Episode #15 – Imports, Exports, and Exchange Rates

 

Crash Course came out in Episode 15 to talk about International Trade.  Maybe this is a reaction to some political candidates talking about the Chinese trade deficit.  Regardless of the motive, this episode was economically sound in content, while the tone may not have been along the same lines.

This Episode’s Major Principle

tv

Imagine that I have a choice of buying an American made TV or a TV made in Malaysia.  Because of lower labor costs in Malaysia the imported TV cost $200 less than the American made one. So I buy the imported TV. That may cost jobs at a TV factory in the US but I saved $200 by buying the imported TV.    

And what am I gonna do with those $200? I’m gonna spend them on something I couldn’t have afforded if I bought the US TV. Like maybe taking my family out to a baseball game or to a restaurant. That creates jobs in those industries that wouldn’t have existed if I’d bought the more expensive TV.

Remember Episode 2, on comparative advantage?  Crash Course has already explained that international trade between two countries helps both countries, even if one is poorer or less productive.

More importantly, international trade doesn’t only help the businesses who are trading, but it helps consumers who are able to save more with each purchase.  That money saved can either go to spending on other goods (creating jobs in those areas) or in the bank (which gets lent out to growing businesses).

But in the same breath of mentioning how international trade helps everyone involved (including consumers), Crash Course goes a little off the rails:

Capture

Economic Theory suggests that international trade shuffles jobs from one sector of the economy to another, like from the TV factory to the restaurant.  But the quality of these jobs can be markedly different.  The guy assembling TVs at the US factory was probably making a lot more at his manufacturing job before he got reshuffled to the burrito assembly line at Chipotle.

As technology improves and consumer demands shift, employees will have to move from certain sectors of the economy to others.  But Crash Course does some injustice to the former factory employee.  Why would this employee get a job at Chipotle?  Because assembling a burrito is like assembling a TV?

If domestic manufacturing shrinks, another sector is likely to grow.  And as the factory employee takes a new job somewhere else, his skills and work product will likely determine his pay.

Trade does not just shuffle jobs from one sector to another; it moves jobs from less productive areas of the economy to more productive areas of the economy.  If Malaysia is better at producing TVs for a cheaper price (assuming both countries’ TVs are the same in quality), then it’s better to have American employees working in areas that can compete internationally, instead of making TVs that will be no one will buy because it’s too expensive.

What Crash Course did not explain is what happens when protectionist policies prevent international trade (this is sometimes referred to as Mercantilism).  For example, let’s say the US government imposes taxes and fees that make the price of Malaysian TVs higher than US TVs.  It will keep that factory employee at the manufacturing plant, but everyone else in the economy will be worse off, as they have to pay more of their paycheck for their TV.

NAFTA

nafta

NAFTA is a polarizing political issue, and depending on which camp you’re most affiliated with, you will regard the agreement as either a huge success and a catastrophic failure.  For example, Democrat Party loyalists or Bill Clinton supporters will call it success, since it happened under his presidency.  Labor Unions hate it, since it removed trade barriers that kept some American producers afloat (like the TV example explained above).  Libertarians and free marketeers are a mix about it, for reasons I will explain.

Like the TPP agreement currently in the works, NAFTA was heavily influenced by corporate interests, and parts of the agreement were tailored specifically to benefit these companies.  NAFTA was a free market international agreement, but not for