Arnold Kling  

Trade Controversies

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The New York Times has several recent articles on international trade. One piece discusses IBM's evaluation of outsourcing.


in recent weeks many politicians in Washington, including some in the Bush administration, have begun voicing concerns about the issue during a period when the economy is still weak and the information-technology, or I.T., sector remains mired in a long slump.

In this piece, the U.S. is portrayed as a victim of international trade.

A major reason for the [weak job market] is the mobility of American companies, particularly the ease with which they now shift operations to China and India. "The wholesale movement of jobs and production overseas is handcuffing the recovery," said Mark M. Zandi, chief economist at Economy.com.

In this piece, the U.S. is portrayed as the villain of international trade.

While nearly one billion people struggle to live on $1 a day, European Union cows net an average of $2 apiece in government subsidies. Japan, a country that prospered like no other by virtue of its ability to gain access to foreign markets for its televisions and cars, retains astronomical rice tariffs. The developed world's $320 billion in farm subsidies last year dwarfed its $50 billion in development assistance. President Bush's pledge to increase foreign aid was followed by his signing of a farm bill providing $180 billion in support to American farmers over the next decade.

The freshman economics course would argue that the United States economy benefits from outsourcing and is hurt by farm subsidies. The media reports it the other way around. Is one of the pre-requisites for journalism that you must not understand basic economics?

For Discussion. How would you explain comparative advantage so that a journalist would understand it?



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The author at Peter Gallagher in a related article titled Comparative Advantage writes:
    Arnold Kling asks how to explain comparative advantage so that a journalist understands it. Well, its perfectly possible ... [Tracked on July 23, 2003 7:16 AM]
COMMENTS (12 to date)
Matt Young writes:

The major reason that a company like China out-trades us is that our government consumes over 40% of our economy, while government consumes only 26% of their economy.

The real question is why does capitalist China want to invest in socialist American by holding all those declining dollars?

Brad Hutchings writes:

I am sure that when their headlines read "All your newspaper are belong to us", the journalists will understand.

Actually, the problem here is not an economic problem or a trade problem. Like file sharing, Linux, and discount air fares... it's a value problem. I could write a book with countless other examples. People (in general, maybe best to give it a name like "the mob") want something, don't want to pay what it costs to deliver it, move to other pastures thinking their is a cost saving advantage, end up with garbage, whine excessively about it. But hey, they are saving money. I'm not for regulating against the mass migration from value to cheap, just as I'm not for regulating in its favor. I do think that individuals who participate in it give up their prviilege of being taken seriously when they whine later. I also think that a case needs to be made that excellence shouldn't just be a niche. But hey, few who make excellent stuff seem to be making the case effectively these days. Oh well...

-Brad

Bernard Yomtov writes:

Arnold,

I don't see that the passage you quote suggests that the US benefits from its own farm subsidies. It seems to be critical of agricultural subsidies and tariffs in general, Japanese, European, and American.

In fact, my overall impression is that the American subsidies have been widely criticized here by opinion writers on both the left and the right.

Peter Gallagher writes:

Hi Arnold,

I thought the NY Times piece got it right about the impact of farm subsidies. I think they're absolutely right: that it ultimately hurts US interests (and doubly wastes taxpayer funds).

You ask a reasonable question about comparative advantage that many analysts ask. But explanation's only half the job.

In my experience, it's not that difficult to show how comparative advantage works. I regularly run through the basics with business organizations all over the world as part of my work with the UN. There's a note on my site about my approach... no guarantees offered.

The problem, I find, is that many people assume the idea doesn't scale. They pretty quickly 'get' the idea (of opportunity cost) at a household level but they are afraid to apply the same analysis to global exchange.

If you say: "Now, suppose we are talking about a deal between a rich country and a poor country; do you think that the same rule applies?"... they frequently get cold feet. Suddenly, imports become a threat and (bizzarely) exports become the purpose of trade.

I know a few trade ministers who have the same problem.

Best wishes

Eric Krieg writes:

Matt, isn't it ironic that China, a full blown Communist country less than a generation ago, has a smaller government relative to GDP than nominally capitalist countries like the US, Germany, and Japan?

When I read articles like these, that make China out to be this steamroller of an adversary, destroying entire economies in its wake, I just think back to the late '80s, and how the same stories were written about Japan.

The Chinese have done a wonderful job getting to where they are now, economy wise. But anyone who thinks that the next 10 years will be as easy for them as the last is just not thinking hard enough. SARS showed the creakiness of their post-Communist authoritarian system of government. Even the Chinese realize that they need reform, but reform may be the catalyst for the authoritarian system to break down, with nothing but chaos in its place.

Bernard Yomtov writes:

To start to answer your question we have to realize that journalists are not theoreticians or meticulous empirical researchers. They are reporters - story-tellers. They go out into the community, see what's happening, and write about it.

So when ABC Corp shuts down its local factory because it can produce the goods more cheaply in China or Mexico the reporter sees people out of work and the local economy damaged. If you give him an explanation of comparative advantage he's going to ask you to identify the specific benefits of the plant closing.

How will you answer that? More important, how will you answer in a way that convinces him that these benefits outweigh the problems caused by the closing?

Eric Krieg writes:

>>More important, how will you answer in a way that convinces him that these benefits outweigh the problems caused by the closing?

Bernard Yomtov writes:

One reason the comparative advantage argument doesn't fare well is that it is strictly utilitarian, and completely ignores distributional effects. I know the conventional answer is that a portion of the benefits can be used to make those adversely affected whole, and there will still be a surplus. But does this ever actually happen?

Take the $44 DVD players. Suppose they would cost $100 if made in the US. Does any significant part of the $56 difference find its way to the newly unemployed factory workers? Is it unreasonable for someone to take the position that a certain amount of inefficiency is acceptable in order to avoid other problems?

I'm a strong advocate of free trade, but I think we need to come up with better arguments, and better evidence, and a better understanding of opposing views, rather than just doing arithmetic about the price of wheat in terms of corn, etc.

Eric Krieg writes:

>>I'm a strong advocate of free trade, but I think we need to come up with better arguments, and better evidence, and a better understanding of opposing views, rather than just doing arithmetic about the price of wheat in terms of corn, etc.

Micha Ghertner writes:

I've also used the same example Peter Gallagher suggested to explain the concept of comparative advantage. I think the first place I heard read it was in Thomas Sowell's "Basic Economics". It's a great example.

Chicago Boy writes:

Eric, your point about journalists being feelers, not thinkers, is right on. Journalist tend to be high in verbal skills, so a concept like trade that requires more in the way of quantitative and analytical skills will naturally be difficult to understand. I hate to say this, but the best way to convince journalists to come over to free trade may be to simply appeal to authority. "Economists (or however many Nobels) unanimously agree..."

Bernard Yomtov writes:

Sure, Gallagher's example makes sense, but I don't think it's going to convince many people about trade. The problem comes when the lawyer outsources her typing to India at $5/hour and her secretary is out of work.

What does the secretary do? Accepts a lower paying job, I suppose, and the economy is better off because we get the typing and the secretary's production in the new job. But it's not hard to understand why people aren't enamored of this outcome.

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