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Korea us trade agreement economics and politics

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Ed Dolan
Ed Dolan

A set of slides discussing recent US initiatives to liberalize international trade, using the Korea-US Free Trade Agreement as a case study

1 of 15
Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Recent US Moves toward Trade Liberalization: Economics vs. Politics Post prepared July 12, 2010 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.
White House Initiatives to Liberalize Trade The Obama administration has recently undertaken several initiatives to promote US trade with other countries National Export Initiative Advocacy for exporters Increased export financing Efforts to remove trade barriers Enforcement of trade rules Efforts to promote world economic growth Revive stalled bilateral trade agreements Korea Colombia Panama Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: www.whitehouse.gov
Counting the gains from trade: The starting point Most economists argue that expanding trade is a good thing As a starting point, suppose the market for some good is closed—no imports or exports At price P1 and quantity Q1, the gain to producers (producer surplus) is A The gain to consumers (consumer surplus) is B Both consumers and producers gain compared to no production or use of the good at all Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Gains from expanding exports Now suppose the rest of the world lifts barriers to export of the good Demand shifts to the right As P and Q both increase, producer surplus increases to A+B+C Consumer surplus for domestic consumers is reduced from B+D to just D Because producers gain more than consumers lose, there is a net gain to the domestic economy from expanding exports, equal to area C Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Gains from opening up to imports Suppose instead that the domestic country lifts barriers to imports of a good for which the world price (P2) is lower than the domestic price (P1) Domestic production falls to Q2 and consumption rises to Q3. Imports of the good are Q3-Q2 Consumers gain from greater Q and lower P. Consumer surplus increases from B to B+C+D+E Domestic producer surplus decreases from A+C to just A Consumers’ gains are bigger than producer’s losses. Net gain to the economy is equal to D+E Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Variations on the theme There are many variations on these diagrams, depending on the relative sizes of the countries, whether the original restrictions are tariffs or quotas, and other variables. Except in a few very specialized circumstances, the conclusion holds that both importing and exporting countries gain from trade liberalization. Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Implications for Trade Liberalization Implications for trade liberalization A country gains when trading partners lower barriers to its exports, because its producers gain more than its consumers lose A country gains when it lowers barriers to imports from other countries because its consumers gain more than its producers lose When two countries enter into an agreement that lowers barriers to both imports and exports, there are net gains for both producers and consumers in both countries. Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: commons.wikimedia.org
The Politics of Trade Liberalization If liberalizing both exports and imports is good for a country, why is there so much political resistance? The answer lies in two factors not shown in the simple trade models Although trade liberalization promises net gains, not every one wins. There are some losers The political strength of well-organized winners and losers can be greater than their numbers or the size of their gain or loss Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: http://commons.wikimedia.org/wiki/File:US_Congress_02.jpg
Specialized labor and capital as potential losers When a market is opened to imports, there is a decrease in resources that were previously used to produce goods in the home country—goods that are now imported The value of these resources in their former use is shown by D+F If workers and capital were completely unspecialized, they would move smoothly to equally good employment in other sectors of the economy However, if some are specialized in their old uses, they may become unemployed or go where they are not as well paid The dislocation of specialized workers and capital is a major source of political resistance to trade liberalization Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
How well organized are the winners and losers? The political strength of groups of winners and losers is not always proportional to their numbers or the size of their gain or loss—it also depends on how well organized they are Access to the media Use of paid lobbyists and campaign contributions Ability to organize public demonstrations Ability to mobilize members to contact representatives by phone, mail, or the Internet Skilled workers, especially if unionized, tend to be better organized than unskilled workers Farmers and ranchers are well organized Trade associations help focus the influence of producers of goods like steel or cars Consumers, often the big winners from trade liberalization, tend to be poorly organized Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: http://commons.wikimedia.org/wiki/File:Image-2005_NYC_transit_strikers.jpeg
Case Study: The Korea-US Trade Agreement The US-Republic of South Korea Free Trade Agreement (KORUS FTA) was first negotiated in 2006 and signed in June, 2007. 95% of trade in industrial and consumer goods would be duty free 2/3 of Korean imports of US farm products would be free of tariffs and quotas Non-tariff barriers would be reduced for financial services, delivery services, consulting services, etc. Biggest free trade agreement since NAFTA The agreement has met political opposition in both countries and has not been ratified by the Korean parliament or the US Congress At the G20 meeting in Canada in June 2010, the presidents of the United States and Korea promised to push for ratification Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: pdclipart.org
Who Supports KORUS? KORUS FTA has a number of strong supporters in the United States A long list of corporations—Microsoft, Wal-Mart, FedEx, GE, and more* The US Chamber of Commerce Many farm groups Free-trade oriented public-policy advocacy groups** Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ *See http://www.uskoreafta.org/members for a full list **See, for example, http://www.piie.com/publications/pb/pb07-7.pdf Picture source: US Airforce Museum; USDA, via commons.wikimedia.org
Who opposes KORUS FTA? In the US, the strongest opposition has come from the Big Three auto makers and their unions Beef producers also oppose KORUS unless complex issues regarding health-related restrictions on beef trade are settled US-Korea Car Industry Links In 2007 Korea exported 772,482 cars to the US and imported 6,235 US also exports auto parts to Korea, e.g., airbags, gear boxes Kia and Hyundai have plants in the United States Each has about 300,000 car capacity Workers are not UAW members but wages and benefits are close to union scale GM joint venture with Daewoo in Korea produces >1 million cars Posting P100130 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ http://commons.wikimedia.org/wiki/File:2009_Hyundai_Elantra_Touring_rear.jpg
Is Ratification Possible? Many Democrats in Congress are opposed to KORUS FTA, in large part because auto worker unions oppose it At least 13 Republican Senators and many Republican Representatives favor ratification, in large part because of the support from business groups President Obama has pledged to work for ratification, but the political balance is very close as of mid-2010, and ratification is by no means assured Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
The Bottom Line The bottom line: There is a big gap between the politics of trade and the economics of trade Politics: In Washington, lobbyists for corporations and unions battle one another in a zero-sum political game. Consumer interests and non-union workers are rarely heard from Economics: Economic analysis tells us that when the interests of poorly organized groups like consumers and non-union workers are thrown into the balance, trade liberalization brings net gains to both importing and exporting countries Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

