artificially High Price Causes: Producers Use Too Many Resources in Sugar Production, and Consumers of Sugar Use Too Little Sugar Use Substitutes that are Actually More Expensive, eg Corn Sweeteners, Corn Ethanol.
What would Happen if Sugar Quota were Ended? Consumers Better Off $2.9B Producers (Farmers) Worse Off Production Shifts to Other Goods: Would Farmers be Unemployed? Would Land be Unemployed? Loss = Difference in Profits between Sugar and Next Best Alternative = $1.7B Loss to Producers < Gain to Consumers
(And a Bit of Politics) Who has the Incentive to Organize and Lobby for Removing the Quota? 314 Million Consumers Gain $9.15 each Small Incentive 10,000? Producers Lose $170,000 each Large Incentive Producers Protected by Quota are MUCH More Likely to Organize & Lobby
Voluntary Export Restraint (VER) Foreign Country Volunteers to Reduce Exports to USA 1981: USA in Recession + Japanese cars Popular => Unemployed USA auto factories and workers Reagan Supports Free Trade; Opposes Import Quota. Reagan Asks Japan to Reduce Exports Results: Higher USA Car Prices Cost Consumers $13 B; More Employment; Net Cost = $3B (or more)
Product Net Costs of Quotas USA mid-1980s Cost $Billions Autos 2.4-9.1 Dairy 1.65 Steel 0.8 2.3 Sugar 0.5 1.4 Textiles 8.9 12.0 Total 14.25 26.45 Feenstra 1992
Import Tariff Tax on Imports => Higher Domestic Prices (Perhaps Lower Prices to For n Exporters) Winners: Domestic Producers, Gov t Losers: Domestic Consumers Typically: $ Losses Exceed $ Gains Mid 1980s: $1.2 3.4 Billion = 0.2% - 0.3% of Income Less Now
Health and Safety Domestic Producers Sometimes Argue that Imported Goods are Unsafe May be True, but Economists Skeptical US: Drugs from Canada US: Skis from Japan (1950s 60s) US: Beef from Argentina EU: Beef from US EU: Foreign Dairy Factories must be Inspected, but No Inspectors Available Other Explanation than Health?
Export Subsidy China s Government Subsidizes some Firms => Lower Costs => Unfairly Outcompete USA Firms Lower Prices in USA Lower Production in USA Net Gain to USA Milton Friedman: Write China a Thank You Note
Other Risks of Protection Trade War 1930s Underdevelopment India 1971: 100% Tariff on Imported Autos Egypt: 1999: Approx. 50% => Domestic Producers are High Cost Inefficient Scale Lack of Competition How did Japanese Competition Affect Cost and Quality of US Auto Producers?
Free Trade Agreements Reduce Tariffs, Quotas, Subsidies, ie Promote Free(r) Trade International Standards: Labor Environmental Health and Safety Legal Issues Access to Markets Intellectual Property Investor Protections
General Agreement on Trade and Tariffs (1948) First Efforts to Reduce Barriers to Trade Various Rounds of Negotiation Tariffs Pre-GATT: Average 20-30% By 1994: Rarely Exceed 10% Includes 128 Countries
(Why So Broad?) On any Single Protection Issue: Domestic Producers are Likely to Out- Lobby Consumers => Very Hard to Reduce Barriers to Imports Many Issues Considered Together: Some Hurt Domestic Producers Some Help Domestic Exporters Many Countries Give Something Larger Net Benefits for All Sides
GATT Morphed Into WTO World Trade Organization Principles 1. Reduce Barriers to Trade 2. Non-Discrimination ( Most Favored Nation Principle) 3. No Unfair Encouragement of Exports (No Export Subsidies)
North American Free Trade Agreement (NAFTA) Reduced Trade and Investment Barriers between US, Canada and Mexico NAFTA Caused 3-8% of the Growth in Total Trade (Exports + Imports) of US Small Estimated Effects on Trade Balance US Consumers Benefit from Lower Prices; Some Workers Lose Jobs
Gedanken Experiment Shift Labor toward Comparative Advantage: USA: Shift 1 Worker from Toys to Beans CHN: Shift 3 Workers from Beans to Toys Changes in Output USA CHN Total Beans +500-300 + 200 Toys -50,000 +90,000 +40,000 The World is Richer!!!
Resource Reallocation China: Workers Voluntarily Move from Farming to Manufacturing cuz (Much) Better Off USA: 1. Workers Voluntarily Move from X? to Export Industries (Boeing, High Tech ) 2. Workers Laid Off from Manufacturers: What Happens to Them?
THE CHINA SHOCK: LEARNING FROM LABOR MARKET ADJUSTMENT TO LARGE CHANGES IN TRADE David H. Autor, David Dorn, Gordon H. Hanson MIT, University of Zurich, UC San Diego National Bureau of Economic Research Working Paper 21906 http://www.nber.org/papers/w21906 January, 2016
Findings Consumer Benefits: Lower Prices for Manufactured Goods (No Evidence) Adjustment Costs & Distributional Consequences: Slow Adjustment in Local Labor Markets 1. Unemployment up & LFPR down 2. Wages down for at least a decade 3. Rise in Transfer Payments
Employment Direct Impact on US Manufacturing - 1.5 Million Jobs = 1% of US Employment Additional Indirect Impacts (Multiplier) -0.5 Million Jobs Offsetting Employment Gains in Export Industries Yet to Materialize MAY be Gains in Non-traded Sectors (No Evidence)
Wages Reduced Weekly Earnings For Workers in Lower 40% of Wage Distribution Spread Beyond Industry Directly Affected In Local Areas Impacted by Imports Local Labor Markets Impact Does Not Spread to other Areas Few Workers Move to Other Areas Employment and Wage Effects Have About Equal Impact on Worker Income
Dorn et al 2016 Transfer Payments
Trade Adjustment Assistance (TAA) Extends Unemployment Benefits from 6 months to 18 months Assistance toward Relocation, Job Search, Health Care Effectively Inconsequential Financially Achieving Adjustment
Employment is Declining
Why? Several Reasons Technology and Trade have Lowered Demand for Less-Skilled Workers Reduced Supply of Willing and Able Workers; Nonworkers: 1/3 Report Disability; ½ on Pain Meds Lack Skills for Today s Jobs Rising Incarceration Rates Some Men Avoid Women s Work
What Policies to Help? 1. Reduce Disincentives to Work All or Nothing Disability Policy 2. Family Leave Policy 3. Education and Training for Today s Jobs 4. Hit Those Men Up the Side of the Head with a Cast Iron Frying Pan
Summary Day 2-1 Trade and Technological Advance Make us Better Off via Lower Prices/Higher Wages But CHANGES in Trade and Technology Result in Layoffs as Well as Opportunities Workers Must CHANGE Jobs, possibly by Changing Location and Skills
Summary Day 2-2 Barriers to Imports (Quotas, Tariffs, etc) Increase Domestic Prices: Domestic Producers Gain Domestic Consumers Lose Net Loss to Country Barriers are Difficult to remove because Producer Gains are Concentrated on Few, Large, Organized Groups who Lobby Effectively
Summary Day 2-3 But Negotiations by Groups of Countries covering Many Goods and Services (GATT, NAFTA, WTO) have Greatly Reduced Trade Barriers since WWII Negotiations have Also Facilitated Capital Flows (Next Week)
Summary Day 2-4 Employment and Wages have Declined for Lower Income Americans. Causes: Lower Demand for Less Skilled Workers (Technology, Trade) Lower Supply (Availability) of Less Skilled Workers (Disability, Lack Modern Skills, Incarceration, Unwillingness to Move) Solution? Better Education (of course)