Government policy tools in international trade, political economy, and ethics (ECON 300)

Government Policy Tools in International Trade:

Economic reasons:
- The Infant Industry Argument: developing countries have comparative advantage in manufacturing so new manufacturing can't initially compete with established ones in developed countries.
- Strategic Trade Policy: Industries with substantial economies of scale means the world market can only profitably support a few firms, Because of this some countries could dominate if they have one of the huge firms
Political reasons:
- Protecting jobs and industries: foreign competition often causes domestic businesses to suffer and as a result there is job loss. For example, The steel industry is protected by the government domestically so that domestic producers don't get overtaken by cheaper steel producers from other countries
- Protecting National Security: industries like aerospace and advanced electronics are often protected for defense concerns.
- Retaliating: Governments can threaten high tariffs to make another country cooperate like the US did with Mexico and Canada
- Protecting consumers Gov. protection from unsafe products not fit for consumption, Ex beef banned after disease outbreak
- Furthering foreign policy objectives: the government may grant beneficial trade terms for another country they want to have good terms with in order ad to start being friends. Can also punish
- Protecting Human Rights: Gov uses trade policies to pressure other countries into protecting and promoting human rights.
- Peace and stability in certain regions
Economic effect, surplus analysis (PS, CS, DWL), and winners/losers of:
- Tariffs: Import tax: tax imposed on foreign goods, export tax: tax imposed on domestic goods that are exported to other countries.
  - This leads to domestic producer surplus, domestic government revenue from the tax, DWL from lost CS (consumers buying less and out of the market, DWL 1), and DWL from inefficient producers brought back into the market due to tariff (DWL 2).
  - Positive: It causes inefficiencies measured by DWL and wealth loss. Normative: unfair, coercively takes money from consumers and gives to domestic producers.
  - If we impose tariffs on foreign goods, we should target markets that are price inelastic for less DWL. To avoid tariffs you can build factories in the US, con is high startup cost so you have to raise the price anyway.
  - Winners are domestic government and domestic producers, losers are foreign producers and domestic consumers
- Quotas: limit how much can be imported
  - From domestic consumer POV, outcome is same as tariff: increase in price, increase in quantity demanded, increase in dead weight loss.
  - This leads to domestic producer surplus, DWL from lost CS (consumers buying less and out of the market, DWL 1), and DWL from inefficient producers brought back into the market due to tariff (DWL 2), and CS lost to foreign producers. Foreign producers sell less and charge higher price. Domestic government can capture the CS lost to foreign producers by charging them in order for them to sell in the domestic market.
  - Winners are domestic government and domestic producers, possibly foreign producers, losers are domestic consumers and possibly foreign producers
- Subsidies: money given to domestic producers by domestic government for making goods. Comes from consumers in form of tax
  - Supply curve is related to cost of production (marginal cost to producers) so when they get money from domestic government, they increase their supply curve.
  - Same as price open and quantity demanded increases. No DWL. CS goes to subsidy.
  - Winners are domestic producers, losers are domestic consumers
- Open economy (no intervention): (Bike example) decrease in bike price due to competition, quantity demanded increased due to more people able to buy bikes at cheaper price, so consumers are happy. Domestic producers sell way less than in closed economy due to foreign competition, so they make a lot less, and are unhappy. Since consumers have more money from lower prices, they can spend it on other domestic businesses, which leads to more jobs in other businesses. But for domestic producers of bikes, not happy, workers laid off, and revenue down.
- Welfare analysis: allows us to better understand the outcome (consumer/producer surplus and DWL). Size of consumer welfare efficiency leads to “value”
  - Value creation: individuals create value and contribute. When there is a sale, there is value created because a consumer could buy a $100 shoe for $50, then he would have $100 in value even though he only spent $50, so he created value.
  - Value capturing: As above, he captured the created value by buying the discounted item
  - If you have same amount of value in system, no value lost. If value lost, inefficiency.
  - Poor consumers (Walmart goods) have flatter (more elastic) demand curve, while rich consumers (luxury goods) have steeper (more inelastic) demand curve so DWL smaller than poor consumers’.
  - Key factors that adversely affects domestic manufacturing jobs market: Competition from other countries including offshoring, lack of skilled workers, AI/tech/robots+efficiency, Solow Growth Model and determinants of econ growth (education, healthcare, etc), and corporate/shareholder objectives
  - Redistribution of wealth: government takes money from citizens and gives it to others (for example subsidy gives it to domestic producers)
  - Saving jobs: positive: US consumers spend $250k a year to save 1 U.S. job. Normative: not worth it for bike producer job, maybe for battleship producer though.
  - Trade war: race to the bottom. Worst outcome for both players, better to cooperate.
Positive vs normative economics:
- Positive: how things are “Sky is blue”. Ex: If minimum wage is increased, unemployment increases in low-skill workers, price increases in order to pay for higher minimum wage, leads to DWL (inefficiency).
- Normative: how things should be “Sky should be green”
DWL = wealth/value lost, called inefficiency in market. If price is at equilibrium (S = D) then the market is efficient, and vice versa.

