No, it is comparative advantage that matters, not absolute advantage. Nations should specialize and trade based on absolute advantage. David Ricardo “Loonie” “Euro” Adam Smith Exports equal 32% of global economic output, but only 13% of U.S. output.[U.S. supplies 1/8 of world’s exports] In 2010, American imports & exports totaled over $4.1 trillion. [$1.832 trillion in exports& $2,330 trillion in imports][Deficit $498 B]
Joe Smith started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m. While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt(MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA). After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE IN TAIWAN ) to the radio(MADE IN INDIA) he got in his car(MADE IN GERMANY) filled it with GASfrom Saudi Arabia& continued his search for a good paying AMERICANJOB. At the end of yet another discouraging and fruitless day checking his computer (MADE IN MALAYASIA), Joe decided to relax for a while. He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV(MADE IN INDONESIA), and then wondered why he can't find a good paying job in America..... Is This A Bad Thing? Actually this is a good thing. We get more choices, lower prices, & because more is bought, more jobs are created.
What is Globalization? That is Globalization… The process by which individuals and businesses in other parts of the world are affected by events elsewhere in the world. • Question: What is the definition of Globalization? • Answer: Princess Diana’s death • Question: How Come? • Answer: An English princess with an Egyptian boyfriend crashed in a French tunnel, driving a German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky, followed closely by Italian Paparazzi, on Japanese motorcycles; treated by an American doctor, using Brazilian medicines. • This is sent to you by a Canadian, using Bill Gates’ technology, and you’re probably reading this on your computer, that uses Taiwanese chips, and a Korean monitor, assembled by Bangladeshi workers in a Singapore plant, transported byIndian lorry-drivers, hijacked by Indonesians, unloaded by Sicilian longshoremen, and trucked to you from Mexico. Lorry-drivers
Globalization: Merchandise Exports as a Share of World GDP (32%) 32% 30% 25% 20% Percent of GDP 15% 10% 5% 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2007 2008 Globalization increases U.S. incomeby $1.8trillion a year, or $10,000 per household. Or, without globalization, Americans would be poorer by $1.8 trillion a year.
Widening Trade Deficits 14 million iPads were sold in the U.S. last year, but because they were made in China, were counted as imports. $677 $700 $600 $500 $400 $300 $200 $100 0 $498 $381 22million pairs of Nikes are imported each year, employing 50,000 Vietnamese. American companies have 54 million golf balls produced in China so they are imports. 95 97 99 01 02 03 04 07 08 09 10
These Countries represent 66.89% of U.S. Imports, & 60.41% of U.S. Exports in goods. The values are exports and imports added together November 2011 Year To Date Total in Total in Billions Billions Country Nameof U.S. $ of U.S. $ Canada 49.54 548.07 China 46.74 460.67 Mexico 40.86 423.08 Japan 18.30 177.66 Germany 13.15 134.60 United Kingdom 8.94 97.45 Korea, South 8.47 91.68 Brazil 6.68 67.49 France 5.88 62.13 Saudi Arabia 5.60 54.67 The values given are for Imports and Exports added together. Top 10 Countries with which the U.S. Trades
U.S. International Trade in Goods & Services Tradeis analogousto technology, disruptive but ultimately beneficial. $696 $498 $764 $381 2010 Trade Balance -$498 billion 2008 2010 2006 2007 2009
Exports Imports $94.1 $331.0 70.9 133.8 77.6 112.1 50.2 104.0 42.9 115.7 41.5 86.3 94.7 43.6 48.6 55.0 32.0 37.1 25.6 25.8 United States and World Trade Principal U.S. Exports & Imports – 2007 [in Billions of Dollars] Source: Department of Commerce Data Chemicals Consumer Durables Agricultural Products Semiconductors Computers Generating Equipment Automobiles Aircraft Medical equipment Telecommunications Electrical machinery Fuels and lubricants Petroleum Automobiles Household Appliances Computers Metals Clothing Consumer Electronics Generating Equipment Semiconductors Telecommunications Aircraft Chemicals 83.2 34.4 56.2 47.7
The U.S. and World Trade . U.S. Exports & Imports of Goods, 2007 Exports to: Value (Billions of Dollars) Industrial Countries $553 Developing Countries 596 Total $1,149 Imports from: Value(Billions of Dollars) Industrial Countries $819 Developing Countries 1,146 Total $1,965 Most of our imports come from developing countries.
