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... w-skill sectors of industry where Third World countries are attracting U. S. companies. The Stolper-Samuelson theory states that trade affects relative prices and that the real return to the factor used intensively in the production of a good (labor) will increase accordingly and the return of the other factor which is used scarcely will decrease.
According to this model trade has a significant impact on income distribution within the countries involved. This can be seen in the U. S. where the low skill, low wage jobs are being lost to Third World countries who have an abundance of these workers. At the same time the U.
S. has an abundance of high-skill, high-wage jobs and this is resulting in a serious gap between the up! per and lower classes of American society. Pat Buchanan has gained favor with the lower classes because he wants to apply tariffs to Third World countries and try and protect American jobs from being relocated to other countries.
There are serious long term ramifications to a country who holds onto industries that are no longer competitive in the global economy. It is a painful process when layoffs occur and jobs move south of the border where most Third World countries are situated but it is necessary for the further development of the American Economy. Imports and foreign competition have taken a lot of jobs from U. S. workers but this economic change is also creating millions of jobs at the same time. These new jobs are in small businesses, not the highly visible sectors of the economy like steel mills or auto plants.
None-the-less they are where the future lies and they offer higher wages and require new skills. Trade has shifted industry from the assembly lines into complex products with specialized designs a! nd relatively short life cycles which require skilled workers. Through importing, competition has increased and this "forces firms to be more productive, and that desperate drive for productivity makes the entire economy more dynamic. ." A dynamic economy has lower inflation due to intense competition and gives consumers more variety to choose from in stores. Furthermore, since low-wage workers spend a higher percentage of their income at the store than the high-wage workers they see a greater proportion of their earnings being saved as less is going towards necessities like food. Buchanan should focus his attention on the real problem at hand which is the retraining of those workers who currently find themselves in low skill jobs.
The Stolper Samuelson effect has shown that low skilled labor is earning less while statistics show that skilled labor wages have risen. The next logical move is to try and close the gap by retraining workers for the demands required of them i! n today's work environment America's current account deficit with Japan has received a lot of press coverage and been the subject of political debate in numerous congressional elections. The general conception that the lay person is told through the media and politicians is that by running this current account deficit it costs Americans jobs and insects them to foreign nations. Pat Buchanan stated in a speech, "our merchandise trade deficit is a $ 166 billion. As this vast transfer of U.
S. wealth and technology was taking place... our share of world GDP had fallen... and the real income of Americans who work with their hands, tools and machines has fallen 20 percent, in 20 years. " However, without questioning the source of Buchanan's statistics, it is important to review his underlying premise. The current account deficit that the U.
S. is currently running is the reason for the blue collar workers' problems. Furthermore, he has stated that the gains from trading with these countries are minimal. Why should it matter where America's imports are being made as long as it is relatively cheaper in terms of factors of production for foreigners to make them. ? Buchanan is concerned that Japan is not practicing fair trade and this is reflected in the trade deficit the U. S.
currently has with them. Yet Japan is a member of GATT and as such is subject to the same rules of trade as the U. S. Furthermore, they have never asked the U. S. for voluntary export restraints and did not complain when it was asked of them.
However, while visible trade barriers are in line with other developed countries Japan is accused of abusing the use of non-tariff or intangible trade barriers. It is perceived as difficult to export manufactured goods to Japan due to their "product standards and testing procedures, the wholesale and resale distribution systems, and government procurement. " A common them in the U. S. is that the current account deficit signifies that exports are being restricted as a result of non-tariff trade barriers in other countries much like the aforementioned Japan case. Before analyzing the current account deficit it is important to clarify what it is composed of. The current account consists mainly of imports and exports of goods (visible trade balance), the flow of "services (such as transport and banking); interest or dividend payments to foreign investors (and receipts on overseas investments); private transfers from workers...
and official transfers (such as foreign aid). " When a country is running a current account deficit they are actually becoming indebted to foreigners. Subsequently, the reasons for taking on this debt should be the main concern of politicians like Buchanan, not the existence of the debt itself. If the U. S.
was using this debt to finance consumption rather than increasing production capabilities then there wou! ld indeed be cause for concern. The increase in ability to produce goods and services through investment is what gives a country the capability to service and eventually pay off their debt. Another aspect of the current account is that it is affected by domestic fiscal policy. This is because the majority of government expenditure is on transfers and subsidies. Consumption spending of this sort can be dangerous because it does not help to generate the necessary resources to repay the debt.
Tariffs on Japanese and Chinese goods will have numerous effects on the U. S. economy. The main goal will be to raise the price received by domestic producers of that good and reduce imports. By raising the prices of imports, U. S.
consumers will experience a consumer welfare loss. They will be paying more for goods that they have incorporated into their lifestyle and will see a decrease in selection. Substituting domestic goods for foreign ones could result in a further loss by consumers if they receive less value, variety, or substandard products for their money. Competition breeds competitiveness and if Buchanan makes it harder for foreigners to gain access to the U.
S. market then he is creating an uncompetitive environment. If a tariff were put into place it would raise the price of the applicable goods in the U. S.
and create an incentive for domestic producers to increase production. However, consumers will demand less and look for substitute goods. Imports will de! cline because Japan and China will have to lower their domestic prices which will lead to less producers and an increase in demand. The end result is that the U. S.
current account deficit will decrease and might even become a surplus. However, this is the most inefficient way to accomplish such a goal. Increasing savings or reducing the government deficit is the first-best policy to reduce the current account deficit. Unambiguously the terms of trade gain will always be outweighed by the efficiency loss that results from a tariff. Economies of scale cannot be achieved because tariffs fragment world markets and attract too many firms to enter the protected industries as a result of reduced foreign competition and increased profits. Buchanan feels that through tariffs (which he labels a foreign consumption tax) import substitution will stimulate growth in the American economy.
The main problem with this mode of thinking is that tariffs allow an industry to survive but the! y do not promote efficiency. If Buchanan feels that America needs jobs and has lost its dominant role in the world economy he should focus on promoting exports. The very countries that he is condemning for the downfall of the American economy all have followed "industrialization oriented primarily toward export rather than domestic markets. " However, the solution that he should be looking at for the current account deficit is staring himself in the mirror every morning. Politicians must act fiscally responsible and reduce government spending because it is the deficit that causes the problem.
As the deficit goes, so goes America's current account balance. Pat Buchanan feels that protectionism is the answer to re-establishing the U. S. as the world's dominant industrial nation. Through analyzing his policies it becomes evident that though his vision is shared by many his means of achieving it are economically fallible. If he implemented his policies he would accomplish the very result which he is condemning.
Buchanan's economic platform is pandering to the notions of ill-informed people. If we think of the U. S. as a boat, he is trying to patch a leak, and in doing so, has created two new ones.
Lets just hope that level heads prevail and he is not elected or we might just have to bail water to prevent the mighty U. S. from sinking. BIBLIOGRAPHY Buchanan, Pat, "An American Economy for Americans" web Buchanan, Pat, "Time for Economic Nationalism" web "In Praise of Free Trade", Newsweek, July 12, 1993 King, Philip, International Economics and International Economic Policy: A Reader. Singapore: McGraw-Hill Book Co. , 1990 "Not so absolutely fabulous", The Economist, November 4, 1995 Paul Krugman and Maurice Obstfeld, International Economics. New York: HarperCollins College Publishers, 1994 The abuse of economics: Common economic fallacies, UK: The Economist, 1996
Free research essays on topics related to: third world countries, pat buchanan, skilled labor, domestic producers, current account deficit
Research essay sample on Current Account Deficit Third World Countries
