Tag Archives: exports

05.11.2013 | International Trade: The Story of a Subsidy

Oddly, some US farm subsidies go to Brazil.

Imagine a safety net when you think of a subsidy. If prices are too low, then growers get money from the federal government. During the 1930s Great Depression, the goal of subsidies was to sustain a farmer’s purchasing power when he had a bad year.

Fast forward to 2013. Because the US is the world’s leading cotton exporter, our farmers depend on the world price. if that price is too low, they get a subsidy.

This is where Brazil enters the picture. Because US subsidies lower production costs, they depress world cotton prices for Brazilian farmers. Complaining to the WTO, a World Trade Organization composed of 151 countries that include the US and Brazil, Brazil said US cotton subsidies violated WTO rules. A WTO panel agreed.

However, Brazil still had a problem. Because WTO decisions are not enforceable and the US Congress was not about to eliminate subsidies voluntarily, the panel’s decision was virtually meaningless. Then though, Brazil threatened retaliatory measures that would include ignoring US pharmaceutical patents and music copyrights. It worked. Faced with WTO condemnation, angry Brazilians, US firms fearing retaliation, and subsidized US farmers, the US government devised a unique solution. As of 2010, through the Brazilian Cotton Institute, we would pay Brazilian farmers $147.3 million every year–$12.275 million monthly–until an acceptable farm bill is passed.

The farm bill is still being debated.

Our bottom line? Subsidies, like tariffs and quotas, are barriers that diminish the efficiencies of free international trade. As barriers, they obstruct David Ricardo’s comparative advantage and the ability of nations to produce goods and services for which they have the lower opportunity cost..

Sources and Resources: NPR’s Planet Money explains the US/Brazil cotton dispute in one wonderful 30 minute podcast. But then, for more of the specifics, I recommend this 2011 report from the Congressional Research Service. To complete the picture, this Slate column provides all you want to know about the Farm Bill that the US Congress is considering. (Econlife looked at the bill’s impact on the dairy industry here.)

Posted by: adminEcon
Tags: Brazil, cotton, exports, farm subsidies, international trade, Texas, world price, World Trade Organization (WTO)
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02.22.2013 | Purchasing Power

The Big Mac Index is out again and not much has changed. Norway’s Big Macs are expensive and Chinese Big Macs are cheap.

What do Big Mac prices tell us about purchasing power? Starting with an average U.S. price of $4.37, we can determine whether other currencies are overvalued or undervalued in comparison to the dollar. So, when we see that Norway’s Big Mac is $7.84 and a euro zone Big Mac will cost $4.88, we know the kroner and the euro are overvalued. By contrast, Mexico’s Big Mac is very inexpensive at $2.90 and predictably, at $2.57, yes, a Big Mac reflects China’s undervalued currency.

Next, I wondered whether a low price would be inexpensive domestically and discovered that we can use McWages. In 2011, a US McDonald’s employee buying a Big Mac would have needed 27 minutes of work while a person in China doing the same job needed 85 minutes. You can see, below, that a McDonald’s Indian employee needed close to 200 minutes to buy what he or she was making.

Finally, as economists, we should note that the Big Mac Index takes us to purchasing power parity (PPP). This 2 page St Louis Fed paper, though dated, provides the perfect discussion of PPP and the Big Mac.

Sources and Resources: I definitely recommend going to The Economist to see all Big Mac prices and to use their interactive graphic on current and past purchasing power parity. More academic but fascinating, the Ashenfelter paper on McWage purchasing power is here while a good summary of the paper and the source of my graph is at WSJ.com.

Note: This post has been minimally edited since it appeared.

Posted by: adminEcon
Tags: Big Mac Index, China, exports, imports, McWages, Mexico, Norway, Orley Ashenfelter, overvalued, purchasing power, purchasing power parity, St. Louis Fed, The Economist, undervalued
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12.10.2012 | Manufacturing Matters in the US

Hearing about an apparel firm that “insourced,” I confess I was not as enthusiastic as the report.

The firm, American Giant, had just enjoyed a run on their hoodies. As a Made in the USA producer, they have the caché of a San Francisco factory. Proclaiming better grommets, eaglets, drawstrings and zippers and a designer previously employed by Apple, American Giant says their quality is far better than their Asian competitors.

Looking at the NPR facts and other similar articles, I wondered whether making t-shirts and sweatshirts in the US was so beneficial. Yes, they were taking advantage of US expertise, eliminating middle people and selling directly online to consumers to cut costs. However, should we applaud making apparel here?

That took me to a Brookings Report that appeared to be on target. They asked “Why Does Manufacturing Matter? Which Manufacturing Matters?” And no, it is not in the apparel industry.