Free Trade v. Protectionism * You can make a good argument for these. • *1. National Defense Argument: certain industries should remain based in our country, especially if they manufacture items vital to our defense. Items this argument have been used for include: pens, pottery, peanuts, papers, candles, thumbtacks, tuna fishing,and pencils. • *2. Infant Industry Argument: new industries must be protected from older, established foreign competitors until they are mature enough to compete. However, removing protection is almost impossible. • 3. Dumping Argument: domestic industries need to be protected from foreign dumping. Dumping is the sale of goods abroad at a price below their cost and therefore undersell domestic competitors to put them out of business; obtain monopoly power and raise their prices. • 4. Foreign–Export–Subsidies Argument: Some governments subsidize the firms that export goods. Firms say that this forces them to compete with both the firm and the government in question.
Free Trade v. Protectionism • 5. Low Foreign Wages Argument: A country’s low wage advantage may be offset by its productivity disadvantage. High wages means high productivity. Low wages mean low productivity. • Some recentminimum wages in other countries: Turkey: 41¢; India: 42¢, Hungary: $1.22, Brazil: $1.50, Mexico: $6 a day, Haiti: 68¢ or $5.50 per day; Indonesia: $1.06 a day [where Nikes are made]. • Even though these wages are very low, worker productivity there is probably low. It may take several workers to do what one American worker can do. The more important question is what does it costto do the job? • Saving Domestic Jobs Argument: This argument is actually most of the previous arguments but indisguise.
Manufacturing Output, Top 8 countries, 2010 Country Share of Global Manufacturing - 2008 U.S. China Japan Germany France Italy UK Korea Russia Brazil Rest World U.S. ROW China Japan FR. Ger.
U.S. Manufacturing Not Dead U.S. manufacturing is not dying. It is at an all time high. We are making more than twice as much today as we were in the 70s. However we’ve gone from 19 million manufacturing jobs to 11 million because of increasingproductivity or building the same amount of stuff with fewer workers. Where will they go? High tech employs millions compared to almost none 50 years ago. So, we are building twice as much with fewer workers. That trend will continue and then some. Health care. Clean energy. And fields we can’t imagine yet. For instance, in 1900, 44% of jobs were in agriculture. Tremendous improvements in farm productivity pushed that number to 2.2% today. Those who once would have plowed fields now work at curing cancer, building roads, etc. We don’t want those farm jobs back. So, all of you who thought U.S. manufacturing was dead “TAKE That!!!”
Important Questions To Ask About “Saving Jobs” 1. How many domestic jobs in the firms that produce good X are being saved because of the tariff? 2. How much do consumers have to pay in higher prices to save those jobs? Let’s just see HOW MUCH consumers do have to pay when we protect domestic jobs with tariffs and quotas.
12,000 x $40 = $480,000[NS-NT];12,000 X $25 = $300,000[S-T](It cost $180,000 to save one clock-radio guy’s job) Joe Export Goes Out Of Business “I can do the econ rap.” Suppose Joe Export lives & works in the U.S. making dancing clock radios. He produces and sells 12,000clock radios per year at a price of $40 each. There is no international trade. One day the U.S. market is openedto dancing clock radios from Japan. The Japanese manufacturers have acomparative advantageand sell them for $25 each. Joe can not compete at this price. His sales drop to such a degree that he goes out of business. International trade has harmed him but helped American consumers because they save $180,000.
Saving Jobs Costs Money Industry Yearly Loss Employment Annual Cost To Economy Loss If Barriers Per Job From BarriersWere RemovedSaved Textiles $15,850 billion 71,639 Dairy Products 1,630 million 2,378 Sugar 657 million 2,040 Peanuts 74 million 397 Meat 177 million 928 Non-rubber 170 million 1,377 footwear Orange Juice 307 million 609 Canned Tuna 100 million 390 $221,258 685,233 322,059 187,223 190,733 123,456 635,103 257,640 I love the chicken in this tuna can. Chicken of the Sea of the Chicken Sea
High Cost of ProtectionIt cost an average of $231,289 per job saved. Consumers pay $100 billionannually in higher prices.Protecting sugar raises candy and soft drink prices; protecting steel makes car prices higher. This is a “negative-sum game.” So you can see that, “Free trade is a good idea for most of us despite the hardship it imposes on a few of us.”
Keep The Money At Home Point: When I buy a coat in England, I have the coat and England has the money. But when I buy a coat in America, I have the coat and America has the money. America is more wealthy because it has both the coat and the money. Abe Lincoln Counterpoint:Money is not wealth in and of itself, it merely facilitates trade. If America sends dollars to England, England will eventually use those dollars to buy American goods. If we don’t buy goods from other countries, then other countries will not be able to buy goods from us.
