Category: Economics for Business: 8e Ch 24, 7e Ch 24

I admit it, the title of my blog today is a little bit misleading – but at the same time very appropriate for today’s topic. Nancy Sinatra certainly wasn’t thinking about emigration when she was singing this song – it had nothing to do with it, after all. It is, however, very relevant to economists: Indeed, there are many economics papers discussing the effects of skilled immigration on host and source economies and regions.

Economists often use the term ‘brain drain’ to describe the migration of highly skilled workers from poor/developing to rich/developed economies. Such flows are anything but unusual. As The Economist points out in a recent article, ‘[I]n the decade to 2010–11 the number of university-educated migrants in the G20, a group of large economies that hosts two-thirds of the world’s migrants, grew by 60% to 32m according to the OECD, a club of mostly rich countries.’.

The effects of international migration are found to be overwhelmingly positive for both skilled migrant workers and their hosts. This is particularly true for highly skilled workers (such as academics, physicians and other professionals), who, through emigration, get the opportunity to earn a significantly higher return on their skills that what they might have had in their home country. Very often their home country is saturated and oversupplied with skilled workers competing for a very limited number of jobs. Also, they get the opportunity to practise their profession – which they might not have had otherwise.

But what about their home countries? Are they worse off for such emigration?

There are different views when it comes to answering this question. One argument is that the prospect of international migration incentivises people in developing countries to accumulate skills (brain gain) – which they might not choose to do otherwise, if the expected return to skills was not high enough to warrant the effort and opportunity cost that comes with it. Beine et al (2011) find that:

Our empirical analysis predicts conditional convergence of human capital indicators. Our findings also reveal that skilled migration prospects foster human capital accumulation in low-income countries. In these countries, a net brain gain can be obtained if the skilled emigration rate is not too large (i.e. it does not exceed 20–30% depending on other country characteristics). In contrast, we find no evidence of a significant incentive mechanism in middle-income, and not surprisingly, high-income countries.

Other researchers find that emigration can have a significant negative effect on source economies (countries or regions) – especially if it affects a large share of the local workforce within a short time period. Ha et al (2016), analyse the effect of emigration on human capital formation and economic growth of Chinese provinces:

First, we find that permanent emigration is conducive to the improvement of both middle and high school enrollment. In contrast, while temporary emigration has a significantly positive effect on middle school enrollment it does not affect high school enrollment. Moreover, the different educational attainments of temporary emigrants have different effects on school enrollment. Specifically, the proportion of temporary emigrants with high school education positively affects middle school enrollment, while the proportion of temporary emigrants with middle school education negatively affects high school enrollment. Finally, we find that both permanent and temporary emigration has a detrimental effect on the economic growth of source regions.

So yes or no? Good or bad? As everything else in economics, the answer quite often is ‘it depends’.

Articles

Questions

  1. ‘The brain drain makes a bad situation worse, by stripping developing economies of their most valuable assets: skilled workers’. Discuss.
  2. Using Google, find data on the inflows and outflows of skilled labour for a developing country of your choice. Explain your results.
  3. ‘Brain drain’ or ‘brain gain’? What is your personal view on this debate? Explain your opinion by using anecdotal evidence, personal experience and examples.
  4. Referring to the previous question, write a critique of your answer.

Donald Trump has threatened to pull out of the World Trade Organization. ‘If they don’t shape up, I would withdraw from the WTO,’ he said. He argues that the USA is being treated very badly by the WTO and that the organisation needs to ‘change its ways’.

Historically, the USA has done relatively well compared with other countries in trade disputes brought to the WTO. However, President Trump does not like being bound by an international organisation which prohibits the unilateral imposition of tariffs that are not in direct retaliation against a trade violation by other countries. Such tariffs have been imposed by the Trump administration on steel and aluminium imports. This has led to retaliatory tariffs on US imports by the EU, China and Canada – something that is permitted under WTO rules.

Whether or not the USA does withdraw from the WTO, Trump’s threats bring into question the power of the WTO and other countries’ compliance with WTO rules. With the rise in protectionist sentiments around the world, the power of the WTO would seem to be on the wane.

Even if the USA does not withdraw from the WTO, it is succeeding in weakening the organisation. Appeals cases have to be heard by an ‘appellate body’, consisting of at least three judges drawn from a list of seven, each elected for four years. But the USA has the power to block new appointees – and has done so. As Larry Elliott states in the first article below:

The list of judges is already down to four and will be down to the minimum of three when the Mauritian member, Shree Baboo Chekitan Servansing, retires at the end of September. Two more members will go by the end of next year, at which point the appeals process will come to a halt.