Political Economy:

Political system: individualism vs collectivism, democracy vs totalitarianism
- Individualism: laid out by Aristotle, emphasized individual happiness (pursuit of happiness), how to make yourself happier given your constraints, individual needs before group. Led to democracy.
- Collectivism: laid out by Plato, emphasized importance of state and establishing rules and boundaries, harmony is important. Each individual has a role in society, put needs of society before individual needs. Led to socialism, communism, and social democracy.
- Democracy: People own means of production, distribution, free markets, capitalism. People hold power.
  - Pure/direct = direct democracy, In a pure/direct democracy, referendum is majority rule (50.1%), majority can abuse minority.
  - Indirect = representative. Constitutional republic, decisions made according to set of laws. (Ex: Bill of Rights and US Constitution: protect against majority rule and protect basic human rights)
  - Gov’t system (executive branch): Presidential system with (SK) or without prime minister (US)
  - Parliamentary system: prime minister or chancellor, parliament members elected, often constitutional monarchy (UK)
- Totalitarianism: someone or some group holds power. Some are true executive monarchy.
  - Communist totalitarian government: communist party has power
  - Theocratic totalitarian government: religious group has power
  - Tribal totalitarian government: tribal and/or ethnic group has power
  - Right-wing totalitarian government: economic freedom, property rights and free market. Political participation is very much limited. Ex: China and Russia
- Socialism: state ownership of the public means of production, distribution, and exchange. Ownership without control might not be true ownership.
Economic system: free market vs mixed vs command economy
- Free market: consumers should be able to consume whatever goods from any country in the world, and producers should be able to sell goods to anyone from any country who wants their goods.
  - Capitalism: 2 stakeholders: capitalists and workers. Capitalists own means of production (companies). Entrepreneur, banks, investors, CEO not capitalist unless they own a significant portion of a business (huge amount of stock). Ex: Jeff Bezos is a capitalist, David Yi is worker. Workers provide labor, capitalist provide wages. Capitalist produces goods and services using workers’ labor, workers use wages from capitalist to buy these goods and services.
- Mixed: Ex: US economy (leaning towards free market). Most if not all countries are mixed economies but lean towards free or command.
- command economy: socialist.
Legal environment: common vs civil law
- Common law:
  - Influenced by Great Britain's legal system (most countries ruled or colonized by them follow similar laws)
  - Based on precedents (previous court rulings)
  - Subjective but flexible verdicts, good lawyers and arguments are important
  - Business contracts are long and complex, well-specified legal codes/guidelines
- Civil law:
  - French law, most countries ruled or colonized by them follow similar laws
  - Based on a detailed law code, relatively straightforward
  - Objective, rigid, and clear
  - Business contracts are short and simple because courts just look at law book

Ethics: a set of accepted principles of right or wrong that govern the conduct of a person, members of a profession, or the actions of an organization

Ethical dilemma: situation which no choice seems ethically acceptable
- Areas in business: business ethics are the accepted principles of right or wrong for business
- The root cause of unethical behavior: no clear cut reason managers behave unethically. Causes are complex and reflect:
  - Personal ethics, decision-making processes, leadership, unrealistic performance expectations, organizational culture
    - Decision-making process: usually profit maximization (MC = MR), returns to shareholders, might also focus on the quality of service, depending on the objective.
- Personal ethics come from: parents, religion, experience, trauma, temptation, money, grades, power, success, and lies.
- Ethical strategy: course of action that doesn’t violate the code of ethics
- Common ethical issues in business: employment practices, human rights, environmental regulations, corruption, and the moral obligation of multinational companies to produce quality product and create jobs
Philosophical solutions:
- Strawmen approach = provides some guidance on ethical behavior, but has shortcomings. Give strengths and weaknesses for each:
  - Friedman doctrine: Milton F, businesses should maximize profit, because if they fail, there is pain, suffering, and job loss.
    - Strength: Encourages economic efficiency and wealth creation, leading to job opportunities and economic growth.
    - Weakness: Ignores broader ethical and social responsibilities, potentially leading to exploitation, environmental harm, or unethical business practices.
  - Cultural relativism: When in Rome, do as the Romans do.
    - Strength: Encourages adaptability in global business by respecting local customs and traditions.
    - Weakness: Can justify unethical practices (e.g., bribery, labor exploitation) if they are the norm in a given culture.
  - Righteous moralist: Applying your ethics onto others.\
    - Strength: Maintains consistency in ethical standards and prevents moral compromise in international business.
    - Weakness: Can be seen as ethnocentric or imperialistic, disregarding cultural differences and local norms.
  - Naive immoralist: ask around for what others are doing and do that
    - Strength: Provides a practical approach by aligning with industry norms, reducing the risk of being at a competitive disadvantage.
    - Weakness: Justifies unethical behavior if it is common practice, leading to a race to the bottom in ethical standards.
Utilitarianism vs Kantian
- Utilitarianism: evaluates ethical behavior based on the outcome. Might perform a cost-benefit analysis, if marginal benefit is greater than marginal cost, it is ethical. One of the foundations of capitalism.
- Kantian: evaluates ethical behavior based on intention.
  - Categorical imperative: From Immanuel Kant. Something you must do in order to be ethical. For example: if you see something dying of thirst, if you don’t offer them water you are an ethically bad person, and vice versa. Follow logic to know if something is ethical, don’t need guide books.
- America was founded on Judeo Christian faith and philosophy:
  - According to the Bible, we should use a combination of judging based on outcomes and intention to decide if something is ethical.

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International trade is consumers wanting foreign products
Consumer safety = to protect consumers from problems with the free market such as ill goods, high-tech and/or military goods
Ill goods = illegal drugs, kids toys made of lead, cars not meeting safety standards, etc. Anything that could cause harm to consumers
Solution to problems of selling high tech and military goods to other countries: sell these goods to allies only, for example don’t sell jet engine to Russia or China, but Britain is okay
lawmakers could be selfishly motivated to protect jobs in order to win elections (look how many jobs i saved!)
Trade policy tools: import tax, export tax, quotas, subsidies, administrative restriction, domestic content requirements
Administrative restriction: random requirements to punish other countries
Domestic content requirements: needs a percentage of parts from the domestic market