Problem Focused Exercise: Should home production be protected to keeps jobs?
1
Scenario
When jobs appear to be threatened by imports of products from other
countries someone will usually call for controls to be introduced on imports.
This exercise focuses on the economic analysis of import controls and the
arguments for considering a wider perspective.
Task 1
The data in table 1 gives the 10 most important sectors for exports from the
USA to Canada and the 10 most important sectors for imports into the USA
from Canada. Examine these data. Do they suggest whether the USA gets a
net benefit from its trade with Canada?
Table 1: Leading Sectors in US Goods Trade with Canada, 2003
Billions of US$
Exports
Imports
Vehicles
35.0
52.8
Non-electrical machinery
26.0
16.0
Electrical machinery
11.9
8.4
Plastics
7.5
7.8
Iron and steel
5.6
5.5
Precision instruments
4.8
Mineral fuels
4.0
41.3
Paper, paperboard, paper pulp
3.8
9.0
Rubber and products
2.6
Pharmaceuticals
2.4
Wood and wood products
10.4
Aircraft
6.3
Furniture
5.1
Source: Bureau of the Census http://www.dfait-maeci.gc.ca/eet/research/TPR2004/TPR-2004-09-en.asp
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Copyright: Embedding Threshold Concepts Project
21/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Should home production be protected to keeps jobs?
2
Task 2
Read the extract below ‘Lumbering towards a better standard of
living?’
a.
Explain clearly Senator Smith’s proposal.
b.
Decide what the effects of Senator Smith’s proposal are likely to
be on:




Different sectors of industry
Consumers
Workers
The overall economy in the USA.
Lumbering towards a better standard of living?
WASHINGTON, D.C.– Today, (March 5th 2003) Senator Gordon Smith
(R-OR) urged U.S. Trade Representative Robert Zoellick to pursue a
strong and enforceable trade agreement that ensures fair marketing
opportunities for lumber producers. Smith raised his concerns at a
Senate Finance Committee hearing. Yesterday, Smith met personally
with Ambassador Zoellick to stress the importance of trade laws and
remedies with regard to the U.S.-Canadian softwood lumber trade.
"The Bush Administration must reach a quick and acceptable
settlement with Canada so that our mills stay open, jobs are
protected, and a free market is restored," said Smith "The Canadian
government provides anti-competitive supports for its lumber industry
which put American producers at an unfair disadvantage. No matter
how it is characterized by either side, the U.S. and Canada have very
different systems for marketing public timber to private industry."
From http://gsmith.senate.gov/press/2003/03-05-03.htm
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Copyright: Embedding Threshold Concepts Project
21/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Should home production be protected to keeps jobs?
3
Feedback Task 1
Relating to theory
When we look at data we are looking to see how far they fit with economic
theory. The trade between these two countries suggests some specialisation.
Three of the ‘leading sectors’ of exports do not appear in the import list and
vice versa. As such the data provide some basis for starting to think about
absolute and comparative advantage, which may lead to both countries
gaining from the trade.
Some of the trade can be related to familiar associations with the two
countries: e.g. Canada as a source of wood. The level of paper imports to
the USA from Canada is also much higher than the imports. The appearance
of furniture as an important export from Canada may also be linked to the
production of wood. In the reverse direction, the USA exports precision
instruments and pharmaceuticals to Canada and may have an absolute or
comparative advantage in these products.
Complications in practice
Even in the sphere of a product (lumber) for which Canada is famous the flow
of trade is not in a simple one-way fashion. Paper is both exported and
imported, but overall there are more exports than imports. You can see a
pattern that seems to reflect the theory, but it is sufficiently muddy to convey
the idea that making sense of trade patterns is not simply a case of just
identifying which country has the absolute/comparative advantage in a
particular good.
There is also some hint of the relative size of the economies. Canada exports
more vehicles to the USA than it imports from the USA but this needs to be
interpreted in the light of the relative size of the two economies. We would
expect that the USA produces more vehicles. Canada also exports more
mineral fuels than it imports. This is because although the USA is a large
producer of mineral fuels, it is an even bigger consumer.
Reflection
1.
2.
Yes
Partly No
Did you think about comparative advantage in your
analysis?