This raises the question of the implication of a ‘no-deal’ Brexit – something that seems more likely as the UK struggles to reach a trade agreement with the EU. Leaving without a deal would mean ‘reverting to WTO rules’. But if these rules are being ignored by powerful countries such as the USA and possibly China, and if the appeals procedure has ground to a halt, this could leave the UK without the safety net of international trade rules. Outside the EU – the world’s most powerful trade bloc – the UK could find itself having to accept poor trade terms with the USA and other large countries.

Articles

Information

Questions

  1. Explain the WTO’s ‘Most-favoured-nation (MFN)’ clause. How would this affect trade deals between the UK and the EU?
  2. Would the trade deals that the EU has negotiated with other countries, such as Japan, be available to the UK after leaving the EU?
  3. Demonstrate how, according to the law of comparative advantage, all countries can gain from trade.
  4. In what ways is the USA likely to gain and lose from the imposition of tariffs on steel and aluminium?
  5. How could a country that supports free trade ever support the imposition of tariffs?
  6. Why are tariffs not the most serious restriction on trade?

The President of the United States, Donald Trump, announced recently that he will be pushing ahead with plans to impose a 25% tariff on imports of steel and a 10% tariff on aluminium. This announcement has raised concerns among the USA’s largest trading partners – including the EU, Canada and Mexico, which, according to recent calculations, expect to lose more than $5 billion in steel exports and over $1 billion in aluminium exports.

Source: Bown (2018), Figure 1

A number of economists and policymakers are worried that such policies restrict trade and are likely to provoke retaliation by the affected trade partners. In recent statements, the EU has pledged to take counter-measures if the bloc is affected by these policies. In a recent press conference, the Commissioner for Trade, Cecilia Malmstrom, stated that:

We have made it clear that a move that hurts the EU and puts thousands of European jobs in jeopardy will be met with a firm and proportionate response.

She added that, ‘I truly hope that this will not happen. A trade war has no winners.’

Why is everyone so worried about trade wars then? Trade wars, by definition, result in trade diversion which can hurt employment, wealth creation and overall economic performance in the affected countries. As affected states are almost certain to retaliate, these losses are likely to be felt by all parties that are involved in a trade war – including the one that instigated it. This results in a net welfare loss, the size of which depends on a number of factors, including the relative size of the countries that take part in the trade war, the importance of the affected industries to the local economy and others.

A number of studies have attempted to estimate the effect of trade restrictions and tariff wars on welfare: see for instance Anderson and Wincoop (2001), Syropoulos (2002), Fellbermayr et al. (2013). The results vary widely, depending on the case. However, there seems to be consensus that the more similar (in terms of size and industry composition) the adversaries are, the more mutually damaging a trade war is likely to be (and, therefore, less likely to happen).

As Miyagiwa et al (2016, p43) explain:

A country initiates contingent protection policy against a trading partner only if the latter has a considerably smaller domestic market than its own, while avoiding confrontation with a country having a substantially larger domestic market than its own.

As both Canada and the EU are very large advanced market economies, it remains to be seen how much risk (and potential damage to the local and global economy) US trade policymakers are willing to take.

Articles and Academic Papers

Questions

  1. Explain how trade diversion works and why it relates to economic prosperity.
  2. What are the key advantages of international trade?
  3. What are the key disadvantages of international trade?

TATA steelworks, Ijmuiden, Netherlands: photo JS

Since running for election, Donald Trump has vowed to ‘put America first’. One of the economic policies he has advocated for achieving this objective is the imposition of tariffs on imports which, according to him, unfairly threaten American jobs. On March 8 2018, he signed orders to impose new tariffs on metal imports. These would be 25% on steel and 10% on aluminium.

His hope is that, by cutting back on imports of steel and aluminium, the tariffs could protect the domestic industries which are facing stiff competition from the EU, South Korea, Brazil, Japan and China. They are also facing competition from Canada and Mexico, but these would probably be exempt provided negotiations on the revision of NAFTA rules goes favourably for the USA.

