Economics Chapter 11 Homework International Agreements The Environment The Wto Indirectly

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Suppose a tariff in the amount of t dollars is applied on all importers before NAFTA.

Then the United States imports Q1 units of auto parts at a price of PAsia + t given by point

A, where the quantity Q2 is supplied by Mexico with the remaining amount arriving from

Asia (i.e., Q1 − Q2). The tariff revenue collected from the Q1 units of import is area (a + b

+ c + d), of which the amount given by area a is from Mexico.

Interpretation of the Loss Thus, the net effect of the regional trade agreement on the

United States and Mexico is negative. In particular, the loss in tariff revenue to the

United States outweighs the gain to Mexico from being able to import duty-free to the

Not All Trade Diversion Creates a Loss It should be noted that the result of the

previous example is not a necessary condition. Namely, members of a regional trade

agreement may experience gains from removing a tariff despite any trade diversions. To

see this, let us suppose that after joining NAFTA, Mexico improves its auto parts

production, which leads to a rightward shift of the supply curve to S

′

Mexico. The new post–

APPLICATION

Trade Creation and Diversion for Canada

The gains and losses for Canada from joining the Canada‒U.S. Free Trade Agreement

(CUSFTA) are examined by economist Daniel Trefler. Using data from 1989 to 1996,

Trefler found that the reduction in Canadian tariffs on U.S. goods increased imports by

3 International Agreements on Labor Issues

In addition to issues regarding tariffs and trade, regional agreements also deal with labor

standards, which we will refer to as all matters directly impacting workers, such as

occupational health, job safety, child labor, minimum wages, and so forth. Concerned

about working conditions in foreign factories, consumers and policy makers argue against

How to Promote Labor Standards Enforcement of labor standards also occurs outside

of international agreements. Pressures from unions and grassroots organizations can

Consumer Responsibility Table 11-2 presents the responses to a survey conducted by

the National Bureau of Economic Research questioning people on their attitudes toward

the working conditions of the production of a product. Although most respondents

claimed that they at least somewhat cared “about the condition of workers who make the

Corporate Responsibility Due to pressures from consumers and unions, corporations

such as Walmart are insisting that factories in China meet strict guidelines on both labor

and environmental standards.

H E A D L I N E S

Walmart Orders Chinese Suppliers to Lift Standards

In order to improve its reputation, Walmart has recently required its more than 1,000

Chinese suppliers to meet strict environmental and social standards. Suppliers are

required to demonstrate compliance with Chinese environmental laws, improve energy

efficiency, and disclose the names and locations of all factories involved in production.

Country Responsibility Aside from consumers, unions, and corporations, the U.S. trade

laws provide the president with the power to deny trading privileges to countries that lack

proper labor standards. Withholding trade from a country that violates the basic rights of

workers creates potential issues because the measure would affect an entire nation when

H E A D L I N E S

American Tariffs, Bangladeshi Deaths

It is argued that one effective means to address the poor safety conditions and low wages,

and to improve working conditions, at factories like the Bangladeshi plant where a fire

remain competitive globally. Currently, they are using labor-saving measures such as

holding down wages and scrimping on working conditions to just stay in business.

H E A D L I N E S

United States Suspends Bangladesh’s Preferential Trade Status

The United States suspended its preferential trade with Bangladesh as an apparent

punitive move following the garment factory collapse that killed over 1,000 workers in

2013. The move ousts Bangladesh from a South Asian agreement that removes import

duties and grants low tariffs to the least-developing nations. It was viewed as a victory for

U.S. labor leaders, who hailed it as an “important message to our trading partners,” and a

Living Wage The issue of whether foreign workers should receive a wage above the

4 International Agreements on the Environment

Environment Issues in the GATT and WTO

The “green provision,” or Article XX of the GATT, states that countries are allowed to

adopt their own environmental laws as long as these laws are uniformly applied to all

Tuna–Dolphin Case In response to the U.S. ban on tuna imported from its southern

neighbor, Mexico filed a case against the United States with the GATT (former WTO) in

Shrimp–Turtle Case In 1996, four Asian countries (India, Malaysia, Pakistan, and

Thailand) brought a case to the WTO to appeal the U.S. ban on shrimp caught without the

use of turtle-safe nets. Although the WTO ruled against the United States as in the tuna–

dolphin case, the decision was not based on the extension of the same production process

Gasoline from Venezuela and Brazil In the case against the United States concerning

gasoline from Venezuela and Brazil, the GATT/WTO ruled in 1996 that the import

Biotech Food in Europe In 2006, the United States, along with Argentina and Canada,

won their case with the WTO against the EU regarding a ban on genetically modified

Summary of GATT/WTO Cases The outcomes of the cases presented in Table 11-3

suggest that environmental concerns are recognized by the WTO. More specifically,

Does Trade Help or Harm the Environment?

We will examine some examples to understand how the environment could be helped and

harmed by trade.

Externalities A positive or negative externality occurs when one person’s or firm’s

consumption or production of a good affects another person or society positively (R&D

or education) or negatively (pollution). It leads to a market failure because the

With regard to positive externalities, the benefits of R&D leads to more productive

industries as discoveries are used by other firms or even a healthier labor force as new

vaccines are discovered. Patents are a way to ensure that firms engage in R&D.

Externalities and Trade Free trade may either harm or benefit the environment. We will

now turn to showing how sometimes trade reduces an externality and raises welfare, and

sometimes less trade would benefit the environment.

Consider the blue demand (D) and supply curves (S) for the industry in Figure 11-4. The

autarky price is PA, where quantity demanded and supplied occurs at Q0. With trade, we

When trade opens, the gains from trade due to the fall in price consumer surplus increase

by area +, or the private gains, net to area .

Negative Production Externalities In Figure 11-4, we will let the social supply curve

include the additional social marginal costs to society of producing each unit of the good.

This supply curve (SMC) then includes both the private marginal costs and social

marginal costs of the externality produced. It is measured by the vertical distance

The shaded area  in panel (a) is the total amount that social costs fall due to trade and

represents a gain to Home. If we add this gain to area , the total gain from trade to

Home is +. Trade leads to additional social gains.

In addition, if the externality is a positive externality, then the reduction in trade to S1 will

Negative Consumption Externalities Negative externalities that arise from consumption

imply that the true consumer benefits of consuming this good must include the negative

social benefits (SMB) as well. This means that SMB is less than the private benefit curve

This increase in the social costs of area  is a loss for the country and must be added to

the gains from trade of area . So, the net gains from trade depend on whether >.

U.S. Trade Restriction in Sugar and Ethanol Because of the import quota on sugar,

American consumers and firms pay up to double the world price. The higher price causes

U.S. Automobile VER The “voluntary” export restraint (VER) on Japanese cars sold to

the United States led automobile manufacturers to export more luxurious models, larger

in engine size and weight. Consequently, the average gas mileage of the imported

The Tragedy of the Commons The relationship between free trade and the environment

can also be negative, as we will see in the next examples.

Trade in Buffalo A recent research study indicated that international trade contributed to

the slaughter of the Great Plains buffalo to near-extinction between 1870 and 1880.

Trade in Solar Panels Chapter 9 discussed the issue of solar panel production. There is a