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Korea us trade agreement economics and politics

  • 1. Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Recent US Moves toward Trade Liberalization: Economics vs. Politics Post prepared July 12, 2010 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.
  • 2. White House Initiatives to Liberalize Trade The Obama administration has recently undertaken several initiatives to promote US trade with other countries National Export Initiative Advocacy for exporters Increased export financing Efforts to remove trade barriers Enforcement of trade rules Efforts to promote world economic growth Revive stalled bilateral trade agreements Korea Colombia Panama Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: www.whitehouse.gov
  • 3. Counting the gains from trade: The starting point Most economists argue that expanding trade is a good thing As a starting point, suppose the market for some good is closed—no imports or exports At price P1 and quantity Q1, the gain to producers (producer surplus) is A The gain to consumers (consumer surplus) is B Both consumers and producers gain compared to no production or use of the good at all Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  • 4. Gains from expanding exports Now suppose the rest of the world lifts barriers to export of the good Demand shifts to the right As P and Q both increase, producer surplus increases to A+B+C Consumer surplus for domestic consumers is reduced from B+D to just D Because producers gain more than consumers lose, there is a net gain to the domestic economy from expanding exports, equal to area C Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  • 5. Gains from opening up to imports Suppose instead that the domestic country lifts barriers to imports of a good for which the world price (P2) is lower than the domestic price (P1) Domestic production falls to Q2 and consumption rises to Q3. Imports of the good are Q3-Q2 Consumers gain from greater Q and lower P. Consumer surplus increases from B to B+C+D+E Domestic producer surplus decreases from A+C to just A Consumers’ gains are bigger than producer’s losses. Net gain to the economy is equal to D+E Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  • 6. Variations on the theme There are many variations on these diagrams, depending on the relative sizes of the countries, whether the original restrictions are tariffs or quotas, and other variables. Except in a few very specialized circumstances, the conclusion holds that both importing and exporting countries gain from trade liberalization. Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  • 7. Implications for Trade Liberalization Implications for trade liberalization A country gains when trading partners lower barriers to its exports, because its producers gain more than its consumers lose A country gains when it lowers barriers to imports from other countries because its consumers gain more than its producers lose When two countries enter into an agreement that lowers barriers to both imports and exports, there are net gains for both producers and consumers in both countries. Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: commons.wikimedia.org
  • 8. The Politics of Trade Liberalization If liberalizing both exports and imports is good for a country, why is there so much political resistance? The answer lies in two factors not shown in the simple trade models Although trade liberalization promises net gains, not every one wins. There are some losers The political strength of well-organized winners and losers can be greater than their numbers or the size of their gain or loss Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: http://commons.wikimedia.org/wiki/File:US_Congress_02.jpg
