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Pat Buchanan is currently campaigning to become the Republican representative in the next U. S. Presidential election. He is credited with striking a chord amongst the main stream, blue collar sector of the country. This is because he has based his economic platform on common myths about free trade and how it is the cause of the economic problems in the U. S.
His theme is that layoffs and the closing of American plants are the result of foreign companies and countries taking advantage of easy access into U. S. markets which, in his opinion, is not being reciprocated abroad. This is how he accounts for the current trade deficit that the U. S. is running with countries like Japan.
Pat's economic platform regarding trade policy can be summarized as follows: Impose a 10 % tariff on Japanese imports and a 20 % tariff on Chinese imports. This would generate, in his opinion, $ 20 billion in government revenue and reduce the trade deficit which could be reinvested into the American economy and help create tax cuts for small businesses. Impose a social tariff on Third World manufactured goods to protect U. S.
workers' wage rates from the foreign laborers who are paid a fraction of what their U. S. counterparts earn. He also resents that foreign companies do not have to adhere to the strict environmental, safety, and health standards that American firms do yet get free access to the U. S.
market via GATT and NAFTA. It is evident that Pat Buchanan believes that trade deficits and trade with Third World countries are at the heart of what he perceives to be America's economic problems. He feels that through tariffs the burden of income taxes paid by U. S. workers and small businesses can be shifted onto consumers who purchase foreign goods. His underlying sentiment about his trade restrictive policies is, "This is our land; America is our country; the U.
S. our market. We decide who enters here and who does not. " The basis of international trade is that their are gains to be had from partaking in it. This was proven by David Ricardo, an economist in the early 19 th century, who introduced the concept of comparative advantage. His theory stated that a country's "absolute advantage (overall productivity differences between countries) should be reflected in differences in income, whereas comparative advantage (variations in productivity differences by sector) will determine the pattern of international trade. " A common misconception about free trade is that it is based on absolute advantage. Comparative advantage always is applicable when applied to international trade so it stands to reason that there will always be gains from trade.
The existence of low wages in a country is not by itself a reason for the U. S. to fear trading with them. For one thing, wages generally reflect the productivity levels of workers. If low wages meant low costs then world trade would be dominated by Th!
ird World countries and the U. S. would never export. The fact is that differences in technology cause labor productivity variances between countries which affects unit labor costs.
A firm will tend to hire more workers until the value of the product that the last worker produces is equal to the cost of that worker. In the less developed countries low productivity, as a result of low levels of technology, is reflected in wages. The significant measure to determine which sectors a country has a comparative advantage is not wages, but unit labor costs. A country can have a comparative advantage in a sector even if it is more inefficient than any other country. This is because comparative advantage is based not on who is the best, but rather on where a country's "margin of superiority is greater, or its margin of inferiority smaller." As long as a poor country specializes in sectors where it is the least inefficient compared to a rich country then it will gain from trade. The Ricardian Model, based on differences in labor productivity, is best explained using a simple situation based on the following assumptions: two countries, one called Wealthy, the other Poor; two goods, jeans and sneakers; and labor is the only factor of production.
Both countries have 40 hours of labor available but Wealthy has more advanced technology which gives it an absolute advantage in the production of both goods. These countries will benefit from trade because pre-trade relative prices differ. For this example assume that sneakers and jeans are traded in world equilibrium on a 1 for 1 basis and that there are constant returns to scale. Amount of labor JEANS SNEAKERS JEANS/SNEAKERS WEALTHY hours required to 1 2 1 / 2 POOR produce one unit 5 2. 5 2 In analyzing the production possibility frontiers of each country it becomes apparent that Wealthy can produce only 1 / 2 a pair of sneakers in an hour.
However, in that same hour, they could make one pair of jeans and trade with Poor for one pair of sneakers. Thus, they will gain from trade with their less technologically advanced partner by specializing in the production of jeans. Poor can make 1 / 5 of a pair of jeans in an hour or produce 1 / 2. 5 of a pair of sneakers which can be traded for 1 / 2. 5 of pair of jeans on the world market. Therefore, through trade both countries are using their labor twice as efficiently than when they had closed economies. This results in gains being realized from trade.
The U. S. signed NAFTA and became trading partners with Mexico much to the chagrin of Pat Buchanan. His opinion, and it is a common one, is that U. S. companies will relocate to Mexico where wages and employee benefits are a fraction of what American workers earn and environmental regulations are quite lax.
It is for this reason that he feels it is impossible to compete with Third World countries and a tariff must be imposed on them for their social injustices. Buchanan should be asking himself what causes American firms to relocate in Third World countries and is it really a problem worth addressing. From a humanitarian perspective it is concerning that some countries are attracting companies due to the lack of regulation in their manufacturing industry. It is not an appealing thought to think that a country's comparative advantage is sweatshop labor and unregulated pollution. However, it is a misconception to think that trade is only beneficial if both countries receive! high wages.
Whether these companies relocate because of low wages or higher productivity is irrelevant. The reality is that it is cheaper for America in terms of its own labor to trade for these goods than produce them. The root of the low-skilled job migration problem lies in the fact that America has a highly skilled labor force. Most politicians and economists would say that this is an enviable position to be in because the global economy has a scarcity of skilled labor. This translates into high wages since there is more demand than supply in the world for high-skilled labor. However, some sectors of the American economy are based on labor intensive, low-skilled labor.
In the U. S. there is a relative shortage of low-skilled workers so they receive a relatively higher wage than the world wage for low-skilled labor. It is therefore more efficient for companies who use low-skilled labor to move their operations to countries that have an abundance so that they can reduce their labor cost per unit. Labor productivity is the real reason behind why firms are relocating.
Buchanan should recognize that by trying to preserve jobs that Third World countries can perform more efficiently, he is! actually weakening the very country he is trying to strengthen. Every country has a comparative advantage in producing certain goods. If a Third World country has a comparative advantage in certain labor intensive industries due to their low wages then America should not focus their efforts in these sectors. It is important to take into account the productivity of foreign workers when analyzing wage rate discrepancies between countries.
The Ricardian model has shown that there is a correlation between labor productivity and comparative advantage. All countries have limited resources which limits the amount that they can produce. Therefore, the U. S. must decide where to allocate its factors of production and it faces a trade-off in that when it produces more of one good it will produce less of others. In choosing which goods to produce the U.
S. will have to take into consideration what its products can be traded for on international markets. This results in them choosing to produce goods that have a relatively high value in world mar! kets and abandoning the production of goods that consequently have a relatively low trading value. The U. S.
should be specializing in the production of goods whose relative price exceeds the opportunity cost foregone by not producing alternative goods. It is currently accomplishing this by letting various sectors of its economy, like the textile industry, migrate to Third World countries like Mexico. The relative labor productivity between the U. S. and Mexico across industries will lead to them specializing in the production of different goods. A country like the U.
S. has an absolute advantage in production of all goods and yet the Ricardian model proves that it still gains from trade because of comparative advantage. It is neither efficient nor economical for the U. S.
to try and protect industries that can be done relatively less expensively in other countries. It is cheaper for the U. S. in relation to its labor force to produce high value goods and trade for lower valu! e goods than to try and produce them both.
The free market will guide private enterprise toward industries where the returns are higher and with higher returns comes higher wages. Focusing on industries that produce goods with a relatively high trading value allows individuals to maximize their earnings, and this is consequently reflected in their wage rate. This is the second argument against protectionism, especially in low wage, lo...
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Research essay sample on Third World Countries Comparative Advantage
