A globalized world economy opening up markets for US exports refers to international trade which is defined as the exchange of goods and services across international boundaries. This brings about good benefits to the US economy such as higher consumption possibilities and reaping economies of scale. However, US companies and workers also face unfair foreign competition in the form of dumping and the cheap labour argument.
Increased exports have led to the US economy gaining benefits. One such benefit is higher consumption possibilities. It allows USA to specialize and export goods in which it has a comparative advantage in and import goods in which it has a comparative disadvantage in, whereby comparative advantage refers to the situation where a country has a lower opportunity cost of producing a good as compared to another country. USA is then able to increase the overall consumption of all goods and services as compared to an autarky situation which refers to a situation of no trade but self-sufficiency instead. Hence, increased exports allow USA to enjoy higher consumption possibilities.
Moreover, economies of scale can be reaped. With greater export demand, US firms are able to expand their capacity, enabling them to reap economies of scale which causes long run average cost to fall in the long run. As firms pass on some of these cost savings to consumers, material living standards increase as consumers get to consumer more goods at lower prices. Lower prices for domestic consumers and higher profits for domestic producers benefits the US economy.
On the other hand, American companies and workforce face unfair foreign anti-competitive practices like dumping, which refers to the situation where foreign imports are sold below cost because foreign firms are trying to drive out domestic firms to gain market power. In such situations, protectionism in the form of import tariffs is justified to be imposed in order to raise import prices so that they are more in line with prices of locally produced goods. However, lower prices could be due to lower demand or lower distribution costs, which indicates that claims of dumping are most of the time merely a disguise to elicit protection for inefficient domestic producer.
In the cheap labour argument, labour unions in developed economies such as America, commonly argue that imports from developing countries are cheap because they artificially keep costs down by exploiting their workers and hence lobby for restrictions against the imports from these developing countries. The fact that being labour abundant, developing countries have a comparative advantage in producing labour intensive goods, resulting in them having cheaper imports, is ignored. In this case, it is not justifiable for America to impose protectionism in the affected industries.
Conversely, there are costs of increased exports and not simply just benefits. Terms of trade is defined as the ratio of export prices to import prices. With increased exports, the decrease in export prices relative to import prices would result in the revenue earned from each unit of exports to decrease, causing USA to be able to buy fewer imports than before. In addition, if USA’s inflation is lower than its trading partners, its exports become relatively cheaper than its imports especially with an increase in exports, worsening USA’s terms of trade.
Trade also brings about benefits of competition from imports which is in the case of healthy competition and not an unfair one. Competition from foreign imports forces US producers to innovate and cut costs and improve product quality. Local US consumers thus enjoy lower prices and higher product quality from both imports and domestically produced goods. Besides enabling these US companies to be more productively efficient, market power is also kept in check, reducing the extent of monopoly power in economy and ensures that domestic products which are US exports are comparable to foreign imports. Allocative efficiency is increased as well.
Protectionism refers to the act of imposing economic policies aimed at restricting trade between countries, designed primarily to protect the domestic producers and workers from foreign competition. While imposing protection in the affected US industries might seem ideal, there are costs involved.
Firstly, USA would suffer from lower consumption possibilities. This is due to the fact that protectionism inhibits specialization according to comparative advantage. Protecting domestic firms against imports causes America to produce more of a good in which it has a comparative disadvantage in.
[Insert diagram on impact of protectionism on consumption possibilities]
With protectionism of its domestic sector from imports, USA would produce some Good X and specialize only partially than completely in Good Y. The consumption possibilities curve thus shift down. USA then consumes at a point that is worse than the free trade outcome. Hence, protectionism limits the extent of specialization, reducing the gains from specialization and trade according to comparative advantage.
Secondly, protectionism leads to greater allocative inefficiency as it raises the market power of US firms. They also become productively inefficient as the incentive to minimize costs is generally reduced with the monopoly profits.
Thirdly, engaging in protectionism by America companies creates a ‘beggar thy neighbour’ effect and retaliation from trading partners. Falling import expenditure reduces the export earnings of USA’s trading partners which consequently suffer from reduced output and income, curbing the exports, output and employment of America companies. These trading partners may retaliate and impose their own import restrictions, causing USA’s exports, output and employment to suffer subsequently.
Lastly, it is politically difficult to remove protectionism once it is given. Vested interests are created and the beneficiaries, which in this case, are USA’s affected industries, would inevitably lobby against removal of protectionism. In the long run, there would be over-allocation of resources to declining sectors at the expense of expanding sectors.
In conclusion, protectionism for the affected American industries is justifiable only in the short run to manage the cost of free trade. However, it is not justified in the long run as more consequences would have to be dealt with, suggesting that supply-side policies might be a better option in dealing with the problem instead.
JC Economics Essays (on globalisation, protectionism, international trade, and the US Economy): Economics tutor's comments - While this economics essay is generally well written, wide ranging, and covers a lot of good, solid, theoretical economic concepts and ideas, it could be further developed by use of relevant real world examples that are specific and targeted to the requirements of the question. Remember that relevant, real world, realistic, and specific examples can get students a higher grade in writing economics essays. Examiners and tutors love it when students can apply broad theories to specific contexts, with real world examples. What can you learn of the art writing from this economics paper? (Also, what can you learn about what not to write in an economics paper from this essay, in a similar vein? Think about this "counterfactual question".) How could you have tackled the question differently, or what approaches could have been taken to address this question? What other economics diagrams, concepts, or theoretical economics models could have been used, and what else could have been to develop this response further? Reflection and the reading of many different economics answers should build up a mental model which would be useful in answering economics essay questions.Thanks for reading, and cheers. Special thanks to NT for her kind and interesting contribution.