The Brookings report emphasized that manufacturing provides:

high wage jobs
innovation
exports
environmental sustainability

But not all manufacturing. The industries that reap the largest gains are:

computers and electronics
chemicals (including pharmaceuticals)
transportation equipment (including autos, auto parts and aerospace)
machinery

Our bottom line? Hoping to encourage global trade, economist David Ricardo (1772-1823) said each nation should produce the goods and services for which it has a comparative advantage because then, that nation sacrifices less in order to produce more.

Sources and Resources: You might want to look at the Brookings report here. 53 pages long, it has lots more detail. Meanwhile, the American Giant stories at Slate and NPR sounded more like commercials for the firm than news reports. Finally, at econlife, whenever we talk about manufacturing, I always recommend The Travels of a T-Shirt in the Global Economy, a wonderful narrative describing the multinational origins of the typical t-shirt.

From the Brookings Report on manufacturing, the following graphs illustrate their conclusion that manufacturing should be supported by public policy.

Posted by: adminEcon
Tags: "Made in the USA" label, American Giant, chemicals manufacturing, comparative advantage, David Ricardo, exports, high wage jobs, innovation, insourcing, machinery manufacturing, NPR, outsourcing, pharmaceutical manufacturing, Slate.com, sustainability, trade deficit, transport equipment, US Manufacturing
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10.21.2012 | The Real Mother of Invention

Saying that profit, not necessity is the mother of invention, economic historian John Steele Gordon starts his column in this week’s Barrons. His focus was the 18th century clipper ships that earned people like John Jacob Astor $50,000 for a single voyage between the US and China. Furs went to China, tea returned and, because of the invention of the clipper ship, the voyage was faster than ever before.

More speed, more trips, more profits.

The Gordon column reminded me of a book I always enjoy rereading. In How We Got Here, Andy Kessler looks at a history of technology and markets. Echoing Gordon, Kessler takes the reader through the history of the steam engine. He begins with 18th century English coal mines that flooded because they were below water level. Realizing miners needed something better than their vertical bucket brigade, Thomas Savery invented the Miner’s Friend, a steam powered mechanized pump.

Here we can fast forward, from the first steam engines to the steamboat (yes, there is lots in between). But that gets us back to the clipper ship and again, how the quest for profits leads to invention. When steam power became cheap enough, because of their speed and cargo capacity (10 times more than sailing vessels), steamboats replaced clipper ships. Merchants, whose transport costs could run as high as three-quarters of the price of an exported good, saw their opportunity.

Again, more voyages, higher volume, lower prices, bigger profits and soon, the next invention.

Wouldn’t Adam Smith (mass production) and David Ricardo (free trade) both be smiling?

Sources and Resources: Happily, here you can easily take a look at the Kessler book (my source for steamship stats) while the Gordon article is here. For good brief bios on Smith and Ricardo, the econlib library, here and here, is a handy link.

Posted by: adminEcon
Tags: 19th century merchants, Adam Smith, Andy Kessler, clipper ships, cotton, David Ricardo, economic growth, economies of scale, exports, free trade, GDP, How We Got Here, John Steele Gordon, mass production, miner's friend, profit, steam engine, steamboats, Thomas Savery
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04.14.2012 | Chicken Economics

Ten chicks.

If I were teaching in Uzbekistan instead of Summit, NJ, I might have received 10 Serbian chicks as a part of my salary. According to Radio Free Europe, the Uzbek government partially paid certain teachers and doctors with chicks. Their goal was to increase domestic production of eggs, milk, other dairy products and vegetables.

Elsewhere also, chickens represent more than a meal.

During the 1990s, during a food shortage, Russia accepted massive exports of surplus dark chicken meat from the US. Still today, dark meat in Russia is called Bush legs and associated with neediness.

For U.S. chicken raisers, Chinese love of chicken paws was a life saver. As a Purdue representative explained it, U.S. consumers loved the white meat. What to do with everything else? For years, inexpensive pet food was the answer. However, when Purdue discovered that the Chinese especially loved U.S. chicken paws, suddenly, they had a money maker. Large (Purdue) chicken breasts mean juicy feet and the Chinese like juicy feet.

We’ve accounted for the breasts, dark meat and paws. What about the wings? Maybe the Super Bowl?

Our bottom line: Chicken shortages and chicken surpluses relate to international trade. Citing comparative advantage, David Ricardo (1772-1823) said that trade enables nations to optimize efficiency and thereby increase world production and well-being. For U.S. chicken producers, exporting what had been waste certainly created value. With the Uzbeks, though, payment in imported Serbian chicks rather than money is a step backwards.

Radio Free Europe and the Atlantic tell more of the Uzbekistan chicken story. For the China and Russian chicken situation, Businessweek and Freakonomics explain. And here, econlife looks at chicken wings.

Posted by: adminEcon
Tags: chickens, China, comparative advantage, David Ricardo, exports, international trade, Purdue, Russia, teachers, Uzbekistan
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