Econ 334 International Trade Department Of Economics

Econ 334 International Trade Department of Economics University of Massachusetts Boston

Discuss the employment growth in different occupation categories in the U.S., select an occupation of interest, analyze an offshoring model with wage differentials, assess tariff impacts on welfare and trade, and explore terms related to international trade such as subsidies, dumping, and duties. Provide analytical diagrams, explore welfare effects of monopolies and policies, and evaluate trade agreements between countries.

Paper For Above instruction

Introduction

International trade is a vital component of modern economies, influencing employment patterns, trade policies, and economic welfare. This paper explores various facets of international trade, including employment growth across occupational categories, offshoring models, tariff impacts, trade-related terms, and the effects of trade policies on welfare. By analyzing these elements, we aim to understand how trade policies and international agreements shape economic outcomes.

Employment Growth in Different Occupational Categories

The U.S. labor market exhibits significant variation across different occupational categories with diverse growth trajectories. According to data from the Bureau of Labor Statistics (BLS), four occupations span the spectrum of manual and cognitive activities, classified as non-routine manual, routine manual, routine cognitive, and non-routine cognitive jobs.

In the non-routine manual category, Animal Care and Service Workers have experienced a growth rate of 16%, substantially higher than the national average. Their median annual pay is approximately $23,950 (BLS, 2023). Conversely, routine manual occupations, such as Assemblers and Fabricators, have seen employment decline by 11%, with median earnings of $32,820. Routine cognitive jobs like Bookkeeping, Accounting, and Auditing Clerks declined marginally by 4%, earning about $40,240 annually. Meanwhile, non-routine cognitive roles, exemplified by Financial Managers, exhibit a robust growth rate of 16%, with median pay of nearly $128,000.

For individuals contemplating future careers, financial management remains attractive due to its high growth outlook and lucrative compensation. The faster employment growth of 16%, matching the non-routine manual sector, underscores the increasing importance of financial expertise in a dynamic economy (U.S. Bureau of Labor Statistics, 2023). My personal preference gravitates toward becoming a Financial Manager, motivated by the job prospects and substantial earning potential, aligning with economic trends emphasizing financial expertise.

Offshoring and Wage Differentials

In modeling offshoring, where home’s skilled labor has higher wages than foreign skilled labor, the production activities are strategically sliced along the value chain. With higher wages at home, high-skilled tasks become more expensive domestically, prompting firms to offshore these activities abroad. Conversely, low-skilled, labor-intensive processes are retained at home due to their lower wage costs, making them high on the value chain.

Given this wage differential, Home’s offshoring decisions will favor outsourcing higher value-added activities, increasingly offshore high-skilled tasks to Foreign, which boasts cheaper skilled labor. Thus, Home’s offshoring will concentrate on low-skilled-intensive activities, maximizing cost efficiency.

Furthermore, when Home raises tariffs uniformly on imports, it effectively raises the costs of foreign goods, prompting firms to relocate higher value activities back home—a re-shoring effect. This compression of the value chain results in Home expanding its high-value activities domestically, hence shifting the slicing of the value chain toward higher-skilled functions.

Diagrams illustrating labor supply and demand show that with tariff increases, the demand for high-skilled workers at Home rises, pushing wages upward. Conversely, the relative wages in Foreign may decline as the demand for foreign high-skilled labor diminishes, adjusting the relative disparity across countries (Krugman et al., 2015).

Impact of Tariffs on Welfare

When a small country imposes a tariff t′ on imports, this price increase reduces import quantities from foreign exporters and raises domestic prices, subsequently incentivizing domestic production. Graphically, the equilibrium shifts, with domestic supply increasing from S to S3 and demand reducing from D to D3, decreasing imports from M to M3. Welfare effects include:

- Consumer Surplus: decreases by the area representing the loss due to higher prices (a + b + c + d).

- Producer Surplus: increases by area a, reflecting gains from higher prices.

- Government Revenue: increases by the area c, representing tariff income.

The overall welfare change is negative, with deadweight losses captured by the combined areas b + d, indicating a typical efficiency loss associated with tariffs (Corden, 2014).

The optimal tariff for a small country with perfectly elastic foreign export supply is zero, as any tariff would only harm consumers without improving overall welfare (Helpman & Krugman, 1985). For a large country, the optimal tariff depends on the trade-off between terms-of-trade gains and efficiency losses, formulated as (Grossman & Helpman, 1994).