TATA steel works IJmuiden Netherlands (photo JS)Assuming there were no retaliation from other countries, jobs would be gained in the steel and aluminium industries. According to a report by The Trade Partnership (see link below), the tariffs would increase employment in these industries by around 33 000. However, the higher price of these metals would cause job losses in the industries using them. In fact, according to the report, more than five jobs would be lost for every one gained. The CNN Money article linked below gives example of the US industries that will be hit.

But the costs are likely to be much greater than this. Accorinding to the law of comparative advantage, trade is a positive-sum game, with a net gain to all parties engaged in trade. Unless trade restrictions are used to address a specific market distortion in the trade process itself, restricting trade will lead to a net loss in overall benefit to the parties involved.

Clearly there will be loss to steel and aluminium exporters outside the USA. There will also be a net loss to their countries unless these metals had a higher cost of production than in the USA, but were subsidised by governments so that they could be exported profitably.

Valancia port: photo JSBut perhaps the biggest cost will arise from possible retaliation by other countries. A trade war would compound the net losses as the world moves further from trade based on comparative advantage.

Already, many countries are talking about retaliation. For example, the EU is considering a ‘reciprocal’ tariff of 25% on cranberries, bourbon and Harley-Davidsons, all produced in politically sensitive US states (see the first The Economist article below). ‘As Jean-Claude Juncker, president of the European Commission, puts it, “We can also do stupid”.’ In fact, this is quite a politically astute move to put pressure on Mr Trump.

But cannot countries appeal to the WTO? Possibly, but this route might take some time. What is more, the USA has attempted to get around WTO rules by justifying the tariffs on ‘national security’ grounds – something allowed under Article XXI of WTO rules, provided it can be justified. This could possibly deter countries from retaliating, but it is probably unlikely. In the current climate, there seems to be a growing mood for flouting, or at least loosely interpreting, WTO rules.

Articles

Report

Questions

  1. Explain how, by countries specialising in goods in which they have a comparative advantage, all countries can gain.
  2. Can tariffs or other trade restrictions ever be justified? Explain.
  3. Is there any economic justification for the US tariffs of 25% on steel and 10% on aluminium?
  4. Can putting tariffs on US imports be justified by countries whose steel and/or aluminium industires are faced with US tariffs?
  5. Can trade wars be won? Explain.

In the light of the Brexit vote and the government’s position that the UK will leave the single market and customs union, there has been much discussion of the need for the UK to achieve trade deals. Indeed, a UK-US trade deal was one of the key issues on Theresa May’s agenda when she met Donald Trump just a week after his inauguration.

But what forms can a trade deal take? What does achieving one entail? What are likely to be the various effects on different industries – who will be the winners and losers? And what role does comparative advantage play? The articles below examine these questions.

Given that up until Brexit, the UK already has free trade with the rest of the EU, there is a lot to lose if barriers are erected when the UK leaves. In the meantime, it is vital to start negotiating new trade deals, a process that can be extremely difficult and time-consuming.

A far as new trade arrangements with the EU are concerned, these cannot be agreed until after the UK leaves the EU, in approximately two years’ time, although the government is keen that preliminary discussions take place as soon as Article 50 is triggered, which the government plans to do by the end of March.

Articles

Trade deals are difficult to negotiate and Britain lacks the skills for the job The Conversation, Nigel Driffield (27/1/17)
Why a U.S.-U.K. Trade Deal Could be Harder than it Sounds Newsweek, Josh Lowe (26/1/17)
UK-US trade deal will have ‘very small upsides’ for Britain, says former Bank of England economist Independent, Rob Merrick (26/1/17)
Trump says he wants a U.K. trade deal. Don’t hold your breath CNN Money, Alanna Petroff (23/1/16)
Reality Check: Can there be a quick UK-USA trade deal? BBC News, Jonty Bloom (16/1/17)

Questions

  1. What elements would be included in a UK-US trade deal?
  2. Explain the gains from trade that can result from exploiting comparative advantage.
  3. Explain the statement in the article that allowing trade to be determined by comparative advantage is ‘often politically unacceptable, as governments generally look to protect jobs and tax revenues, as well as to protect activities that fund innovation’.
  4. Why is it difficult to work out in advance the likely effects on trade of a trade deal?
  5. What would be the benefits and costs to the UK of allowing all countries’ imports into the UK tariff free?
  6. What are meant by ‘trade creation’ and ‘trade diversion’? What determines the extent to which a trade deal will result in trade creation or trade diversion?