Jobs, Jobs, Jobs Point: Protecting businesses from foreign competition preserves American jobs. Counterpoint:Few are helped by protective policies, but they are more visible and more vocal than the many who are hurt. Protecting jobs in import competing industries raising prices to consumers and costs jobs in industries that use imported inputs. America and consumers pay dearly each time protectionist measures “save” jobs.
Jobs, Jobs, Jobs Argument . Protecting American businesses from foreign competition does potentially preserve American jobs. Point 1: Restrictions on imported steel in the 80s saved 17,000 jobs in the steel industry and its suppliers. Counterpoint:That is half the story. Here is the rest of the story. 1. The higher steel prices saved 17,000 jobs in the steel industry but led to the loss of 52,400 jobs in American steel-using industries. For every job saved, three were lost. Point2: Import quotas on Japanese autos preserved 4,598 American jobs. Counterpoint2: but at a cost to consumers of $241,235 per job per year, in higher prices paid for cars. Saving a $30,000 auto job costconsumers $120,000 annually in higher prices. *The more you pay for protected goods, the less you have to use to buy other goods. The less consumers have to buy other goods, then fewer jobs will be created by the market. In the last few years, tariffs have preserved 3,500 steel jobs; by contrast tariffs have cost steel users between 12,000 and 43,000 jobs due to higher prices.
Low Wage competition Point: If we trade freely with low wage countries, U.S. businesses will flee to those countries and U.S. wages will plummet. Counterpoint:Low wages, combined with low productivity, will result in high unit costs. High wages in the U.S. Result from the high productivity of American workers, aided by the availability of raw materials, massive capital equipment, sophisticated management, and elaborate infrastructure.
“I know you are against free trade as a former employee. But – how do you feel about free trade as a consumer?
2009 Deficit in goods$501 Surplus in services $135 $381 U.S. Trade Deficit Imports Exports Total: $1,832 Exports Total: $2,330 Imports Over $4 trillion going both ways *Exports support14 million American jobs. [Wages 16.5% higher] 6.5 million Americanswork forforeign companiesin the U.S. Toyota alone has created more than 100,000 U.S. jobs. 2010 Deficit in goods$646 Surplus in services$149 $488
U.S. Export of Services [X=$543B; M=$394B in 09[ [+149B] 38 U.S. schools have 65 branches in 34 countries. The U.S. has more great colleges than the rest of the world combined. Kentucky colleges welcome 5,018 foreign students who contribute $85 million to the state’s economy. In Texas, 55% of engineering master’s degrees go to foreigners. Over 50% of the PH.D.s in mathematics go to “nonresident aliens”. Also, 75% of engineering PH.D.sgo to foreigners. 500 million visit the U.S. every year bringing in $70 billion. Foreign visitors buy tourism “exports”, such as hotel rooms, airline fares and consumer goods. Watching American movies & TV programs [foreign sales accounted for about half of the film industry’s $5 B box-office revenue. Hiring American investment bankers, engineers, consulting fees, royalty payments, accounts, architects, advertising agencies and even lawyers [they earned $20 billion]. Using American hospitals or attending U.S. schools. About 3% of all college students are foreigners. Tuition-paying foreign students pay about $18 billion a year on tuition, housing, & consumer goods. About 700,000 foreign college studentsattend American colleges. Texas attracted the 3rd largest # of foreign students with 38,000 who provide $615 million net spending to the Texas economy. India leads with 104,000; Chinais next with 98,000; S. Korea has 75,000; and Canada has 30,000; & Japan – 29,000; USC-7,500. CCCC has 630 foreign students. 1/3 of Richland’s are foreign; 2,000at UTD out of 15,000. They make up25% of grad students& 5% of undergrads. 1/3 of U.S. sci and eng doctorates & 40% of PHD’s in comp sci go to foreigners. “Begging at the gates of world’s best”
276 Canada 365 China 249 Canada 230 Mexico 120 Japan 163 Mexico 83 Germany 50 UK 49 Korea 36 Taiwan 39 France 92 Deficit of $273 China 61 Japan 49 UK 48 Germany 39 Korea 27 France 29 Singapore 32 Netherlands 26 Taiwan Who Are Our 200 180 160 140 120 100 80 60 40 20 0 Top Trade Partners? 180 160 140 120 100 80 60 40 20 0 2010 IMPORTS EXPORTS http://www.census.gov/foreign-trade/statistics/highlights/top/index.html