Applying tariffs higher than the optimal level results in welfare deterioration due to increased deadweight losses, while lower tariffs do not fully capitalize on potential welfare gains associated with favorable terms of trade adjustments.

Trade Terms and Policy Instruments

In international trade, several policy instruments and phenomena influence market outcomes:

- Export Subsidies: Payments to exporters that effectively lower their prices abroad, potentially distorting trade and benefiting domestic producers at the expense of consumers (Krugman & Obstfeld, 2003).

- Dumping: Selling goods abroad at prices below domestic production costs, often leading to unfair competition and anti-dumping tariffs.

- Anti-dumping Duties: Tariffs imposed to counteract dumping practices, restoring fair competition.

- Countervailing Duties: Tariffs levied to offset foreign subsidies that give exporters an unfair advantage.

- Safeguard Tariffs: Temporary restrictions aimed at protecting domestic industries from sudden surges in imports.

These tools collectively aim to stabilize domestic industries but often lead to trade tensions and economic inefficiencies when misused or applied excessively (Bagwell & Staiger, 2009).

Welfare Analysis of Monopoly vs. Perfect Competition

In analyzing the figure depicting no-trade equilibrium under perfect competition and monopoly, consumer and producer surpluses differ significantly. Under perfect competition, consumers enjoy a larger surplus, represented by the triangle with the price PC, while producers' surplus is smaller.

In a monopoly, the price PM exceeds the competitive price, reducing consumer surplus but increasing producer surplus—profit for the monopolist. The reduction in total welfare compared to perfect competition illustrates deadweight loss, represented by the area between the monopolist’s marginal cost and the demand curve, beyond the profit triangle.

This loss underscores the inefficiency introduced by monopolistic market power, which distorts resource allocation and reduces overall economic welfare (Stiglitz & Walsh, 2002).

Effects of Export Subsidies on Small and Large Countries

Support for domestic exporters through subsidies causes various effects depending on the country’s trade size. For a small country, the subsidy leads to increased exports, but the welfare impact is primarily at the expense of domestic consumers, with no change in world prices.

In contrast, a large country’s subsidy impacts world prices, often increasing domestic prices less than the subsidy amount due to market reactions. Welfare analysis reveals:

- Consumers face higher prices, reducing surplus.

- Producers benefit from increased exports and higher prices.

- The government bears the subsidy cost.

Overall, large countries often experience welfare losses when subsidizing exports due to terms-of-trade deterioration, surpassing gains from increased production and exports (Krugman et al., 2015).

Trade Policy and International Agreements

Trade agreements like the ASEAN-China Free Trade Area aim to reduce tariffs and facilitate trade among member countries. Before implementation, tariffs restrict imports; after, these are eliminated, increasing imports and welfare in partner countries.

For example, China’s imports from Thailand and India increased post-agreement, while tariff revenue decreased. Wealth distribution shifts, with Thailand benefiting from increased exports, whereas China loses tariff revenue but gains in consumer surplus due to lower consumer prices.

Expanding such agreements to include India, for instance via a broader trade pact, would likely increase China’s imports from both countries, with potential gains in consumer surplus and efficiencies but at the cost of tariff revenues. The overall welfare impact depends on the balance between these factors, often leading to net welfare gains for all participants through increased specialization and market access (Rodrik, 2018).

Conclusion

This analysis underscores the complex interplay of employment trends, offshoring behaviors, trade policies, and international agreements in shaping economic outcomes. As globalization progresses, understanding these dynamics becomes essential for policymakers aiming to balance welfare, efficiency, and equitable growth.

References

• Bagwell, K., & Staiger, R. W. (2009). Evolving Discretionary Trade Policy: A Global Perspective. MIT Press.
• Corden, W. M. (2014). Trade Policy and Economic Welfare. Oxford University Press.
• Grossman, G. M., & Helpman, E. (1994). Protection for Sale. American Economic Review, 84(4), 833-850.
• Helpman, E., & Krugman, P. R. (1985). Market Structure and Foreign Trade. MIT Press.
• Krugman, P. R., Obstfeld, M., & Melitz, M. J. (2015). International Economics: Theory and Policy. Pearson.
• Krugman, P. R., & Obstfeld, M. (2003). International Economics: Theory and Policy. Pearson.
• Rodrik, D. (2018). Straight Talk on Trade: Ideas for a Sane Economy. Princeton University Press.
• Stiglitz, J. E., & Walsh, C. E. (2002). Economics. Norton & Company.
• U.S. Bureau of Labor Statistics (2023). Occupational Outlook Handbook. https://www.bls.gov/ooh/