Do you understand what the theory of comparative
advantage predicts on trade patterns?
Copyright: Embedding Threshold Concepts Project
21/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Should home production be protected to keeps jobs?
4
Feedback Task 2
Can we take the arguments of the senator as unbiased?
The senator talks of the need for a free market to protect jobs in the lumber
industry. However, it is not clear from the extract whether protective
practices really are higher in Canada, or whether the senator is producing a
one-sided argument because he is concerned with the interests of his
supporters. In other places the senator’s words suggest protectionism.
Does competition guarantee jobs in a particular sector?
The senator seems to argue that the free market and guaranteeing jobs in the
lumber mills is the same thing. BUT the free market does not guarantee jobs in
a particular sector. In economics we look to see that theories and concepts
will give us insight into the question. Here we start by considering the theory
of trade which suggests that gains can be made by specialisation based on
absolute and comparative advantage. The USA may well benefit from the
timber trade with Canada – there is an opportunity cost of resources in
producing the timber in the USA which is likely to be higher than in Canada
with its vast forests. This means that the USA needs to switch production from
lumber to other areas in which it has an advantage (and workers will need to
change their employment).
Would anyone suffer if the lumber mills jobs were saved?
An important aspect for economists is the knock-on effects of the proposal.
How would the proposal affect consumers of wood products in the USA? (It
could make wood more expensive.) How would a reduction in Canadian
exports of lumber affect Canadian demand for US exports (and would this
affect jobs)? (It may reduce these and this would reduce jobs in other
sectors.) How would the proposal affect the existing importers of the
Canadian lumber products? etc. (It would make importing dearer, reduce
their business, etc.) These interactions between markets are important in
economics thinking.
That is, economists are concerned with the opportunity costs of using the
resources elsewhere and consider the effects in terms of interactions between
markets – how the situation affects the overall economy – rather than just jobs
in the mills. It is quite possible that more (or better) jobs are created
elsewhere in the economy if there are no restrictions placed on the timber
trade with Canada.
Reflection
Do you understand the importance of:
1. Possible gains from trade for consumers of the timber
imports?
2. The need to consider wider aspects other than just
the lumber industry?
Copyright: Embedding Threshold Concepts Project
Yes
Partly
No
21/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Problem Focused Exercise: Should home production be protected to keeps jobs?
Follow-up task
An economist would use the ideas of opportunity cost and interactions
between markets in an economy to analyse the effects of Senator Smith’s
proposals. Look at the analysis carried out be Francois and Baughman (2004)
(U.S.-Canadian Trade and U.S. State-Level Production and Employment,
available at http://www.dfait-maeci.gc.ca/eet/research/TPR-2004/TPR-200409-en.asp) and identify what other examples you can of these ideas being
used in their argument. Do they reach the same conclusions as you? Do they
try to reach their conclusions in the same way as you?
Copyright: Embedding Threshold Concepts Project
21/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.
5
Problem Focused Exercise: Should home production be protected to keeps jobs?
6
Notes for lecturers
Objectives of the exercise and prerequisites
Learning Focus: Developing an understanding of the role of comparative
advantage in evaluating the relative gains from trade.
Threshold Concepts that are pivotal to this learning are opportunity cost,
interactions between markets and economic modelling (the importance of
assumptions).
Prior Knowledge Required
Students require knowledge of opportunity cost, absolute and
comparative advantage.
Sequencing and timing
1. Task 1 asks students to examine data and then answer a
question. The task can be carried out on an individual basis but
students may benefit from working in groups. Students can be
asked to give a presentation of their findings to encourage
participation (this can be certain selected groups rather than all
in order to fit the time scheduling).
2. Task 2 asks students to read a short extract that contains a
proposal to restrict the timber trade and asks them to consider
the effects of the proposals.
3. We would strongly recommend that both tasks are completed.
4. Feedback for task 1 should be given before students attempt
task 2.
5. The exercise is likely to take 30 minutes, without allowing time for
presentations.
6. An optional follow-up task is provided that links directly to task 2.
Copyright: Embedding Threshold Concepts Project
21/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for
Employment and Learning (DEL) under the Fund for the Development of Teaching and Learning.