Archive for March, 2012

Sometimes Anti-Trade means Anti-Export, Too

March 26, 2012 Leave a comment

When governments restrict trade, it’s usually in the direction of restricting imports.

The U.S. has had longstanding restrictions on exports of energy products. Here’s a good example of how they are justified, and the harm these restrictions produce:

But most of the pushback comes from certain segments of the business community that fear that diverting U.S. gas into world markets would raise prices for everyone from steel companies to electric utilities. Rep. Edward J. Markey (D-Mass.) has proposed a bill that would prohibit any new LNG export facilities until 2025.

Unlike oil, gas does not trade on a unified world market. Prices in Asia are four times higher than in the United States. Obliging U.S. customers to compete with, say, Chinese customers, would exert upward pressure on U.S. prices.

When a country restricts exports it harms domestic producers to benefit domestic consumers, but overall the losses are greater than the gains.

Exporting gas to China, for example, would drive up domestic U.S. prices of gas, but benefits to both the U.S. and Chinese economies will follow. The obvious benefit to the U.S. is that Chinese buyers would pay to import a U.S. product in dollars.

But that’s the simplest way to look at the transaction. Taken one step further: buying U.S. gas at lower prices than they would otherwise pay helps Chinese consumers, too. Money they otherwise would have spent on higher-priced gas can then go, instead, to consumption of more healthcare, education, or other goods and services.

Some of that spending will also make its way back to the U.S. in the form of students furthering their education or for imports of agricultural products.

Freer trade in energy will benefit both economies. Rep. Markey’s proposal would hurt the U.S. economy and make Chinese consumers worse off, too.

Categories: Uncategorized

More on Rare Earths and Export Restrictions

March 23, 2012 Leave a comment

Lots of possible discussion topics in this report:

China’s quotas may have helped push up demand – and prices – enough to make extraction cost-effective.

Several companies are now starting to extract rare earths outside China. In 2010, US company Molycorp reopened the Mountain Pass mine in California for the first time in eight years. Australia’s Alkane Resources has a pilot plant in New South Wales, and hopes to start large-scale mining by the end of 2013.

Plus, more background on why China’s exports of rare earths are falling:

China is now imposing stricter regulations. As of last year, only companies that comply are allowed to export rare earths.

I think you’ll see this theme a lot in the next few years: China will move away from dependance on exporting industries that have high externalities…because it can more and more afford the move.

Development isn’t always good for the environment. But clearly, often it is.

Categories: China, Environment

China’s Peg and Inflation

March 21, 2012 Leave a comment

I seldom post about macroeconomic topics, but since this is a hot topic with many of my students:

Because China ties it currency to the U.S. dollar, it could experience inflation, Bernanke said, noting that China’s currency has become more flexible lately.

“If the Fed lowers interest rates and stimulates the U.S. economy, that means also that essentially monetary policy becomes easier in China as well. Those low interest rates may not be appropriate for China,” Bernanke said. “China may experience inflation because it’s tied to U.S. monetary policy.”

Categories: China

Man Bites Dog

March 18, 2012 2 comments

If a nation restricts imports (through tariffs and quotas) it’s easy to illustrate how domestic producers win and domestic consumers lose. Despite this, many students just can’t get over the idea that exporting is always good for the exporting country, and importing somehow reflects weakness.

So here’s an interesting case for you to consider: who’s winning and losing here?

On March 13th three of China’s biggest trading partners—Japan, the European Union and America—complained that China was exporting too little, not too much. They brought a case at the World Trade Organisation alleging that China was unfairly restricting its exports of tungsten, molybdenum and 17 “rare earths”, obscure elements such as terbium and europium, used in the manufacture of many high-tech goods including fluorescent lights.

Why would China’s trading partners complain of too many exports of some items and too few of others? Hint: think in terms of winners, losers, concentrated benefits and diffuse costs.

A bonus point on the next quiz to any student who can give a well-reasoned answer in the comments!

China Sneezes, India Catches a Cold

March 15, 2012 Leave a comment

Students in my global marketing class will understand:

National Aluminium Co. (NACL), India’s third-largest producer, is delaying the restart of the shuttered 10 percent of its capacity on signs the economy is stalling in China, the biggest user of the light metal.

Aluminum prices on the London Metal Exchange are being dragged down by the uncertain outlook for Chinese growth, Chairman B.L. Bagra said in a telephone interview.

Categories: Uncategorized

Hate to Say I Told You So, But…

March 12, 2012 1 comment

As expected, rising productivity leads to higher wages.

Chinese wages may be rising fast, but so is Chinese productivity. The precise numbers are disputed, but the trend is not. Chinese workers are paid more because they are producing more.

Categories: Uncategorized

Superstar Phenomenon, Discrimination, Wages and Jeremy Lin

March 6, 2012 Leave a comment

It’s not often so many things in one article will converge with what we’ve just been covering in class, but for students who are paying attention in Microeconomics, check out this article by Harvard’s Professor Economics and Public Policy Kenneth Rogoff:

How the profit motive works against discrimination: Lin’s success is delicious, partly because it contradicts so many cultural prejudices about Asian-American athletes.

How consumer discrimination could possibly lead to employer discrimination: The NBA, which has been trying to build brand recognition and interest in China, is thrilled.

Wage differentials based on ability: If a star basketball player reacts a split-second faster than his competitors, no one has a problem with his earning more for every game than five factory workers do in a year. But if, say, a financial trader or a corporate executive is paid a fortune for being a shade faster than competitors, the public suspects that he or she is undeserving or, worse, a thief.

Superstar phenomenon: As the late University of Chicago economist Sherwin Rosen postulated, globalization and changing communication technologies have increasingly made the economics of superstars important in a variety of fields. That is certainly true in sports and entertainment, but it is also the case in business and finance.

And by the way…Jeremy Lin took Greg Mankiw’s ec10 class when he was a student at Harvard.

Categories: Uncategorized