CountryImports fromExports to Australia Beef Airplanes Aluminum Computers Autos Auto parts Belgium Jewelry Cigarettes Cars Airplanes Optical Diamonds Canada Cars Auto parts Trucks Cars Paper Computers China Toys Soybeans ($9 B) Shoes Semiconductors 5 B Clothes Chemicals ($4 B) Germany Cars Airplanes Engines Computers Auto parts Cars Japan Cars Airplanes Computers Computers Telephones Timber Russia Oil Corn Platinum Wheat Artworks Oil Seed crops [canola & sunflower] South Korea Shoes Airplanes Cars Leather Computers Iron ‘ngots
Toyota Camry and Toyota Tundra Honda Accord and Honda Odyssey Minivan BMW Z4 Roadster & BMWX5 SUV Mercedes-Benz-M-Class Toyota Corolla Subaru Legacy Hyundai Elantra Nissan Maxima Chrysler Crossfire Dodge Ram Plymouth voyager Chrysler PT Cruiser Pontiac Firebird Chevrolet Camaro and Impala Ford Fusion Mercury Capri Chrysler 300 “Are these vehicles made in the U.S. or in other countries?" BuyAmerican? Chrysler 300 1957 Chrysler 300
Are You Really Buying American? Toyota Camry and Tundra – U.S.A. (California and Texas) Honda Accord and Honda Odyssey Minivan – U.S.A. (Ohio) BMWX4 Roadster and BMWX5 SUV – U.S.A. (South Carolina) Mercedes-Benz-M-Class – U.S.A. (Alabama) Toyota Corolla – U.S.A. (California) Subaru Legacy – U.S.A. (Indiana) Nissan Maxima– U.S.A. (Tennessee) Hyundai Elantra– U.S.A. (Alabama) Dodge Ram – Mexico Plymouth Voyager – Canada Chrysler PT Cruiser – Mexico Pontiac Firebird – Canada Chevy Camaro and Impala – Canada Ford Fusion - Mexico Mercury Capri – Australia Chrysler Crossfire - Germany Chrysler 300 - Canada Foreign nameplates were made in theU.S. Domestic nameplateswere made inother countries.
Are You Really Buying American? This competition gives consumers higher quality, more choices, and lower prices. Globalization has blurred national auto identities. Fiat owns Chrysler. Daimler builds Mercedes SUVs in Vance, Alabama and owns stake in Mitsubishi and 10% of Hyundai Motor. GM did own Saab and has stakes in Isuzu, Suzuki, Subaru, Fiat and Daewoo. Ford owns Mazda and Volvo. By 2011, predictions are that foreign-based automakers will build more cars at U.S. auto plants than the “Big 3”.
The BMW plant in S. Carolina sends 40% of its cars to other countries. This is an example of in-sourcing. As many as20% of our exports are a result of in-sourcing. Toyota Georgetown, KY Princeton, IN Fremont, CA San Antonio, TX [$800 mil. Plant employing 2,000] Honda Marysville, OH East Liberty, OH Lincoln, AL Hyundai Montgomery,AL Nissan Smyrna, TN Canton, MS Mitsubishi Normal, IL Hyundai Montgomery, AL BMW Spartanburg, SC Mercedes-Benz Vance, AL Subaru Lafayette, IN Volkswagen Chattanooga, SC KIA West Point, GA Honda provides 50,000 high-output V-6 engines for GM cars, blurring the distinction between U.S./foreign cars. Asian and European auto co’s employ 92,700 Americansdirectly and 574,500 indirectly accounting for 33% of U.S. auto production. The “Big 3” employ 240,000 workers. It is less expensive to build an Accord here than ship it from Japan. Only 16% of Honda carssold hereare imported from Japan. Honda also buys $13 billion worth of parts from 620 suppliers in North America. Toyota’s Tundraplant in San Antonio received 110,000 applications for the 2,000 positions that pay from $15.50 to $25 an hour.
[parts from 15 countries] All-World Car Ford Escort Switzerland may get the inputs to make the speedometer and gears from several countries.
What Country Owns These Companies • Nestle • Shell • Lipton • Baskin-Robbins • Burger King • Alka Seltzer • Volvo • Sony • Tropicana • TV Guide • Vaseline • Bayer • Gatorade • Adidas • Levi Straus Switzerland Netherlands Great Britain Great Britain Great Britain Germany Sweden Japan Canada Australia Great Britain Germany U.S. Germany U.S.
The Fruits of Free Trade Global Fruit Basket Apples New Zealand Apricots China Bananas Ecuador Blackberries Canada Blueberries Chile Coconuts Philippines Grapefruit Bahamas Grapes Peru Kiwifruit Italy Lemons Argentina Limes El Salvador Oranges Australia Pears South Korea Pineapples Costa Rica Plums Guatemala Raspberries Mexico Strawberries Poland Tangerines S.Africa Watermelons Honduras
The World In A Can In an average can of mixed nuts, you findalmonds from Italy, walnuts fromChina, Brazilian nutsfromBolivia, cashews fromIndia, pistachiosfrom Turkey, and hazelnutsfromCanada.