  • 9. Specialized labor and capital as potential losers When a market is opened to imports, there is a decrease in resources that were previously used to produce goods in the home country—goods that are now imported The value of these resources in their former use is shown by D+F If workers and capital were completely unspecialized, they would move smoothly to equally good employment in other sectors of the economy However, if some are specialized in their old uses, they may become unemployed or go where they are not as well paid The dislocation of specialized workers and capital is a major source of political resistance to trade liberalization Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  • 10. How well organized are the winners and losers? The political strength of groups of winners and losers is not always proportional to their numbers or the size of their gain or loss—it also depends on how well organized they are Access to the media Use of paid lobbyists and campaign contributions Ability to organize public demonstrations Ability to mobilize members to contact representatives by phone, mail, or the Internet Skilled workers, especially if unionized, tend to be better organized than unskilled workers Farmers and ranchers are well organized Trade associations help focus the influence of producers of goods like steel or cars Consumers, often the big winners from trade liberalization, tend to be poorly organized Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: http://commons.wikimedia.org/wiki/File:Image-2005_NYC_transit_strikers.jpeg
  • 11. Case Study: The Korea-US Trade Agreement The US-Republic of South Korea Free Trade Agreement (KORUS FTA) was first negotiated in 2006 and signed in June, 2007. 95% of trade in industrial and consumer goods would be duty free 2/3 of Korean imports of US farm products would be free of tariffs and quotas Non-tariff barriers would be reduced for financial services, delivery services, consulting services, etc. Biggest free trade agreement since NAFTA The agreement has met political opposition in both countries and has not been ratified by the Korean parliament or the US Congress At the G20 meeting in Canada in June 2010, the presidents of the United States and Korea promised to push for ratification Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: pdclipart.org
  • 12. Who Supports KORUS? KORUS FTA has a number of strong supporters in the United States A long list of corporations—Microsoft, Wal-Mart, FedEx, GE, and more* The US Chamber of Commerce Many farm groups Free-trade oriented public-policy advocacy groups** Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ *See http://www.uskoreafta.org/members for a full list **See, for example, http://www.piie.com/publications/pb/pb07-7.pdf Picture source: US Airforce Museum; USDA, via commons.wikimedia.org
  • 13. Who opposes KORUS FTA? In the US, the strongest opposition has come from the Big Three auto makers and their unions Beef producers also oppose KORUS unless complex issues regarding health-related restrictions on beef trade are settled US-Korea Car Industry Links In 2007 Korea exported 772,482 cars to the US and imported 6,235 US also exports auto parts to Korea, e.g., airbags, gear boxes Kia and Hyundai have plants in the United States Each has about 300,000 car capacity Workers are not UAW members but wages and benefits are close to union scale GM joint venture with Daewoo in Korea produces >1 million cars Posting P100130 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ http://commons.wikimedia.org/wiki/File:2009_Hyundai_Elantra_Touring_rear.jpg
  • 14. Is Ratification Possible? Many Democrats in Congress are opposed to KORUS FTA, in large part because auto worker unions oppose it At least 13 Republican Senators and many Republican Representatives favor ratification, in large part because of the support from business groups President Obama has pledged to work for ratification, but the political balance is very close as of mid-2010, and ratification is by no means assured Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  • 15. The Bottom Line The bottom line: There is a big gap between the politics of trade and the economics of trade Politics: In Washington, lobbyists for corporations and unions battle one another in a zero-sum political game. Consumer interests and non-union workers are rarely heard from Economics: Economic analysis tells us that when the interests of poorly organized groups like consumers and non-union workers are thrown into the balance, trade liberalization brings net gains to both importing and exporting countries Post P100712 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/