Video Equipment TV sets Toys Photo equipment Roasted coffee Audio equipment Dishes & flatware Women’s outerwear Men’s shirts/sweaters Film & photo sup. Girls’ apparel Men’s footwear New cars Women’s dresses Rice HH laundry equip. Wanted: More Cheap Imports Trade fosters competition, which rewards productivity and restrains cost. More-traded Products Five-year price change (percent) Competition From Overseas – Lower Prices
Less-Traded Products [Less Competition-Higher Prices] Less-traded Products No Competition From Overseas – Higher Prices
Buy only from your self. 1. Food 2. Economic knowledge ***Buy American?*** The Job You Save May Be Your Own. Buy D-FW BUY Buy “D”
Independently Poor [If we consumed only the goods & services we produced,we would toil long hours but remain dirt poor]
The Japanese paid $28 billion per year in higher prices for rice because they would not buy from U.S. rice farmers. Japanese consumers pay $600,000 in higher prices for each job protected. Japan – “Land of the $30 pizzas, $30 lipstick, $50 melons, $100 jeans and $4,500 two-bedroom apts.” Japan has been aclosed economy [fewer choices, higher prices] ItemN.Y.Tokyo Shock Absorbers $228$605 Alternator $120$600 Watermelon $5$50 Cup of coffee $1$7 Cab to airport $30$200 Stamp .44.79 Gallon of gasoline $3.00$7.00 Newspaper 1.50$2.00 Movie Ticket $14$20 We have 550 cars per 1,000; Japan has only 240 per 1000 inhabitants. Japanese cameras aremore expensive in Tokyothan in New York. In Tokyo, you have to have a sizable inheritance to beable to afford a house. Japan has had adecade-long economic tailspin, even withinterest rates less than 1%.
Share Of World Exports [Selected Nations] The 8 largest export nations account for 46% of world exports. Percentage Share of World Exports, 2009 0 2 4 6 8 10 12 China Germany U.S. Japan Netherlands France Italy Belgium Principal U.S. exports include chemicals, agricultural products, consumer durables, aircraft, and semiconductors. So, China & Germany are the leading export nations but the U.S. is the leading export and import [or trade]nation. Source: World Trade Organization
$273 Billion Chinese Trade Deficit The U.S. trade deficit with China in 2009 was $273 B. Wal-Mart bought $20 Bfrom China in 2010 & istheir 8th largest trade partner. Top Chinese Imports (percentage of all imports) 88% of all Radios 87% Christmas & festive items 83% Toys 70% Leather goods 67% Shoes 67% Handbags 65% Lamps and lights 64% Cases for cameras, eyeglasses, etc. 60% Drills, power tools 56% Household plastics 54% Sporting goods 53% Ceramic Kitchenware We import 54 million golf balls from China each year.
China - the "World's Factory" 10 million toys including “Big Bird” were recalled because of “lead” or magnets that tear the intestines when swallowed by children. After a series of product recalls, from pet food to tires, American regulators are paying more attention to goods exported to the U.S. from China. 450,000 tires were recalled because of tire separation problems. Who Buys Chinese Goods? The U.S. accounts for 1/5 of all Chinese export destinations, 2007. 1.5 mil imported toy trains were made using lead paint. $56 billion In goods from U.S. to China FDA ordered recall after a poisonous ingredient was found in toothpaste. 675,000 Barbie doll accessories More than 60 billion cans of cat and dog food were recalled.
$273 Billion Chinese Trade Deficit The U.S. trade deficit with China in 2010 was $273 billion. X to China $92 B Mfrom China $365 B
The US buys far more from (IMPORTS) than it sells (EXPORTS) to China - the US claims this is because China has kept its currency artificially weak. In fact trade with China accounts for 14.3% of all US trade - the States only does more trade with Canada. Feb 2011
Key Facts On Trade • Export Goods & Services make up about12%of American GDP • Exports havemore than • Doubledas a percent • of GDP since1975 When I was born! • $498 billiontrade • deficit in 2010
Absolute Advantage and Comparative Advantage
Write these into your notes!!! 1. Comparative Advantage – can produce a product at a "lower opportunity cost". (less left behind…) 2. Absolute Advantage[outputs] – can produce absolutely more (outputs/finished products) With the same inputs… 3. Absolute Advantage [inputs] – can produce absolutely faster (more efficient) with the same inputs…